Guide to Release or Withdrawal of an IRS Tax Lien
A federal tax lien is a legal claim the IRS has against your property. The tax lien exists when the IRS assesses your tax liability, the IRS sends a bill for payment, the taxpayer doesn’t pay the debt on time (or make an alternative resolution), and the IRS files a Notice of Federal Tax Lien.
A Notice of Federal Tax Lien (NFTL) is a public notice that alerts other creditors of your tax debt. The IRS generally files an NFTL when you have an unpaid balance over $10,000 and have failed to respond to the notice to pay. The IRS usually won’t file a tax lien if the debt is under $25,000 and you enter into a direct debit installment agreement. If the balance is over $25,000 and you are in an installment agreement, the IRS will likely file a lien. The NFTL may make it difficult to sell your home and limit your access to credit. Also, failure to address the unpaid tax balance with a type of resolution, the next step of the IRS will likely be a tax levy.
You have several options to have the IRS tax lien released or withdrawn. The IRS may also agree to discharge the lien from a particular asset or subordinate the lien to another creditor’s interest in some cases.
Help To Release or Withdraw Tax Lien
Tax Liens No Longer on Credit Reports, But Can Still be Seen
As of April 2018, tax liens no longer appear on reports from the three major credit bureaus. Tax liens not showing on credit reports could improve your credit rating if you previously had a tax lien on your credit report.
If the IRS files an NFTL in the public records, a creditor may still be able to see this information and use it when making credit decisions. A creditor is less likely to provide credit, knowing that the IRS will likely have a claim to assets over them.
Since tax liens are no longer on credit reports, LexisNexis offers a service called “RiskView Liens & Judgments Report,” which LexisNexis offers for helping lenders search for tax liens. So, the fact that they aren’t on credit reports doesn’t mean that lenders cannot see that they exist. Therefore, if a taxpayer with a tax lien is looking to buy a home, sell a home, refinance, or obtain credit, it is essential to get the lien release, withdrawn, discharged, or subordinated to accomplish the objective they seek.
Methods to Withdraw a Federal Tax Lien
You have a few different options to get the IRS to withdraw the NFTL from the public records. You can use Form 12277 to apply for a tax lien withdrawal if you meet any of the following conditions.
You may request a lien withdrawal if you’ve entered into a Direct Debit Installment Agreement and meet the following requirements:
- You are an individual or business with income tax liability only, or you are an out of business entity with any type of tax debt
- You owe $25,000 or less. If you owe more than this amount, wait until you pay down your balance to $25,000 before you request the lien withdrawal.
- Your payment plan must pay off your full tax within 60 months or by the collection statute expiration date, whichever comes first.
- You are in full tax compliance with current filings and payments.
- You have made three consecutive direct debit payments.
- You may not have defaulted on your current or any prior direct debit installment agreement.
Convert a Regular Installment Agreement to a Direct Debit Installment Agreement
You may also qualify for a lien withdrawal if you convert your existing IRS installment agreement into a direct debit installment agreement. Your balance must be $25,000 or less, and you will need to make three consecutive direct debit payments before applying for lien withdrawal.
Show That the Lien Withdrawal Will Facilitate Collection of the Tax
The IRS may withdraw the lien if it makes it easier to collect the tax. You’ll have to provide a good argument for how the lien withdrawal will improve your ability to pay off your tax debt.
For example, you could ask for the lien withdrawal to allow you to get a car loan. If you need a new vehicle to perform your job duties and earn income that you can use to pay off your tax debt, the IRS may agree to withdrawal the NFTL.
Below are some of the factors that the IRS will consider when determining if the withdrawal of the NTFL will facilitate collections of the tax debt.
- Will the chances of collecting the tax amount owed increase with the removal of the NTFL?
- If the NTFL has not yet been filed, are there conditions that exist that would allow for NFTL forbearance?
- Would the withdrawal of the NFTL to obtain a partial payment towards the debt hinder the collection of the remaining balance after the partial payment?
- Would the withdrawal give the taxpayer a better ability to obtain additional credit and would this additional credit impact the taxpayer’s ability to pay?
- Was the NTFL a result of a default on an installment agreement? Was one of the conditions of the installment agreement that the IRS would file an NFTL upon default?
- Is it possible that the taxpayer will file bankruptcy if the IRS does not approve the withdrawal? Would the taxes be dischargeable in bankruptcy? Would the IRS collect more if the taxpayer didn’t file bankruptcy?
- Is the taxpayer adding up additional tax liabilities by not staying in compliance? Does the taxpayer meet the filing requirements? If not, then it is likely the IRS will not consider a withdrawal.
- Will a discharge or subordination of the lien achieve the same result as a withdrawal? If so, then it won’t be accepted, and the taxpayer would have to file for a lien discharge or subordination.
- Can the taxpayer post a bond for the amount they owe or another adequate security? If so, then the IRS will withdrawal the NFTL.
Pay Your Tax Debt in Full
Once you’ve paid off your tax debt in full, the IRS may withdraw the lien if you meet the following conditions:
- You’ve filed all required tax returns for the past three years.
- If applicable, you are current on your estimated tax payments and tax deposits.
