The IRS routinely issues federal tax liens against people who have unpaid tax debts.

Federal Tax Lien

Federal Tax Lien

This tax lien, in real life, is actually paperwork that the IRS files with your local government. That paperwork lets the public know that you owe the IRS, and it has a right to your property. This claim attaches to real property (land, houses, and other buildings) and personal property (cars, TVs, and furniture). Under a federal tax lien, the profits of any sale of your property must go towards paying off your tax debt. A tax lien also makes it difficult to borrow and can seriously damage your credit.

Anyone who has a federal tax lien naturally wants to get rid of it. But how is that done? Fortunately, there are a number of options to remove a tax lien. It’s important to understand the problem, however, before getting to the solution.

How a federal tax lien happens:

The IRS first assesses your tax liability. This is fancy language for the IRS figuring out how much you owe them, including interest and penalties. It can occur whether or not you’ve filed your tax returns. Once your tax liability is calculated, the IRS will then send a bill. This bill states the amount you owe and a demand for payment. The IRS does not take kindly to any refusal or neglect in answering its demand. A failure to pay inevitably ends up with the IRS filing a tax lien.

A tax lien is NOT a tax levy:

A tax lien is a matter of public record. It makes everyone aware that you owe the IRS and that profits from the sale of your property must go towards paying off your tax debt. This lien gives the IRS the power to block the sale of your home if the profits are not enough to pay off the mortgage and the lien in full. A tax levy, on the other hand, means the IRS is coming to take your property to satisfy an unpaid tax debt. The IRS can seize your home or car and sell it when it has issued a tax levy.

There are three primary ways to deal with a federal tax lien:

1. Prevent a federal tax lien.

This is the best option and is easier than you may think. After the IRS sends you a bill for your tax debt, but before it files a tax lien, there is a window of opportunity. Anyone who gets a bill from the IRS with a huge number attached probably thinks their battleship is sunk. There are, however, a number of ways to get back into the IRS’ good graces regardless of your financial situation with the Fresh Start Program. If you’re short on cash, you can agree to pay your tax debt off over several years or even pay off an amount less than you owe. You can also request that the IRS wait to take action against you because your financial situation is so bad. If you’re on firmer financial footing, you can make an offer to the IRS. This is bargain between you and the IRS to pay less than what you owe in exchange for the IRS forgiving the balance. Refer to this article for details on how to settle a tax debt.

2. Release of federal tax lien.

A release of your federal tax lien means the IRS has updated the public record and no longer has a right to your property. The original tax lien is still public record, however, and can cause credit problems. You can pay off the tax debt in full to get a release, but there are other ways to obtain it without this nuclear financial option. Under the IRS’ Fresh Start Program, just getting the balance under $25,000 and entering into a payment agreement may be a way out. You can also try to get the IRS to agree that it is in their best interest to release the lien so you can pay the tax debt. The IRS may agree to discharge certain property from the tax lien so you can sell it then pay them (see IRS Publication 783). The IRS may also agree to subordinate its claim (a complex area of law requiring professional assistance) (see IRS Publication 784).

The IRS releases a tax lien 30 days after you make suitable arrangements.

3. Withdrawal of federal tax lien.

A withdrawal of your federal tax lien means the IRS releases the lien and removes the public record. This usually occurs when the IRS filed the tax lien in error and you prove it to them. The Fresh Start Program, under certain criteria, also makes a withdrawal possible after the IRS releases your tax lien.

The new IRS policies give you many options to remove a tax lien. Smart choices and knowing these options can make the process of removing a tax lien much less painful than it was just a few years ago.

Feel free to ask questions about your specific situation.

Ari Good, Esq.

Ari Good, JD LLM, a tax, aviation and entertainment lawyer, is the Shareholder of Good Attorneys At Law, P.A. Ari Mr. Good received his BA, With Distinction, from the University of Michigan in 1993. He graduated from the DePaul University College of Law in 1997 and received his LL.M. in Taxation from the University of Florida. Ari represents DJs, live musicians, fashion models and other entertainers in copyright, licensing and contract matters.

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