When you overlook or fail to pay a tax bill, the government has a legal claim against your property. The government’s interest in everything of your property, including real land, personal property, and financial assets, is protected by the lien. A federal tax lien is created when:
The Internal Revenue Service (IRS)
Assesses your responsibility and enter the sum owing on the records.
Sends you a bill (Notice and Demand for Payment) that specifies how much you owe; and
You:
Failure or refusal to pay the bill in full on time.
The Notice of Federal Tax Lien is a public document filed by the IRS to notify creditors that the government has a legal claim to your property.
The easiest option to get rid of a federal tax lien is to pay your tax amount in full. After you have settled your tax liability, the IRS will remove your lien within 30 days.
Other possibilities for lessening the impact of a lien exist where conditions are in the best interests of both the government and the taxpayer.
Property discharge
A “discharge” clears a lien from a specific piece of property. The Internal Revenue Code (IRC) has various clauses that determine eligibility.
Subordination
While “subordination” does not erase the lien, it does allow other creditors to go ahead of the IRS, making it simpler to obtain a loan or mortgage.
Withdrawal
A “withdrawal” removes the Notice of Federal Tax Lien from the public record and ensures that the IRS is not competing for your property with other creditors; nonetheless, you remain accountable for the amount owed.
The Commissioner’s 2011 Fresh Start program resulted in two more Withdrawal possibilities.
After the lien is released, you may be able to remove your Notice of Federal Tax Lien. The following are examples of general eligibility:
Your tax debt has been paid in full, and your lien has been lifted; additionally:
- For the previous three years, you have filed all individual, business, and information returns in a timely manner;
- You’ve paid your projected tax payments and made your federal tax deposits on time.
If you have gone into or converted your standard installment arrangement to a Direct Debit installment agreement, the other option may allow you to withdraw your Notice of Federal Tax Lien. The following are examples of general eligibility:
- You’re a taxpayer who qualifies (i.e. individuals, businesses with income tax liability only, and out of business entities with any type of tax debt)
- You owe $25,000 or less (if you owe more than $25,000, you may request removal of the Notice of Federal Tax Lien by paying down the debt to $25,000 first).
- Your Direct Debit Installment Agreement requires you to pay off your debt in full within 60 months or before the Collection Statute runs out, whichever comes first.
- You’ve met all of your other filing and payment obligations.
- You’ve made three direct debit payments in a row.
- You must not have defaulted on any prior or current Direct Debit Installment arrangement.
What a Lien Does to You
- Assets – A lien encumbers all of your assets (including real estate, stocks, and cars) as well as any future assets acquired during the term of the lien.
- Credit – If the IRS files a Notice of Federal Tax Lien, your credit options may be limited.
- Business — The lien attaches to all business property and to all rights to business property, including accounts receivable.
- Bankruptcy – Your tax debt, lien, and Notice of Federal Tax Lien may persist after you file for bankruptcy.
Keeping a Lien at Bay
A federal tax lien can be avoided by simply submitting and paying all of your taxes on time and in full. Do not disregard IRS mailings or communications if you are unable to file or pay on time. If you are unable to pay the entire amount due, payment plans are available to assist you to pay down your tax burden over time.
Levy vs. Lien
A lien is not the same as a levy. When you don’t pay your tax bill, a lien secures the government’s claim on your property. A levy is when the property is taken to satisfy the tax obligation. The IRS can levy, seize, and auction any real or personal property you possess or have an interest in if you don’t pay or make arrangements to satisfy your tax burden.