What is Federal Tax Lien?

A federal tax lien is the government’s legal claim against taxpayer’s property when the taxpayer neglects or fails to pay a tax debt. The lien protects the government’s interest in all of the taxpayer’s property, including real estate, personal property and financial assets.  Filing of the Notice of Federal Tax Lien affects taxpayer’s credit.

When Does Tax Lien Arise?

A federal tax lien exists after: (1) the IRS assesses tax liability (legal term for putting tax balance due on the books); (2) the IRS sends taxpayer a bill (Notice and Demand for Payment); and (3) taxpayer fails to full pay the liability by the due date.

The IRS files a public document, the Notice of Federal Tax Lien, with the County Recorder Office, alerting creditors that the government has a legal right to the taxpayer’s property.

How to Get Rid of a Tax Lien?

We often are asked – how do I get the tax lien removed?  A several options to consider:

  1. Paying Your Tax Liability in Full. This is the best and easiest way to get rid of the tax lien. The IRS releases your lien within 30 days after the tax debt is paid off.
  2. Discharge of Specific Property from Tax Lien. A “discharge” removes the lien from specific property. Section 6325 of the Internal Revenue Code has several provisions which allows the IRS to remove the tax lien from specific property. Application for Certificate of Discharge of Federal Tax Lien, as well as certain documents in support of the Application, need to be filed with the Internal Revenue Service.
  3. Subordination of Tax Lien. “Subordination” does not remove the lien, but allows other creditors to move ahead of the IRS. This technique is often used when the taxpayer needs to get a loan or a mortgage, or refinance the existing loan. A Certificate of Subordination, with the supporting documents and information, needs to be filed with the IRS.
  4. Withdrawal of Tax Lien. A “withdrawal” removes the public Notice of Federal Tax Lien and assures that the IRS is not competing with other creditors for your property; however, the taxpayer is till liable for the amount due.

There are several eligibility criteria for the withdrawal. The IRS will withdraw the lien if it was filed prematurely  or not in accordance with IRS procedures. Another option, albeit hard to achieve, is to convince the IRS that withdrawal of the lien will facilitate collection of the tax and will be in the best interest of both the taxpayer and the government.

There are two additional withdrawal options that were enacted in 2011 under the IRS Fresh Start initiative.

One option may allow withdrawal of your Notice of Federal Tax Lien after the lien’s release. General eligibility includes:

(1) Your tax liability has been satisfied and your lien has been released;

(2) You are in compliance for the past three years in filing all individual returns, business returns, and information returns; and

(3) You are current on your estimated tax payments and federal tax deposits, as applicable.

The other option may allow withdrawal of the Notice of Federal Tax Lien if the taxpayer has entered into a “direct debit” installment agreement, which falls within the following criteria:

(1)  The taxpayer owes $25,000 or less (If you owe more than $25,000, you may pay down the balance to $25,000 prior to requesting withdrawal of the Notice of Federal Tax Lien);

(2)  The Direct Debit Installment Agreement must full pay the amount owed within 60 months or before the Collection Statute expires, whichever is earlier;

(3) The taxpayer is in full compliance with other filing and payment requirements; and

(4)  The taxpayer timely made three consecutive direct debit payments and is in compliance with any current o previous installment agreement.

If you have questions about IRS or state tax debts, tax liens, or experiencing forced collection actions, please contact former IRS attorneys of Holtz, Slavett & Drabkin for further assistance.