What You Need To Know About Federal Tax Liens
In some respects, tax liens are attention-getting devices as opposed to collection devices. The IRS almost never forecloses on these liens, and the liens themselves are not even publicly available. As a result, some people think there is no need to seek IRS tax lien relief. But for the most part, the attention-getting aspect simply lulls people into a false sense of security. Read on to find out what you need to know about federal tax liens.
The Service always files a Notice of Federal Tax Lien (NFTL), and when that happens, alarm buzzers go off at the three major credit reporting bureaus and consumer reports are updated before you can say “Taxpayer Bill of Rights.” Liens have a particularly bad effect on credit scores, because they indicate that the taxpayer simply ignored the debt. A NFTL may also affect a security clearance under Guideline F of DoD Directive 5220.6.
A quick note before we go further into the world of IRS tax lien relief. Even though some people use the terms interchangeably, a “lien” is not the same thing as a “levy.” You can find out, in detail, the difference between the two here. But for now, just know that a lien is a legal document that makes the IRS a priority creditor; a levy is a tap into a source of funds, typically a bank account.
Preventing a Lien
The one sure way to prevent a lien is to pay the tax due on time, or at least before the IRS files the NFTL. As outlined below, that’s also the one sure way to remove a tax lien.
Furthermore, if the taxpayer sets up a guaranteed or streamlined installment agreement before the IRS files the notice, the Service will not file a lien. However, if the feds have already filed a lien, they will not remove it based on payment status, unless the taxpayer qualifies for lien withdrawal under the Fresh Start initiative. The same thing goes for Currently Not Collectible taxpayers. In each case, the liens remain, but the IRS will not foreclose on them. In fact, the IRS never forecloses on tax liens unless the property has sufficient equity to satisfy the lien in full.
If the IRS based the lien on a substitute return instead of a filed return, limited IRS tax lien relief is often available, because substitute return liens are usually for the wrong amount. The best practice is to file a return and politely direct the IRS to alter the tax due. On a related note, the Service does not adjust the lien amount with the credit bureaus if the taxpayer pays down the debt, so the taxpayer must provide such notice.
Lien Removal and IRS Tax Lien Relief
Other than the Fresh Start basis, the IRS hardly ever withdraws liens, unless the Service filed the lien on the wrong taxpayer or property, and that seldom happens. The IRS does not even withdraw liens if the taxpayer declares bankruptcy. This process may extinguish the legal obligation to repay the debt, but never the debt itself. Furthermore, bankruptcy judges do not have the power to remove property liens.
Lien release, however, is another matter. If the taxpayer pays the debt or enters into one of the aforementioned qualifying installment agreements, the IRS will release the lien within thirty days. It’s then incumbent on the taxpayer to inform the credit bureaus of the release, because the IRS does not do so. Even after the taxpayer gives this notice, a federal tax lien entry may remain on the credit report for several years.
An experienced tax attorney can review your situation and find the mode of IRS tax lien relief best suited for you and your family.