A federal tax lien is a legal claim the government places on your property when you fail to pay your taxes. The Internal Revenue Service (IRS) has the authority to enforce tax collection. A federal tax lien is one of the tools they use to ensure payment. When a tax lien is filed against you, it becomes public record and can impact your financial well-being.
The Tax Lien Process
If you owe back taxes, the IRS will send you a bill (Notice and Demand for Payment) that explains how much you owe. It will also include a payment due date. If you fail to pay your tax bill, a federal tax lien will automatically be triggered. The IRS may also file a Notice of Federal Tax Lien (NFTL) in the public records. This notifies other creditors that the IRS has a priority claim against all your current and future property.
After filing the NFTL, the IRS will typically send you a Notice of Your Right to a Collection Due Process Hearing within five (5) business days. If you want to request a Collection Due Process hearing, you must do so before the deadline on the notice.
Understanding the Consequences of an IRS Lien
Having an IRS lien filed against you can have serious consequences. First and foremost, it affects your ability to obtain additional credit. This means that taking out new loans, credit cards, or even renting an apartment becomes challenging. The lien will also attach to any property you own, including real estate, vehicles, and other assets. If you sell or refinance your property, the IRS will have a legal right to claim the proceeds to satisfy your tax debt.
Once a lien is filed, it becomes a matter of public record. This can be embarrassing and damaging to your reputation, as anyone can access this information. It is essential to address the lien promptly to prevent further damage to your financial well-being.
How to Remove a Federal Tax Lien
Generally, the IRS won’t release a tax lien until you’ve paid your tax debt in full or it can no longer legally collect the tax. There are, however, certain circumstances where a tax lien may be withdrawn, discharged, or subordinated.
Discharge of Property
You may request a lien discharge from a specific piece of property by completing Form 14135, Application for Certificate of Discharge of Property from Federal Tax Lien. This is typically done when you want to use the property for collateral to obtain a loan to pay off your taxes. The IRS may also consider a discharge for the following situations:
- Refinancing an existing loan so you can afford to make monthly tax payments.
- Selling your property and using the funds to pay down or satisfy your tax debt.
- Transferring or selling property that has no value for the IRS to claim.
The IRS may also consider a discharge request for a specific piece of property if the value of your other assets is double the amount owed. For more information on how to apply for a discharge, refer to IRS Publication 783.
Tax Lien Subordination
Although subordination does not remove the lien from your property, it does move the IRS to a lower priority. This can make it easy to obtain a loan or refinance a mortgage, which could free up more money to help pay your tax debt. To apply for a Certificate of Subordination, you must complete IRS Form 14134.
Generally, there are two main reasons why the IRS would grant subordination:
- You agree to pay them an amount equal to the property they are subordinating, or
- The subordination will allow you to pay more to the IRS.
To determine your eligibility for lien subordination, refer to IRS Publication 784.
IRS Lien Notice Withdrawal
Thanks to the Fresh Start Initiative, you may be eligible to have your Notice of Federal Tax Lien withdrawn if all of the following are true:
- You’re a qualifying taxpayer
- You owe $25,000 or less in back taxes
- You’ve entered into a Direct Debit Installment Agreement that will pay the balance in full within 60 months or before the statute of limitations expires (whichever is earlier)
- You are in full compliance with all other filing and payment requirements
- You’ve made three (3) consecutive direct debit payments
Additionally, you must not have defaulted on your current or previous Direct Debit Installment Agreement. The IRS will also withdraw its NFTL if your tax liability is satisfied and your lien is released. Before this happens, you must be current on your estimated tax payments and federal deposits (if applicable). You must also be in filing compliance for the past three (3) years.
Keep in mind that a lien withdrawal removes the Notice of Federal Tax Lien, but you are still on the hook for the amount due. To determine your eligibility for withdrawal, refer to IRS Form 12277, Application for the Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien.
Steps to Take to Prevent a Federal Tax Lien
Prevention is always better than dealing with the consequences of a federal tax lien. To prevent a lien from being filed against you, it is crucial to stay current with your tax obligations. Here are some steps you can take to avoid a tax lien:
- File your tax returns on time. Make sure to file your tax returns by the deadline, even if you cannot pay the full amount owed. Filing your returns on time reduces the chances of the IRS initiating collection actions.
- Pay your taxes in full. If you have the means to pay your taxes in full, do so to avoid accumulating interest and penalties. This will also prevent the IRS from pursuing more aggressive collection methods, such as filing a tax lien.
- Set up a payment plan. If you cannot pay your taxes in full, set up a payment plan. This will allow you to make monthly installments toward your tax debt and avoid a tax lien.
- Seek professional advice. If you are unsure about your tax obligations or need help managing your finances, consult with a tax professional. They can provide guidance and help you navigate the complexities of the tax system.
By taking these proactive steps, you can minimize the risk of a federal tax lien being filed against you and protect your financial well-being.