If the IRS determines that you have a hefty unpaid tax bill, and you fail to negotiate a payment plan with them or pay the debt back in full, they are eligible to place a federal tax lien on your property.
In this article, you will discover how to remove a federal tax lien.
Tax liens are troublesome because they can affect your likelihood of receiving a loan or making use of your property’s equity, and they leave a considerable and long-lasting impact on your credit score. Worse yet, a tax lien may turn into a tax levy, leaving you no choice but to give up your property to satisfy your debt.
The sooner you act on a tax lien, the better your ultimate outcome. Tax liens are not something to be ignored, and they are just one of the ways in which the IRS may coerce you to pay your debt. If your property has been made subject to a federal tax lien, knowing your options for removal of the lien is the first important step.
Here’s how to remove a federal tax lien.
Getting A Federal Tax Lien Removed
There are a handful of different options for getting a tax lien removed, depending on your current circumstances and the size and age of the debt. Working with a tax professional can greatly relieve the burden of wading through every potential avenue and figuring out which path is best for you, as they’ll be able to advise you. Common options include:
Reducing and paying your total tax liability: if the circumstances permit it, the IRS may accept an offer in compromise in cases where it is simply not realistic for you to totally repay your debt. The IRS will typically request key financial information, then calculate how much of your debt you’d be able to pay over the ten year period after you were first given notice about the debt.
If you can send them an offer that matches their estimate, they may lift the lien – provided you have been up-to-date with your current tax returns and payments, as well as a few other eligibility requirements.
Appealing the lien: if you believe there may be the reason the lien was filed in error – such as the IRS making a mistake in thinking you have a debt – you can send an appeal to the IRS’s Independent Office of Appeals, and they will investigate your case.
Discharging a lien: you may request that certain property is discharged from the federal tax lien, effectively lifting the lien from that piece of property and allowing you to utilize it to refinance, get a loan, or otherwise pay your tax debt.
Subordinating a lien: subordinating a lien does not discharge it, but it does let another creditor’s claim take precedence over the IRS’s claim, which can help in refinancing to pay your tax debt.
Withdrawing a lien: you can ask the IRS to withdraw a lien if you are eligible. This won’t cancel your tax debt, but it does grant you greater financial flexibility. Some of the eligibility requirements for withdrawing a lien include a total tax liability of under $25,000, a payment plan that fully covers the tax debt within 60 months, or the end of the collection period (i.e. before the statute expires), and more.
Liens and Levies
A lien is a legal claim on a property by a creditor – in this case, the IRS – effectively meaning that should the property be sold or liquidated, whoever issued the lien gets the first cut. A tax lien does not mean that anyone is going to personally show up and evict you out of your home. Instead, it’s a means for the government to protect its interest in your property on account of your tax debt.
A levy, on the other hand, is an actual claim on a property or account by the IRS, wherein they clear out your account or sell your property and use it to cover your tax debt. Levies have their limitations – the IRS generally shouldn’t cause “financial hardship”, and acts within its interpretation of that term – but they are nonetheless frightening, and a likely outcome of an ignored lien.
As part of the federal US government, the IRS’s liens and levies take precedence over any other creditors in the land.
How the IRS Announces a Tax Lien
Tax liens can “come out of nowhere”, but only insofar that you may receive your notice of a tax lien after the lien has already taken effect, but not before the IRS reminds you that you have a tax debt to settle.
This reminder is called a Notice and Demand for Payment, and a tax lien is usually only issued some time after you either refuse/forget to pay or completely ignore the notice. At this point, the IRS issues a Notice of Federal Tax Lien.
This document is a bit different from other notices in that it is a public document, and is designed not only to inform you of the IRS’s tax lien on your property but also to inform creditors of the IRS’s tax lien on your property.
This is important because the IRS supersedes other creditors, which means your creditworthiness will take a big dip as a result. While tax liens do not show up on your credit report, the fact that they’re public still means creditors and credit reporting agencies will take note and act accordingly.
It’s still possible to take out a loan while you have a tax lien on your property, but only by working with the IRS to create an exception and allow another creditor’s claim to take precedence.
Preventing a Tax Lien
If you receive a Notice and Demand for Payment, you can prevent a tax lien even while still having an outstanding debt with the IRS by negotiating a payment plan, or taking steps to minimize your tax debt with the IRS.
It goes without saying that you can avoid a tax lien altogether by keeping up to date with your tax payments, and ensuring that you don’t owe the IRS anything. But if you do owe them money, don’t ignore the notice – take it to a tax professional instead, and work together on developing a realistic payment plan you can propose to the IRS.
Payment options and assorted fees vary depending on your financial status as a taxpayer, the total size of your tax debt, and whether you are opting for monthly installments, a shorter payment plan, automatic or manual deposits, and more.