How to Release a Tax Lien
An IRS tax lien will remain in place until you pay off taxes owed, prove financial hardship, or until the IRS has levied enough of your assets to call it even. With just a tax lien, the IRS cannot take assets, but they will eventually place a levy on your assets if no action is taken when a tax lien is given. A tax levy is highly likely if you do not resolve your taxes after the lien is placed. A lien ensures that the IRS has a legal claim on your property so you cannot sell or dispose of property without the IRS taking its share first.
Recently in February of 2011, the IRS announced policy changes whereby they would increase the threshold for when a tax lien is issued. Moreover, they will even withdraw tax liens in most casts if you owe less than $25k and setup an IRS Installment Agreement with a direct debit monthly payment (read below).
Ways to Release or Remove a Tax Lien
- Pay off the Entire Amount of Back Taxes Owed When the tax amount is paid in full, the tax lien will be released (and now withdrawn with a request to the IRS) and you will be back on good terms with the IRS. Some possibilities to paying off the taxes owed could be to borrow from friends and family, take out a loan, do a home equity loan, borrow the money on credit or sell some of your assets.
- Setup a Payment Plan with the IRS The IRS readily accepts payment plans. The most typical form of payment plan is an installment agreement. In the past, generally tax liens were not released until all taxes, penalties and interest were satisfied. In February of 2011, the IRS announced that in most cases a taxpayer who owes $25,000 or less can enter into Installment Agreement with a direct debit payment arrangement and get tax liens withdrawn (removed from credit altogether). Current taxpayers setup on a direct debit Installment Agreement can request to have the tax lien withdrawn.
- Offer in Compromise File for an Offer in Compromise – A tax lien will be released when your Offer is Accepted. With an Offer in Compromise, you can possibly settle your back taxes owed for a fraction of the total taxes owed but your financial situation must be the right fit. The catch with this is that you will have to prove that the amount you offer them is more than or equal to the amount they are likely to collect from you if they enforced collection actions against you or your reasonable collection potential.
- Post a Bond Once you post a bond the lien will be released. This is highly unlikely way to settle though because if you can post a bond, then you can probably pay the back taxes owed and you wouldn’t need a bond.
- Appeal the Lien Filed The IRS has five business days after filing the lien to provide you with written notice. The written notice must include “Notice of right to request a hearing.” That hearing must be within 30 days from the sixth day after the Lien filing. If you win the appeal, the lien will be withdrawn. However, the filing of the lien will still appear on your credit report. This method would not be practical for those out to protect their credit.
- Request Partial Discharge
- Do Nothing With this option you can wait until the IRS statute of limitations expires, but that generally does not start ticking until you have filed. The IRS normally has a 10 year period to collect back taxes owed from the date that they were originally assessed. This is normally not a good option because the IRS can then enforce a tax levy on you and forcibly take your assets. Another downside to this is that the tax lien will show on your credit report forever if you never actually paid anything to get the tax lien released or with withdrawn.
You may own several assets that are encumbered by the tax lien. You can use one of these assets to pay off the IRS. If you want to do this, be sure to ask for a discharge from the tax lien. There is no pre-printed form for you to fill out, so you will need to send a detailed letter to the IRS. IRS Publication 784, “Application for Subordination of Federal Tax Lien” lists all the information you will need to include in your letter.
Other Tips on Dealing With a Tax Lien
- Tax Lien Help from a Professional Tax professionals are a great option for dealing with complicated tax issues like a tax lien especially if you do not have time to resolve the matter. Not only can a tax professional help get a tax lien released, they will completely analyze your financial situation and find the best possible solution for you. Find out more about how the services work and understand why it is important to use a tax professional when dealing with a tax lien.
- Avoid Bankruptcy Contrary to popular belief, filing Bankruptcy will not wipe out a tax lien. If your tax debts qualify for a discharge under any type of bankruptcy, the lien will remain. If you owned any property going into bankruptcy, the property is still subject to a tax lien. The IRS could seize the property after your bankruptcy is over.
What to Do if the IRS Files a Tax Lien in ErrorThe IRS occasionally files a tax lien notice when you don’t owe anything. Perhaps you paid your bill late, and the IRS neglected to update your account. If this happens, under the Taxpayer’s Bill of Rights you are entitled to a “Certificate of Release.” The “Certificate of Release” will state that the lien was filed in error. It will then be your job to mail or deliver photocopies of the release to the three credit bureaus- Experian, TransUnion, and Equifax. This will minimize the damage to your credit rating caused by the IRS error.
When the Lien is Released or Withdrawn
Once the tax amount is paid or settled in any of the above ways, the IRS will issue the Certificate of Release (Form 668Z) within 30 days. You will have to record this certificate which means you will have to pay the recording fee in the county where the lien was filed. It is also important to send to the credit bureaus so it makes it into your credit file. This will not remove the lien from your credit report. Your credit report will show the existence of the lien, but once the certificate of release is received, it will show the release of the lien as well. This will stay on your credit report for up to 10 years after the release.
Update February 2011 – The IRS announced that it would begin making it easier in most cases for the existence of a tax lien to be withdrawn from a taxpayer’s credit (instead of being shown as released or paid) if he or she resolves their taxes by paying in full or by setting up and providing some payment history with a direct debit installment agreement (DDIA).
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