Show That the IRS Didn’t Follow Procedures
The IRS might withdraw the lien if the filing of the NFTL violated their procedures. This provision could apply in any of the following situations:
- The IRS filed the NFTL while the taxpayer was in bankruptcy, and the automatic stay was in effect.
- The IRS filed the NFTL while the taxpayer was in a Combat Zone, was serving as active military outside the U.S. and away from his or her permanent duty station participating in a contingency operation, or the taxpayer was hospitalized due to an injury sustained while serving in a Combat Zone or contingency operation.
- The IRS employee who filed the NFTL knew you had a carryback, overpayment, or adjustment that would satisfy the liabilities that supported the lien.
- The IRS inadvertently filed the lien for an Obamacare shared responsibility payment.
- The IRS filed Duplicate NFTLs.
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Methods to Release a Federal Tax Lien
An Offer in Compromise is an agreement by the IRS to settle your debt for less than you owe. You must be unable to make monthly installment plan payments to qualify for an Offer in Compromise.
Your offer amount will depend on your equity in assets and your disposable income. If your Offer is accepted and you pay your settlement off, the IRS will forgive your remaining debt, and the lien will be released.
Pay In Full
Once you pay off your tax debt in full, the IRS should release your lien within 30 days. The NFTL should be removed from the public records and should not impact your credit or ability to sell your home.
The IRS generally has ten years to collect taxes from you. However, the IRS can extend this period in some situations.
The date that the ten years starts is the date that the IRS assesses the tax. If you owe for more than one year, there can be several expiration dates attached to your debts. To find the CSEDs, you can request your transcripts from the IRS online or by mail. You can also work with a tax professional that can pull them and help you work out a resolution.
If the statute of limitations has expired, an NFTL filed because of that tax debt will be released. However, keep in mind that you may still owe tax debt for another year that the IRS can continue to try to collect.
Post a Bond to Guarantee Payment to the IRS
The IRS can release the lien if you post a bond to guarantee repayment of your tax debt. Taxpayers don’t commonly use this strategy because it can be challenging to qualify for a surety bond and may not be worth the cost when compared to directly paying off your tax debt.
When You Don’t Qualify for Withdrawal or Release
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A tax lien discharge only removes the lien from a specific piece of property. The lien remains in effect against your other assets, and you are still responsible for paying your tax debt.
A tax lien discharge of property can help you sell an asset—such as your home—because a buyer will not want to purchase the property subject to the IRS tax lien
How to Qualify for a Lien Discharge
The IRS will only agree to discharge property in limited circumstances. Typically, you will need to show that the lien discharge is in the best interest of the IRS or won’t negatively impact their ability to collect the tax.
Lien discharges may be granted in the following situations:
- After the discharge, the value of your remaining property subject to the lien will be at least twice as much as the value of your tax debt.
- You pay the IRS an amount equal to their lien interest in the property being discharged.
- The IRS lien interest has no value, such as when you owe more on your mortgage than the value of your home.
- If you are trying to sell your property, you can give the IRS a lien interest in the proceeds equal to their lien interest in the property. The proceeds will be held in escrow to guarantee each creditor receives payment.
- You are a third party who owns the property subject to the lien, and you provide a deposit or bond that is equal to the value of the IRS lien interest.
How a Lien Discharge Differs From a Lien Withdrawal or Release
A lien release removes the lien from all of your property, and a lien withdrawal removes the NFTL from public records.
If you need help determining which option to use to reduce the impact of an IRS tax lien, contact a tax professional for assistance.
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Subordination of a Federal Tax Lien
When you obtain a loan, a creditor generally has a secured interest in the asset that you are taking the loan out on. So if you don’t pay the loan, they can seize that asset to obtain funds back. The most common example of this is a home mortgage where they have a security interest in your home. If a second mortgage is taken out, then the second mortgage lender has priority second to the first lender. There can be multiple parties that have a security interest in an asset. If you have an IRS tax lien, the IRS has security interest and tax priority interest over the mortgage lender.
A tax lien will also cover any loans you take out after the IRS files the lien. Therefore the lender of the loan gets secondary interest to the asset. For this reason, lenders are extremely unlikely to give you a loan.
With a tax lien subordination, the IRS will allow the new creditor to take priority over them. The subordination keeps security interest for the IRS while giving the lender more confidence to provide the loan by decreasing their overall risk. The IRS will agree to this if they think it is in their best interest to collecting the tax debt owed.
Qualifying for a Tax Lien Subordination
The IRS will accept two main reasons to issue a certificate of subordination:
- You will pay an amount equal to the lien or interest to which the certification subordinates: For example, if you refinance a mortgage for an additional $30,000 in equity and the closing costs of the refinance are $6,000, the IRS will receive $24,000 in return for the IRS subordinating its interest to the loan. The tax lien will remain on the property, but the new loan will have priority over the IRS tax lien.
- The IRS determines that subordination will make the collection of the liability easier: For example, refinancing at a lower rate will allow the taxpayer to pay the IRS a larger monthly repayment rate in their installment agreement.
To obtain a certificate of subordination, you will need to use Form 47467 and attach the appropriate attachments. Refer to IRS publication 784 for detailed instructions on completing this form. Be sure to complete this at least 45 days before the sale of your property or loan settlement meeting to allow enough time for the IRS to process.