The Tax Office of
Michael Hogberg

Understanding a Federal Tax Lien

by | Jul 26, 2022 | Federal Tax

July 26, 2022

A federal tax lien is the government’s legal claim against a taxpayer’s property when they neglect or fail to pay a tax debt. The lien protects the government’s interest in all their property, including real estate, personal property, and financial assets. A federal tax lien exists after:

The IRS:

  • Puts the balance due on the books (assesses your liability);
  • Sends them a bill that explains how much they owe (Notice and Demand for Payment); and

Taxpayer:

  • Neglects or refuses to fully pay the debt in time.

The IRS files a public document, the Notice of Federal Tax Lien, to alert creditors that the government has a legal right to your property. For more information, refer to The IRS Collections Process.

How to Get Rid of a Lien

Paying tax debt in full is the best way to get rid of a federal tax lien. The IRS releases liens within 30 days after a taxpayer has paid their tax debt. 

Sometimes tax debts can become heavy or a taxpayer doesn’t have the means to pay. In these situations, the variables can get tricky. When conditions are in the best interest of both the government and the taxpayer, other options for reducing the impact of a lien exist but there are lists of criteria, exclusions, and conditions that get complicated in many situations. Because of this, we recommend contacting one of our tax professionals to get your tax debt cleared up. 

Discharge of property

A “discharge” removes the lien from a specific property. There are several Internal Revenue Code (IRC) provisions that determine eligibility. For more information refer to Publication 783 (rev. 3-2021). 

Unfortunately, these publications can’t cover every taxpayer’s specific needs. Not every situation warrants this, but in those where there are too many variables and each need to be covered, contact one of our Enrolled Agents today. 

Subordination

“Subordination” does not remove the lien, but allows other creditors to move ahead of the IRS, which may make it easier to get a loan or mortgage. The only way the IRS will do this is if a taxpayer has a legitimate plan and reason for them to fall behind other creditors. Their goal is to collect taxes as quickly as possible and for as much as they can so taking a back seat to other creditors is not always in their best interest. 

Again, eligibility for this process can get tricky so we recommend contacting our team to see if your situation is eligible for Subordination but first review Publication 784 (Rev. 6-2010) to learn more about this process. 

Withdrawal

A “withdrawal” removes the public Notice of Federal Tax Lien and assures that the IRS is not competing with other creditors for a taxpayer’s property; however, the taxpayer is still liable for the amount due. This process is extremely difficult and the deadline and eligibility guidelines are intense. 

Two additional Withdrawal options resulted from the Commissioner’s 2011 Fresh Start initiative.

One option may allow withdrawal of a Notice of Federal Tax Lien after the lien’s release. General eligibility includes:

Your tax liability has been satisfied and your lien has been released; also:

  • You are in compliance for the past three years in filing – all individual returns, business returns, and information returns;
  • You are current on your estimated tax payments and federal tax deposits, as applicable.

The other option may allow withdrawal of your Notice of Federal Tax Lien if you have entered into or converted your regular installment agreement to a Direct Debit installment agreement. General eligibility includes:

  • 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)
  • You 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 fully pay the amount you owe within 60 months or before the Collection Statute expires, whichever is earlier
  • You are in full compliance with other filing and payment requirements
  • You have made three consecutive direct debit payments
  • You can’t have defaulted on your current, or any previous, Direct Debit Installment agreement.

In Discharge and Subordination, we recommended doing your research first but if this seems like the best option for you we recommend contacting us and getting this process started now. Not only are the steps complex but the entirety of your taxes must be compliant and stay that way. Time is of the essence in this process.

How a Lien Affects You

  • Assets — A lien attaches to all of the taxpayer’s assets (such as property, securities, and vehicles) and to future assets acquired during the duration of the lien.
  • Credit — Once the IRS files a Notice of Federal Tax Lien, it may limit a taxpayer’s ability to get credit.
  • Business — The lien attaches to all business property and to all rights to business property, including accounts receivable.
  • Bankruptcy — If a taxpayer files for bankruptcy, their tax debt, lien, and Notice of Federal Tax Lien may continue after the bankruptcy.

Avoid a Lien

You can avoid a federal tax lien by simply filing and paying all your taxes in full and on time. If you can’t file or pay on time, don’t ignore the letters or correspondence you get from the IRS. If you can’t pay the full amount you owe, you need to know your options. Schedule a consultation with an IRS Enrolled Agent to defend you and your situation. 

Lien vs. Levy

A lien is not a levy. A lien secures the government’s interest in your property when you don’t pay your tax debt. A levy actually takes the property to pay the tax debt. If you don’t pay or make arrangements to settle your tax debt, the IRS can levy, seize and sell any type of real or personal property that you own or have an interest in. 

We seriously advise you to avoid getting a levy. To do so, follow our instructions and clear your lien today!