Understanding how tax liens work and their impact on your financial wellbeing is crucial for protecting your assets and credit. Let’s explore what tax liens are, how they affect you, and what options you have for addressing them.

What Is a Federal Tax Lien?

A federal tax lien is the government’s legal claim against your property when you neglect or fail to pay a tax debt. There’s an important distinction between the federal tax lien and the Notice of Federal Tax Lien. The federal tax lien automatically applies to all of your property when you fail to pay taxes after a demand for payment.

The IRS will only file a Notice of Federal Tax Lien after three specific actions occur:

1. The IRS assesses your tax liability
2. Sends you a bill explaining what you owe (Notice and Demand for Payment)
3. You fail to fully pay the debt in time

When these conditions are met, the IRS files a public document called the Notice of Federal Tax Lien to alert creditors that the government has a legal right to your property. The Notice of Federal Lien needs to be filed with state or local authorities, such as the country recorder of deeds.

How a Tax Lien Impacts You

A federal tax lien has far-reaching consequences:

• Assets: The lien attaches to all your current assets (including property, securities, and vehicles) and any future assets acquired while the lien is in effect
• Credit: Once filed, a Notice of Federal Tax Lien can severely limit your ability to obtain credit
• Business: For business owners, the lien attaches to all business property and rights to business property, including accounts receivable
• Bankruptcy: Even if you file for bankruptcy, both the tax debt and lien may continue after the bankruptcy proceedings
• Employment: It can prevent you from getting a new job if the employer does not hire staff members with federal judgements against them

Options for Removing a Tax Lien

The most straightforward way to remove a tax lien is to pay your tax debt in full. The IRS will release your lien within 30 days after full payment. However, other options exist that may help reduce the lien’s impact:

Withdrawal

There are some procedural situations that can cause the IRS to withdraw the lien notice. The notice will be withdrawn if it was filed during a bankruptcy automatic stay period or if the IRS failed to follow their own procedures.

The IRS also has the discretion to withdraw the lien if it will facilitate payment or if it is in the best interest of the taxpayer and the government. You’ll need to explain how the lien withdrawal will allow you pay more of your tax debt off when you submit the lien withdrawal request.

A withdrawal removes the public Notice of Federal Tax Lien. While you still owe the tax debt, the IRS won’t compete with other creditors for your property. Under the IRS Fresh Start initiative, you may qualify for a withdrawal if you:

• Owe $25,000 or less
• Have entered into a Direct Debit Installment Agreement
• Have made three consecutive direct debit payments
• Are in compliance with other filing and payment requirements

You’ll still need to request the lien withdrawal by filing Form 12277.

Discharge of Property

A discharge removes the lien from specific property. This option has specific eligibility requirements under the Internal Revenue Code.

Subordination

While subordination doesn’t remove the lien, it allows other creditors to move ahead of the IRS in priority. This can make it easier to obtain loans or refinance property. Lien subordinations are usually granted when you need to sell or refinance property and you convince the IRS that the discharge or subordination will help you pay your tax debt.

Resolve the Tax Debt

Set up a payment plan with the IRS to pay your back taxes in installments or apply for an Offer in Compromise to try to settle your debt for less than you owe.  Work with your tax attorney to determine if you qualify for an OIC.  You will have to prove you are facing financial hardship and cannot pay your full liability.

How Long Does it Take to “Remove” a Tax Lien?

The good news if you have a tax lien is that, once you reach a settlement or finish paying off your debt, the lien is quickly released.  In fact, the IRS releases your lien within 30 days after you have paid your tax debt or come to a settlement.

Appealing a Tax Lien

You may appeal the filing of an IRS tax lien on your property using either the Collection Due Process (CDP) hearing or the Collection Appeals Program (CAP). Each program has slightly different requirements, so discuss your case with a tax attorney to determine which appeal method best fits your situation.

CDP Hearing

You only have the right to request a CDP hearing if you receive certain notices from the IRS. One of these is the Notice of Federal Tax Lien Filing.

The IRS must notify you of the lien filing within 5 days. You then have 30 days to request your CDP hearing. You lose some of your appeal rights if you miss this deadline. The major benefit of the CDP hearing is that if you disagree with the final determination, you can appeal your case to Tax Court. You don’t have this right if you appeal using the CAP.

At the CDP hearing, you can ask for the lien to be withdrawn or propose a collection alternative. You can also request a lien discharge or a lien subordination. You can also dispute the amount of your tax liability, but only if you haven’t had the chance to do so previously.

CAP Procedure

The CAP may proceed more quickly than the CDP hearing. You can request a CAP hearing if you receive a notice of federal tax lien, but you can also use it to appeal other IRS decisions related to liens.

Unlike the CDP hearing, you can appeal the following IRS actions under CAP:

• Denial of a lien withdrawal request
• Denial of a lien subordination
• Denial of a lien discharge
• Appeals filed by third parties who do not have CDP rights

You can use CAP either before or after the IRS files the Notice of Federal Tax Lien. You don’t have the right to appeal a CAP decision in Tax Court.

The method of requesting a CAP hearing varies depending on whether you have previously been in contact with a Revenue Officer. You may have to submit a request in writing, but in other cases you can just ask for the appeal over the phone. Consult with a tax attorney if you have questions about requesting the CAP hearing.

Preventing Tax Liens

The best strategy is to avoid tax liens entirely. Here’s how:

1. File and pay all taxes on time
2. If you can’t pay in full, respond promptly to IRS notices
3. Consider setting up an installment agreement before a lien is filed
4. Stay current with estimated tax payments and federal tax deposits
5. Maintain compliance with all tax filing requirements

Working with a Tax Attorney to Resolve Federal Tax Liens

Given the complexity of tax liens and their serious consequences, working with an experienced tax professional can be invaluable. At Ayar Law, we can:

• Evaluate your specific situation and determine the best course of action
• Negotiate with the IRS on your behalf
• Help you understand your rights and options
• Guide you through the process of lien release or withdrawal
• Ensure ongoing compliance to prevent future liens