When facing tax debt, one of the potential collection actions the IRS may take against you is the issuance of a federal tax lien release. A tax lien is a legal claim on all your property and assets located in the county of filing, including personal property, real property, bank accounts, and financial assets.
Unlike other notices, a Notice of Federal Tax Lien is filed with the county clerk and becomes a matter of the public record. This informs other creditors that the government’s claim on your accounts and assets supersedes all. Prior to 2018, tax liens were also a part of your credit history, often damaging your credit health even more severely than bankruptcy.
Liens limit your financial options by barring you from securing loans with your property and keeping you from liquidating assets without addressing your debt. The idea of a lien is to secure the debt and pressure taxpayers into making their payments to the IRS. A lien must also be filed in order for the IRS to seize an asset.
When Does the IRS Consider a Lien?
Unless you owe a considerable amount in taxes, the IRS will typically not apply a tax lien until you consistently ignore their efforts to remind you of your debt. In other words, a Notice of Federal Tax Lien won’t come out of the blue.
First, the IRS will inform you of your tax debt and note the date on which the tax was assessed, and they will give you a deadline and payoff amount for payment to avoid further penalties and interest, as penalties and interest typically begin to accrue immediately.
If you ignore the penalties and the growing tax debt, liens become the natural next step. A tax lien can be considered the true beginning of the IRS’s enforced collection efforts.
Liens vs. Levies
Liens are not to be confused with tax levies. Levies are a more immediate concern, physically emptying out bank accounts and taking assets to pay down the liability. While a lien is placed on everything you own, a tax levy applies to one bank account or source of income at a time. However, levies and seizures on your assets and property can lead to a loss in real estate and emptied bank accounts.
However, if you do not have any assets to your name, the IRS can still claim a portion of your paycheck every week. Wage levies are applied through your employer, sending some of your income straight to the IRS to cover your debt. A levy is usually only applied in situations where a tax lien was not enough to pressure a taxpayer into dealing with their debt.
Understanding Your Lien Release
Liens are discharged under a select few circumstances:
- The tax liability has been paid, the debt is gone, and the taxpayer’s account has been resolved. This can be done through full payment, expiration of the collection statute expiration date (CSED), or full payment of an agreed-upon amount through an offer in compromise.
- The taxpayer’s debt has been secured via a Direct Debit Installment Agreement. If the taxpayer’s payment plan involves automated monthly installments, the debt is less than $25,000, and at least three payments have successfully been made, the taxpayer may petition the IRS to prematurely lift the lien from your tax account, even though the balance has not been paid fully.
- An appeal against the tax lien was successfully made via a Collection Due Process Hearing, and the lien has been deemed inappropriate, unnecessary, or the cause of undue hardship.
If none of these circumstances apply, then it is unlikely the IRS will consider releasing the lien. It may take the IRS up to 60 days to release your lien and pull it from the public record after your debt has been fully paid. If you have paid your full tax debt but are still under a lien, you can submit a request for a Certificate of Release of Federal Tax Lien.
If a taxpayer is under undue financial hardship and distress due to the collection actions made by the IRS, they may be considered currently non-collectible. The IRS will not pursue further collection actions against them, however, if a tax lien is in effect on their accounts and property, it will not be released until their debt is paid. Furthermore, their debt will continue to accrue penalties and interest.
Finally, there are ways to reduce the impact a federal tax lien release has on your account if circumstances permit it. A lien release can occasionally be subordinated, which allows select creditors to move ahead of the IRS. This can allow a taxpayer to secure or refinance a loan while under a lien, for example. To get the IRS to subordinate the lien, you will generally have to prove that doing so is conducive to resolving the tax debt. Similar rules apply for discharging property from the lien.
Can a Lien Release Be Canceled?
A lien may be released or withdrawn if the full amount owed is paid or if certain other circumstances permit, as discussed above. However, as mentioned previously, liens can be issued by mistake. If you believe your account does not owe taxes or that a Federal Tax Lien shouldn’t be issued against your tax account, you may appeal the decision to file a Federal Tax Lien against you through the IRS Independent Office of Appeals.
Your options are to make an appeal through either the Collection Due Process (CDP) or the Collection Appeals Program (CAP). If your time limit for appealing through the Collection Due Process has elapsed, you may seek a hearing through the Collection Appeals Program. In both cases, it is best to contact an experienced tax professional to discuss your situation first.
What If I Can’t Pay?
There are ways for you to negotiate with the IRS for a payment plan that might suit your finances or to temporarily halt collection actions and allow you to rebuild. A priority for you should be to find a way to work with the IRS to resolve your debt. Tax debt can be a frightening issue, but it is one that we encourage tackling head-on. Discuss your situation with an experienced tax representative to get a better idea of what your options are and how to move forward.