What Is a Federal Tax Lien and How to Remove it?
IRS Notice of Federal Tax Lien
A Notice of Federal Tax Lien (NTFL) establishes a legal claim made by the government, though it doesn’t end in your property’s physical seizure. On the other hand, a levy gives the IRS the right to seize your cash, properties, or wages.
Generally, an IRS tax lien lays claim to everything you own, from your car and house to the swing set that has seen better days in your backyard. Technically, the lien also attaches to any money you have in the bank, as well as your wages, retirement account, and even the change in your pocket.
A Federal Tax Lien also shows up on your credit report, which means it affects your credit score. What does this mean? This means that a federal tax lien can affect your ability to do anything from rent an apartment to obtain a loan. It can even affect your insurance rates and impact your ability to get a job, if you are looking for new employment.
In almost all cases, a tax lien moves ahead of any other liens against your property after a period of 180 days. The only exception is when a specific piece of property is being used as collateral for a loan. Here’s an example. A tax lien won’t jump ahead in priority of a first, second, or third mortgage against your home, or even an automobile loan, but it usually will jump ahead of a mechanic’s lien against your home.
There may be instances when having the lien released could be beneficial in helping you settle your tax situation. For taxpayers, there are three types of liens available to help you resolve your tax liabilities with the IRS. They are:
1. Certificate of Discharge
2. Lien Subordination
3. Lien Withdrawal
1. Certificate of Discharge (COD)
A COD involves removing one piece of property from being subjected to the tax lien. In most cases, this is to allow the property to be legally transferred. Here’s an example. If you are selling your home, but a tax lien prevents you from doing this, you could obtain a COD to release the lien against your home.
In almost all cases, the IRS only releases a lien against a specific piece of property if they are going to benefit from it in some way. For example, a COD will probably be approved if you are attempting to sell your home and the IRS is likely to receive money from the sale to pay off some of your tax debt. Essentially, releasing the lien will make it easier for the IRS to collect the taxes you owe.
If there is a valid reason, you may be able to obtain a COD, even if the government won’t be getting anything out of releasing a piece of property from a lien. This is especially true if the IRS won’t be receiving any money, but getting rid of the property will free up your cash flow and put you in a better position financially to begin repaying your back taxes. Again, the IRS is prone to approving a COD because they will benefit at some point in the future.
2. Lien Subordination
A lien subordination involves moving the tax lien down slightly in terms of the prioritization of claims against a piece of property. Here’s an example. If you own your home with no mortgage attached, the tax lien takes the top position against the house, meaning you can’t take out a mortgage against the house. Obviously, there isn’t a lender anywhere who will loan you money against a home unless their lien will take the top position.
In this situation, lien subordination may be the answer. After all, the IRS is likely to approve a subordination against a property if the lien that will take top priority over the tax lien will result in money going toward paying off your tax debt.
In the above example, a subordination of the tax lien in order to receive a mortgage against the home will end in cash flow coming from that mortgage. During the closing, the IRS will immediately take a cash payment for your tax debt, while the tax lien will be moved into the second position and the mortgage will move to the top.
Keep in mind that paying interest on a loan is probably going to be less expensive than paying interest and penalties to the IRS.
There are additional situations when a lien subordination may be approved, even if the IRS will not directly receive any proceeds by doing so. Here’s an example. A number of trucking companies finance their accounts receivable through a process known as factoring. In factoring, a lender will pay the trucking company a percentage of their accounts receivable (typically around 75 to 90%) up front. Then, the lender assumes responsibility for collecting on that account receivable when it comes due, typically 30 to 90 days later. This allows the trucking company to get money now that can be used to make payroll and purchase fuel.
When a tax lien is filed, most lenders must an end to factoring, which means the trucking company loses all of their cash flow. To allow the funding to continue, a lien subordination may be obtained to move the tax lien to a lower position than the factoring lender, which will protect the lender’s claim on those accounts receivable.
3. Lien Withdrawal
In a very few instances, procuring an outright release of the complete Federal tax lien is the best way to make progress towards resolving your tax liabilities. The only way the government will be open to this option is if a case can be made that withdrawing the lien will either facilitate the payment of the tax debt or it is determined to be in the best interest of the government and the taxpayer.
You may also apply for a lien withdrawal if you have agreed to an Installment Agreement to pay the owed taxes and the agreement did not require that a lien be filed, especially a payment plan where payments are directly withdrawn from your bank account. In this case, the IRS will typically agree to withdraw the lien as long as you are current on your payments, as well as any other tax responsibilities.
As part of the IRS Fresh Start Initiative, which was introduced in March 2012, the IRS permits individuals who are on Direct Debit Installment Agreements to have their lien withdrawn if $25,000 or less is owed, without having to provide proof that lien is causing a hardship. If you are currently or will soon be obtaining a payment plan and you owe less than $25,000, be sure the Installment Agreement is set up so that the IRS will be paid directly from your checking account on a monthly basis. Then, request that the IRS remove the tax lien within the next 30 days.
Certificate of Release of Paid or Unenforceable Lien
If any of the following events occurs, the IRS must issue a certificate of release of lien within 30 days.
The tax debt is paid in full.
The taxpayer provides a cashier’s check to the IRS and obtains a Certificate of Release of Tax Lien.
The tax debt can no longer be collected. Essentially, the 10 year statute of limitations on collections is up.
The IRS accepts the bond of a surely company or payment of all taxes owed is made no less than 6 months prior to the expiration of the 10 year collection statute.
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