Tax Controversy & Resolution: Tax Lien Solutions

Tax Lien Removal

A federal tax lien is a government legal claim against a delinquent taxpayer's property regarding a neglect or failure to pay a tax debt. A federal tax lien secures the government’s interest in property (e.g. real estate, personal property, assets) resulting from a neglect or refuse to fully pay a tax debt timely. However, unlike a tax levy, the government does not actually take property to pay the tax debt. A federal tax lien generally exists when the IRS assesses a tax and sends a Notice and Demand for Payment.
 

In general, the IRS publicly files a Notice of Federal Tax Lien to provide notice to creditors of the government's legal right to a delinquent taxpayer's property. Once the Notice of Federal Tax Lien is filed, it may limit the delinquent taxpayer's ability to obtain credit. For more information, refer to Publication 594, The IRS Collection Process.

When a lien attaches it may apply to both personal and business assets and to future assets and/or rights to business property (e.g. accounts receivable) acquired during the duration of the lien. In addition, if the delinquent taxpayer files for bankruptcy, the tax debt, lien, and Notice of Federal Tax Lien may continue after the bankruptcy.

Options to Remove / Resolve Tax Lien Issues:

Fully Paying the Tax Debt. After fully paying the tax debt, the IRS releases the tax lien within 30 days. A lien that’s been “released” means that it’s no longer attached to your property and assets, and public records will reflect the change. However, unlike a withdrawal, a release may remain on your credit report for up to ten years after the debt has been paid. As such, once the tax lien is removed, either through withdrawal or release, the taxpayer should contact credit agencies to that any liens are updated or removed from your credit report.

 

Discharge of Property. A "discharge" removes the lien from specific property. Internal Revenue Code (IRC) provisions that determine eligibility include the following:

  • IRC § 6325(b)(1) – a discharge may be issued if the value of the taxpayer’s remaining property encumbered by the federal tax lien is equal to at least twice the amount of the federal tax liability secured by the lien and any encumbrance entered into before the IRS filed its public notice of the lien.

  • IRC § 6325(b)(2)(A) – a discharge may be issued when the tax liability is partially satisfied with an amount paid that is not less than the value of the United States’ interest in the property being discharged.

  • IRC § 6325(b)(2)(B) – a discharge may be issued when it is determined that the government’s interest in the property has no value. The debts senior to the federal tax lien are greater than the fair market value of the property or greater than the sale value of the property.

  • IRC § 6325(b)(3) – a discharge may be issued if an agreement is reached with the IRS allowing the property to be sold. Per an escrow agreement the sale proceeds must be held in a fund subject to the claims of the United States in the same manner and priority the claims had prior to the property being discharged.

  • IRC § 6325(b)(4) – a discharge will be issued to a third party who owns the property if a deposit is made or an acceptable bond provided equal to the government’s interest in the property.

  • IRC § 6325(c) – If the appropriate official determines that the tax liability for estate or gift tax has been fully satisfied, the appropriate official may issue a certificate of discharge of any or all property from the lien imposed thereon.The primary purpose of such discharge is not to evidence payment or satisfaction of the tax, but to permit the transfer of property free from the lien in case it is necessary to clear title. The tax will be considered fully satisfied only when investigation has been completed and payment of the tax, including any deficiency determined, has been made. See also Reg. § 301.6325-1(c).

 

For more information, refer to IRS Publication 783, Instructions on How to Apply for Certificate of Discharge From Federal Tax Lien.

 

Subordination. "Subordination" does not remove the lien, but allows other creditors to move ahead of the IRS, which may make it easier for the taxpayer to obtain a loan or mortgage. The IRS will generally only permit subordination if it will help the IRS receive greater or sooner payments. For example, if a taxpayer is attempting to refinance its home, the IRS may allow a lender to act above the lien and refinance the home mortgage, in exchange for a portion of the proceeds.

This process is complicated, though, and professional assistance is recommended.

Withdrawal. "Withdrawal" removes the public Notice of Federal Tax Lien and assures that the IRS is not competing with other creditors for your property. However, the taxpayer is STILL liable for the amount due. Note, this does not include tax liens held at the state levels and those state liens may still apply on your credit reports. Also tax settlements (e.g. "Offers-in-Compromise") are generally not subject to complete withdrawal. Because settlements are generally not a full repayment, the IRS grants a “release” rather than an actual withdrawal.

 

For eligibility, refer to Form 12277, Application for the Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien (Internal Revenue Code Section 6323(j)).

 

Two additional Withdrawal options are available per the IRS 2011 "Fresh Start" initiative

  • Option #1 - IRS may allow withdrawal of your Notice of Federal Tax Lien after the lien’s release. General eligibility includes:

    • Tax liability has been satisfied and your lien has been released; 

    • Compliance for the past three years in filing (all individual returns, business returns, and information returns); and 

    • Current on your estimated tax payments and federal tax deposits, as applicable.

  • Option #2 - IRS 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 includes the following criteria:

    • You are a Qualifying taxpayer (i.e. individuals, businesses with income tax liability only, and out of business entities with any type of tax debt);

    • Owe $25,000 or less (If you owe more than $25,000, you may pay down the balance to $25,000 prior to requesting withdrawal of the Notice of Federal Tax Lien);

    • Your Direct Debit Installment Agreement must full pay the amount you owe within 60 months or before the Collection Statute expires, whichever is earlier;

    • Full compliance with other filing and payment requirements;

    • Made three consecutive direct debit payments; and 

    • Have not defaulted on your current, or any previous, Direct Debit Installment agreement(s).

 

Appeal the Lien. You may request the IRS to remove a Notice of Federal Tax Lien if you can prove the IRS acted in error. In general, on the notice of the lien there is an option to request a Collection Due Process hearing with the Office of Appeals. The request for an Appeal must generally be made within 30 days after lien being filed or as directed on the notice.

 

A lien may be removed on appeal based on the following factors:

  • Tax debt has already been paid in full;

  • Lien was filed in error and /or the IRS made a processing error with your return;

  • IRS did not follow proper procedures;

  • You were in bankruptcy when the lien was filed;

  • You were not provided an opportunity to dispute the amount assessed by the IRS;

  • You have a spousal defense claim (innocent/injured spouse relief)  regarding liable for the lien.

  • You are in process of negotiation alternative collection options (e.g. "Fresh Start" initiative -- see above).

  • Statute of limitations of 10 years on collecting the tax debt has run.

Additional IRS Resources & Links:
  • IR-2011-20, IRS Announces New Effort to Help Struggling Taxpayers Get a Fresh Start; Major Changes Made to Lien Process

  • IR-2008-141, IRS Speeds Lien Relief for Homeowners Trying to Refinance, Sell

Need more details? Contact us

We are here to assist. Contact us by phone, email or via our social media channels.