Federal tax liens are frequently used by the IRS to collect on taxes owed. A lien is the government’s legal claim against your property when you neglect or fail to pay a tax debt. In our last post, we discussed the dangers of a lien. They have a significant impact on your assets and credit so it’s crucial to act quickly if you want to get rid of them. Below are some of the options available to taxpayers to address liens:
- Don’t let them happen. If you cannot file or pay taxes on time, get help to identify the best option for you. And do not ignore letters from the IRS. An IRS Revenue Officer will inform you that a federal tax lien may be filed. If you cannot resolve the matter, a Collection Appeals Proceeding (CAP) should be commenced before the lien is filed. With a CAP, enforcement is stayed until the appeal is resolved.
- Lien Withdrawal. When the lien is withdrawn, it will disappear from the taxpayer’s record and no longer shows on a credit report. The IRS will withdraw a lien if it was filed in error. Lien withdrawal may be obtained under the Fresh Start Program, for taxpayers with personal income tax liabilities of $25,000 or less. Lien withdrawal may also be requested after the liabilities are paid in full, including retroactively for liabilities that were fully paid several years ago.
- Lien Release. When a lien is formally released, the taxpayer’s credit report will still show the lien and release for 7 years. A lien will be formally released when the taxpayer fully pays the corresponding tax liability, including all penalties and accrued interest, or when the lien is no longer enforceable because the Statute of Limitations on collection has expired. In addition, a lien is released when the IRS accepts an Offer In Compromise which the taxpayer pays in full.
- Lien Subordination. A taxpayer may request a lien subordination. Lien subordination does not remove the lien, but instead allows other creditors to move ahead of the IRS, which may make it easier to get a loan or mortgage. For example, a taxpayer may want to refinance his/her mortgage to save money. The bank does not want to issue a new loan because the tax lien would have priority over the new loan. A Lien Subordination will allow the refinancing bank to have priority over the tax lien. However, subordination is only granted if it is in the best interest of the IRS. For example, if money coming out of the refinance will be used to pay the tax bill or if it is more likely that the taxpayer will be able pay the tax liability by lowering other payments.
- Lien Discharge. A “discharge” removes the lien from specific property. For example, if the taxpayer wants to sell a piece of property, no buyer will want it if there is a lien against it. The taxpayer needs discharge of the lien on that property so that the buyer is assured that the IRS will not go after the property in the future. As with lien subordination, the general principle applies that discharge must be in the best interest of the IRS. Generally, this will be true only if the IRS will receive the net equity from the transaction. Discharge is also possible if there are sufficient other assets still subject to the lien.
If you are or could be subject to a federal tax lien, contact us for a consultation.