Tax Insights

Your Guide to State, Local, Federal, Estate + International Taxation

Federal Tax Liens

CPA exam, CPA, accounting, careersHave you fallen behind on your taxes?  It may be due to a life disruption, financial hardship or simply neglect of your personal finances. If you have fallen behind, you may have received notice of a federal tax lien. What is a federal tax lien? How is the lien going to affect you? Is there anything you can do to get rid of it?

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The federal tax lien is the government’s legal claim against your property when you neglect or fail to pay a tax debt. Filing of a federal tax lien serves notice to creditors that the government has a legal right to your property. Your real estate, personal property, financial assets and any future rights you have to property are subject to the federal tax lien. The notice of federal tax lien is filed with local and state authorities, such as the county recorder of deeds or the Secretary of State offices. A notice of federal tax lien may be reported by consumer credit reporting agencies resulting in a negative impact on your credit rating. Your ability to obtain credit, employment or housing can be hindered by the existence of the federal tax lien.

If you have a federal tax lien what can you do? The IRS suggests the best way to get rid of a federal tax lien is simply to pay your tax debt in full. The IRS will release your lien within 30 days after you have paid your tax debt. When the IRS releases a federal tax lien it means that the IRS has cleared both the lien for your debt and the public notice of federal tax lien. A release of a federal tax lien is not removed from the taxpayer’s credit history.  A released federal tax lien remains noted in a taxpayer’s credit history for seven years from the date of release. You’re likely thinking to yourself-it was my inability to pay the amount I owed in full that got me into this mess, so this option doesn’t really seem to work.

You may ask for a discharge of a federal tax lien from property. The discharge removes specific property from a federal tax lien. The service may issue a discharge if you were to sell property and the government would be receiving its interest through the sale.

If you are trying to refinance your mortgage and you have a federal tax lien you may request the service subordinate the lien to the new mortgage. A subordination is where a creditor is allowed to move ahead of the government’s priority position. Many lenders will require subordination to approve a refinance as without it the federal tax lien would have priority over the new mortgage.

A withdrawal removes the public notice of federal tax lien and assures that the IRS is not competing with other creditors for your property. You are still liable for the amount due. Reference to the tax lien in the taxpayer’s credit history is deleted when credit reporting agencies receive notice of the withdrawal. The 2011 Fresh Start Initiative added two additional withdrawal options for taxpayers.

Withdrawal of your notice of federal tax lien may be allowed after the lien’s release. General eligibility requires that your tax liability has been satisfied and your lien has been released. In addition, you must be in compliance for the past three years in filing all returns and current on your estimated tax payments and federal tax deposits if applicable.

The other option may allow withdrawal of your Notice of Federal Tax Lien if you have entered in or converted your regular installment agreement to a direct debit installment agreement.  General eligibility for this option includes:

  • You must be a qualifying taxpayer, i.e. individual, businesses with income tax liability only, and out of business entities with any type of tax debt
  • You owe $ 25,000 or less
  • Your direct debit installment agreement must full pay the amount you owe within 60 months or before the collection statute expires, whichever is earlier
  • You are in full compliance with other filing and payment requirements
  • You have made three consecutive direct debit payments
  • You can’t have defaulted on your current, or any previous, direct debit installment agreement

There really isn’t a way to portray the federal tax lien in a good light. The worst thing you can possibly do is to ignore any notices that you receive regarding your unpaid taxes and the filing of a federal tax lien. Your Henry and Horne tax professional can assist you in navigating the myriad of forms that exist and help alleviate the uncertainty you face with the federal tax lien looming over you. Contact us with questions.

Cheryl Dickerson, CPA

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