Do you have a tax lien on a piece of property you own? Tax liens are no fun, but they aren’t as hard to resolve as you might think.
Here’s how it’s done.
Defining a Federal Tax Lien
Very quickly, a federal tax lien is the government’s legal claim against your property. You get slapped with one if you refuse or neglect to pay your individual or business income taxes. It puts the IRS at the head of the creditors' line to claim assets to pay back the debt.
The lien is not specific to a particular piece of property. It's applied to all real estate, personal property, and future assets acquired during the lien's existence. The lien can keep you from getting a loan, selling the property, and managing your business.
The statute of limitations for the IRS to place a lien is 10 years, but various actions can pause the clock.
- Filing for tax relief or agreeing to a payment plan.
- Time the IRS uses to consider your request for a repayment plan or other considerations.
- Extending the statute of limitations voluntarily.
Any time the statute is placed on hold, it adds to the calendar time the IRS has to place a lien.
The Federal Tax Lien Process
When the IRS decides to place a lien, it will send you Letter 3172, “Notification of Federal Tax Lien Filing and Your Rights to a Hearing Under IRS 6320.” The state Secretary of State or the county recorder in the county where you live, conduct business, or own property receives a copy, too.
That’s a pretty important document, so don’t throw it in the recycling like a piece of junk mail. Sometimes the notice gets lost in the mail. People might find out about a tax lien when they go to refinance or sell their home.
If you suspect there may be a lien, you can find out by doing a title search, but you are better off checking with the IRS directly.
If you disagree with a lien, you have 30 days from the date on the letter to request an appeal. Appeal instructions come with the letter; however, if you miss the deadline, all you can do is file a request on Form 12153 for an Equivalent Hearing.
Unfortunately, this hearing does not block a levy, suspend the statute of limitations, or allow you to take the IRS to court to appeal any decision made by the IRS Office of Appeals.
Resolving a Federal Tax Lien
Resolution options include withdrawal, subordination, and discharge.
- Removes the public Notice of Federal Tax Lien from your property, but you are still liable for the debt.
- IRS may grant a withdrawal if you are up to date with your payment agreement or if the withdrawal allows the IRS to collect the tax you owe.
- A withdrawal also allows other creditors to move ahead of the IRS for collection purposes.
To determine your eligibility for withdrawal, refer to Form 12277, Application for the Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien.
For general eligibility, your tax liability must be satisfied, and the lien released. You must also be in compliance with filing your taxes for the previous three years and current on estimated tax payments and federal tax deposits.
Compliance includes all individual returns, business returns, and information returns.
Another option for withdrawal is to enter into or convert your regular installment agreement to a Direct Debit installment agreement. You must be eligible to do so.
Subordination is when the IRS agrees to let other creditors go ahead of it to collect the debt. It doesn't remove the lien, it just makes it easier to get a loan or mortgage. You may be granted subordination if, by doing so, it’s easier for you to pay more towards your tax debt.
Subordination can help you refinance your home to a lower interest rate.
To determine your eligibility, refer to Publication 784, Instructions on How to Apply for a Certificate of Subordination of Federal Tax Lien.
A discharge removes the lien from a specific piece of property. For example, if you needed to sell your home to pay for taxes, the IRS may grant a discharge on that property to allow you to sell it.
The IRS only allows a discharge under extremely specific circumstances. Refer to Publication 783, Instructions on How to Apply for Certificate of Discharge from Federal Tax Lien.
Avoiding a Federal Tax Lien in the First Place
The best way to avoid a federal lien is to pay your taxes in full and on time. Alternatively, you can apply for an extension by Tax Day to give yourself elbow room. Go ahead and pay as much as possible to reduce the penalties and interest that accrue when you pay late.
The next best thing to do, if you know you can’t pay everything in full on time (even with an extension), is to throw yourself on the limited mercy of the IRS and make arrangements for an installment agreement or Offer in Compromise.
Do this before Tax Day, not after.
You are eligible for an installment agreement if you need more than 120 days to pay the amount owed, and you owe less than $50,000, including penalties and interest. An installment agreement allows you to avoid liens and levies.
If you enter into an Approved Payment Plan with automatic debit payments, you can get a lien removed if it’s already been placed.
An Offer in Compromise is best approached with a tax professional or attorney. An Offer in Compromise is an arrangement to pay back some, but not all, of your federal tax debt. You must prove you would incur significant hardship under the terms of a payment plan covering the full amount.
You’re much better off pursuing other options first.
The People First Initiative
On March 25, 2020, the IRS announced an initiative in response to the COVID-19 crisis. It provides several steps taxpayers can use for relief on issues such as easing payment guidelines to postponing compliance actions. Included in the initiative:
- Taxpayers may suspend payments on installment agreements if unable to comply.
- The IRS halted a majority of new liens and levies initiated by their field officers.
- The government stopped issuing new, automatic systemic liens and levies.
- The IRS quit forwarding new delinquent accounts to private collection agencies.
As the pandemic moves along, the IRS will modify or eliminate this initiative, depending on feedback from partners in the tax industry.
To Sum Up
You are better off paying your tax debt on time and in full, or failing that, making arrangements for an installment agreement if you can’t pay. Refusal to pay or being negligent in tax payment leads to a Federal Tax Lien against your property. You have options to get out from under it, but it’s better to avoid it.
Look into the People First Initiative if the COVID-19 crisis caused an inability to meet your obligations. Otherwise, act quickly when you realize you can’t meet your tax obligations.