How to Remove a Tax Lien

From payroll taxes to income taxes, capital gains taxes to estate taxes and beyond, there are numerous tax obligations that a taxpayer may find himself or herself required to pay – particularly if he or she operates a business, owns a home, or holds substantial assets. Unfortunately for the unlucky taxpayer who falls behind on his or her federal or state tax obligations, the Internal Revenue Service (IRS) and the FTB, CDTFA and EDD can take aggressive measures to enforce and collect a delinquent tax debt, up to and including the imposition of a tax lien. The bad news is that a tax lien is a serious financial issue which may lower your credit score, harm your small business, and potentially even complicate the sale of your home, depending on how efficiently the lien is addressed. The good news is that, with skilled and strategic handling by an experienced tax lien attorney, it may be possible to have the lien removed or withdrawn to avoid these consequences. Read on to learn more about how tax liens work, why and when liens are applied, and perhaps most importantly, what steps you can take to get rid of a tax lien on your real property or other assets.

What is a Tax Lien, and When Does the IRS, CDTFA, EDD and FTB Use Them?

First, it is important to distinguish between a tax lien and a tax levy. If you are looking for assistance with a tax levy, such as the release of a wage levy, our IRS tax levy attorneys are ready to provide you with a reduced-rate consultation. Otherwise, continue reading for a discussion of tax liens.

Unlike a levy, which is the actual seizure of funds or property to satisfy an unpaid debt, a lien is merely a legal claim against your property, the purpose of which is to secure the taxing authorities’ interest in your property, such as your home or personal vehicle. Liens are utilized when a taxpayer fails to pay tax debts, such as unpaid federal income tax debts, which have been assessed.

The loss of personal and real property is not the only matter that should concern a taxpayer if the IRS seeks a tax lien against them. A tax lien would place the IRS ahead of all other creditors of the taxpayer. As a result, a taxpayer may have difficulty securing credit from a financial institution.

Additionally, tax liens are not reserved solely as penalties for individual taxpayers. A tax lien could also be attached to all property owned by a business, including accounts receivable. If the IRS has to proceed with a tax levy because the company did not pay their taxes, this could cause the dissolution of the company as they likely would need all property seized by the IRS to operate.

Note that a tax lien also applies to future assets that are acquired after a tax lien has been issued by the IRS. For instance, if a person purchases a home after the IRS issues a tax lien, the house would be subject to the lien.

Three Requirements for IRS Tax Lien

By way of example, three criteria must be satisfied before the IRS may create a tax lien:

1. First, the IRS must assess your tax liability, or determine how much tax is due. This is referred to as “putting your balance due on the books.”
2. Next, the IRS must formally notify you of the tax liability. Specifically, you should receive something called a “CP501 Notice” (Notice and Demand for Payment). This notice should explain the source of the debt, the amount you owe, the due date for payment, and other key pieces of information. If you do not respond to the CP501 Notice, you may receive a CP502 Notice as follow-up.
3. If you fail to pay in a complete and timely manner after receiving the notices described above, whether willfully or negligently, the IRS may then file a Notice of Federal Tax Lien (NFTL), establishing a lien. Be advised that the NFTL exists in the public record, and is accessible by creditors.

Thousands of debt resolution companies buy data base listings of all new tax liens and this explains the deluge of junk mail that invariably follows the posting of a tax lien.   Unfortunately, many debt resolution companies are disreputable and can often do more harm than good.

How to Remove a Tax Lien

The easiest and fastest way to get a tax lien released is to pay the tax debt in full. Once the tax debt is paid in full, the tax lien will be released within 30 days.

However, the IRS does allow other options for a taxpayer to have a lien subordinated, removed or released, if conditions exist that are in the best interests of both the government and the taxpayer.

Discharge from the Federal Tax Lien

A Certificate of Discharge removes the tax lien from a specific property. To request a Certificate of Discharge, a taxpayer has to submit an Application for Certificate of Discharge from Federal Tax Lien. The IRS will generally discharge the lien from a specific property immediately prior to the real property being sold, (regardless of the amount the IRS receives) so that the new buyer will have clear title. However, keep in mind that if there is an existing tax debt, the tax lien remain against other real and personal property.

Subordination of Federal Tax Lien

A Certificate of Subordination does not remove the tax lien from a specific property, but permits other creditors to move ahead of the IRS. This generally happens in a situation of a refinance. The first mortgage lender will be paid in full, the second mortgage lender will move up to first position. To request a Certificate of Subordination, the taxpayer has to submit an Application for Certificate of Subordination from Federal Tax Lien. The IRS will generally subordinate the lien prior to the close of the refinance. However, if the refinance results in the taxpayer receiving some proceeds, the IRS will want the proceeds in exchange for subordinating the tax lien.

Withdrawal of Federal Tax Lien

A withdrawal of a federal tax lien removes the public notice as if the public notice of the tax lien was never filed. By withdrawing the tax lien, the IRS loses its position in line against other creditors even though the taxpayer may have an existing tax debt. To request the withdrawal of the lien, the taxpayer has to submit an Application for Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien.

A Taxpayer Can Request a Lien Withdrawal if

Option 1:

1. The tax liability has been satisfied and the tax lien has been released
2. Taxpayer has a good history of filing compliance going back 3 tax years, and
3. Taxpayer is current on his/her estimated tax payments and federal tax deposits, if applicable.

Or Option 2:

1. Taxpayer is in a direct debit installment agreement
2. The outstanding balance due is below $25,000
3. The outstanding balance due (below $25,000) is full paid within 60 months or within the Collection Expiration Statute Date, which is earlier,
4. Taxpayer is full compliance with filing and payments
5. At least 3 monthly payments were made via direct debit
6. Taxpayer cannot default the existing agreement and has never defaulted in the past.

