How Do Tax Liens Work?
A federal tax lien is the government’s legal claim against your property when you neglect or fail to pay a tax debt. The lien protects the government’s interest in all your property, including real estate, personal property and financial assets.
The tax lien process begins when the IRS files a public document, the Notice of Federal Tax Lien, to alert creditors that the government has a legal right to your property. For more information, refer to Publication 594, The IRS Collection Process.
In the U.S., the IRS may place a lien against a taxpayer’s home, vehicle, and bank accounts if federal tax payments are delinquent and there has been no demonstrated effort to pay the taxes owed.
A federal tax lien takes precedence over all other creditors’ claims. It also makes it difficult for the taxpayer to sell the assets or to obtain credit.
How a Lien Affects You
- Assets — A lien attaches to all of your assets (such as property, securities, vehicles) and to future assets acquired during the duration of the lien.
- Credit — Once the IRS files a Notice of Federal Tax Lien, it may limit your ability to get credit.
- Business — The lien attaches to all business property and to all rights to business property, including accounts receivable.
- Bankruptcy — If you file for bankruptcy, your tax debt, lien, and Notice of Federal Tax Lien may continue after the bankruptcy.
How To Remove A Tax Lien
Tax Liens affect your credit and reputation; removal of these liens in a timely fashion will provide an immediate and tangible benefit to your business, including lower interest rates and a higher credit rating.
The simplest way to get out of a federal tax lien is to pay the taxes owed in full. However, if this is not possible, you have other options for dealing with a lien with the cooperation of the IRS.
Resolving a tax lien is a daunting and laborious task if you choose to do it alone. At Boxelder Consulting, we know your time is valuable. We can file the CDP paperwork for you and will negotiate directly with the IRS on your behalf — in the meantime, you can keep focusing on the livelihood of your business and family.
If you know where to start, there are several ways to remove a tax lien – keep reading to learn about your lien removal options.
Appealing a Tax Lien
The IRS will remove a Notice of Federal Tax Lien only if you can prove that it was filed in error. In order to appeal a federal tax lien, you’ll need to meet at least one of the following conditions to prove the IRS was in the wrong:
- The tax debt has already been paid in full.
- The IRS did not follow proper procedures.
- The lien was filed in error.
- You were going through bankruptcy when the lien was filed.
- You wish to claim that your spouse should be liable for the lien.
- The Collection Statute Expiration Date (CSED) on the tax debt has passed.
- You were not given a chance to dispute the amount assessed by the IRS.
- You want to discuss alternative collection options. (e.g. an installment agreement)
You’ll see an option to request a Collection Due Process (CDP) hearing with the Office of Appeals on the Notice of Federal Tax Lien sent by the IRS. The request for an appeal must be made by the date indicated on the notice, which is usually 30 days after the lien file date.
A tax lien withdrawal is a possible option for taxpayers who meet one of the following criteria:
- The lien is completely paid off,
- The lien was filed falsely, or
- The taxpayer has qualified for the Fresh Start Initiative with a liability lower than $25,000.
If you fall into one of these three categories, you’ll want to take proactive steps upon receiving the lien notice in the mail and file Form 12277, Application for the Withdrawal of Filed Form 668. As long as the information provided is accurate, the agency will withdraw the intended lien before it is actually placed onto your account.
A tax lien release is similar to a withdrawal. However, a lien release is issued when a taxpayer repays the full obligation after the lien has already been placed on his or her account. This typically occurs when the taxpayer fails to respond to the original Notice of Federal Tax Lien and the IRS is forced to proceed by attaching a lien to their property and assets.
Once your debt has been paid in full, or you’ve arranged a streamlined installment agreement, the IRS is obligated to release the lien within 30 days. Unlike a lien withdrawal, a release will remain on your credit report for up to 10 years after the debt has been paid.
How Does a Lien Affect Your Credit Report
It used to be that, unlike a lien withdrawal, a release would remain on your credit report for up to 10 years after the debt has been paid. On April 15, 2018, however, the Consumer Financial Protection Bureau mandated that tax liens would no longer appear on a consumer credit report. For purposes of car loans and credit cards, your tax lien will no longer appear, even if the money is owed and it has been filed by the IRS or state.
However, when a bank does a title report on your home, the lien will show up. In this case, either a release or a withdrawal is acceptable to remove the bank’s concern. For example, if you’re trying to sell the home or refinance, the bank will be satisfied by a withdrawal or a release because legally, the IRS has given up their secured interest in the debt.
The Difference Between a Tax Lien and a Tax Levy
A lien is not a levy. A lien secures the government’s interest in your property when you don’t pay your tax debt. A levy actually takes the property to pay the tax debt. If you don’t pay or make arrangements to settle your tax debt, the IRS can levy, seize and sell any type of real or personal property that you own or have an interest in.
As we mentioned above, resolving a tax lien can be stressful and time-consuming if you try to take it on by yourself. At Boxelder Consulting, our team of licensed tax professionals can file the CDP paperwork for you and negotiate directly with the IRS on your behalf.