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 liability 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 taxes owed. 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 liability 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You have several options to have the IRS tax lien released or withdrawn.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.
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a tax lien is looking to buy a home, sell a home, refinance, or obtain credit, it is essential to get the lien release, withdrawn, discharged, or subordinated to accomplish the objective they seek.
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 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.
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 taxes owed.
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 taxes owed, 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 taxes owed.
Once you’ve paid off your taxes owed in full, the IRS may withdraw the lien if you meet the following conditions:
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:
An Offer in Compromise is an agreement by the IRS to settle your liability 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 liability, and the lien will be released.
Once you pay off your taxes owed 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 liabilitys. 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 taxes owed will be released. However, keep in mind that you may still owe taxes owed for another year that the IRS can continue to try to collect.
The IRS can release the lien if you post a bond to guarantee repayment of your taxes owed. 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 taxes owed.
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 taxes owed.
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
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:
A tax lien discharge only applies to one specific asset. The NFTL may continue to exist in public records to notify creditors of the IRS lien interest in your other property.
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.
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 taxes owed.
The IRS will accept two main reasons to issue a certificate of subordination:
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.