Other Ways to Handle an IRS Tax Lien

While a lien is perhaps less extreme than a levy, that does not mean a federal tax lien should be taken lightly. On the contrary, it is essential to respond swiftly and aggressively with support from a knowledgeable tax attorney, who can help you navigate the process with maximum efficiency – and minimum financial damage.

If you owe a substantial amount, paying off the debt right away may not be financially feasible. Alternately, you may disagree with the reasoning that forms the basis of the lien. Fortunately, there are steps you can take should you find yourself in such a scenario, including the following:

Get Organized and Check Your Credit Report

As with any tax controversy, the first step toward resolution is to gather as much financial documentation as possible, including your CP501/CP502 Notice and NFTL. It is essential to confirm what you owe before you dive into the repayment process without a clear long-term strategy. For accuracy, you should compare your IRS notices against your credit report, which should reflect any tax liens that are currently attached to your property or assets.

Apply for a “Fresh Start”

The IRS offers a “Fresh Start” program for eligible taxpayers. By participating in the Fresh Start program, qualified taxpayers can obtain a withdrawal of the NFTL, resulting in release of the lien. Taxpayers must meet various qualifications to have a federal tax lien withdrawn, including:

Being up-to-date on all tax returns (i.e. having no back taxes to catch up on).

Being current on federal tax deposits and estimated tax payments, where applicable.

Fight the Tax Lien Using the IRS Appeals Process

When a taxpayer disagrees with the results of an IRS audit, he or she may challenge the IRS’ findings by initiating a process known as “appeal” or “appeals” with help from an IRS appeals attorney. There are three ways to challenge a federal tax lien:

Apply for a discharge of the lien. This process is initiated when the taxpayer, with assistance from an experienced tax attorney, files an Application for Certificate of Discharge from Federal Tax Lien. If successful, the discharge will remove the applicable lien. However, note that the lien will remain against other pieces of property not included in the discharge, similar to how certain debts remain after a bankruptcy is discharged.

Apply for the subordination of the lien. The IRS may agree to issue a Certificate of Subordination if doing so will increase the likelihood of the debt being repaid. Subordination of the lien will only move the taxpayer’s creditors ahead of the IRS. This means that subordination will not technically remove the lien, but it can make it simpler for the taxpayer to obtain a mortgage or other loan.

Apply for withdrawal of the lien. Where possible, withdrawal is the optimal resolution. If the taxpayer obtains a withdrawal, it will be as if the lien never existed in the first place. Taxpayers must file Form 12277 (Application for Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien) to initiate this process.

Get on an IRS Payment Plan

Your tax balance will still accrue interest and penalties until it’s paid off, but if you allow the IRS to take at least three consecutive payments right out of your bank account (called a direct debit installment agreement), you might convince the IRS to withdraw the federal tax lien from public record. (You’ll still have to pay your tax debt, of course.) You don’t necessarily need to hire anyone to get on an IRS payment plan — you can apply right on the IRS website. Fees run from $0 to $225 depending on the plan and your income.

Direct Debit Installment Agreement

There is also another option available for the withdrawal of a federal tax lien if the taxpayer has changed their installment plan to pay off their tax debt to a “direct debit installment agreement.” Under these circumstances, a tax lien can be withdrawn if the following is true:

• The person or entity applying for the lien withdrawal is a qualifying taxpayer with tax debt
• The taxpayer owes the IRS no more than $25,000 or chooses to pay their tax debt down to $25,000 or less before applying for a tax lien withdrawal
• The direct debit installment agreement is scheduled to pay off the loan within 60 months or prior to the expiration of the Collection Statute
• The taxpayer has complied with the necessary tax filings and payments
• At least three consecutive payments were made on the direct debit installment plan
• The taxpayer has never defaulted on their current or prior direct debit plan

Ask For an Offer in Compromise

An OIC, or offer in compromise, is an offer to settle your back taxes for less than the full amount you owe. Beware: There are lots of rules, and the IRS typically accepts fewer than half of the applications it gets in a year. To even be considered, you need to have filed all of your tax returns, plus make required estimated tax payments for the current year. You also won’t be considered if you’re in bankruptcy or are being audited.

Bankruptcy

Bankruptcy is not an effective way to avoid a tax lien. After filing for bankruptcy, there is a chance that the tax lien and tax debt owed to the IRS will not be discharged at the conclusion of the proceedings.

When a taxpayer decides to ignore their obligations to pay their tax debt, the IRS will eventually perform a tax levy. A tax levy will legally seize all property named in the tax lien necessary to pay off the taxpayer’s debt. Receiving a “Notice of Intent to Levy” or a “Notice of Your Right to a Hearing” from the IRS is a clear signal that you should seek legal representation to discuss how you could get a tax levy released. Do not let the IRS seize your property for a matter that could be resolved with negotiation.

Experienced Tax Lien Attorney Providing IRS Representation

Unpaid tax debts can have serious ramifications for your home, your vehicle, your business, your personal funds, your retirement savings, your personal property, and your overall financial health and stability. It is imperative to respond quickly and strategically if the IRS or a state tax agency, such as the California Franchise Tax Board, is attempting to utilize a lien or levy to collect an unpaid tax debt. For a reduced-rate consultation concerning a federal tax lien, IRS tax levy, tax-motivated bankruptcy, or other options for obtaining tax relief and resolution, contact the Tax Law Office of David W. Klasing online, or call our law offices at (800) 681-1295 today for assistance.