IRS tax liens can be broken down into two categories:
(1) unfiled liens and (2) filed liens.
In the world of taxes, numerous terms and concepts can confuse the average taxpayer. One such term is a federal tax lien. If you’ve ever heard this term and wondered what it means and how it can affect you, you’re in the right place. In this article, we will delve into the basics of a federal tax lien, including what it is, the process involved, the consequences it can have, how to resolve it, and even how to prevent it in the first place. So, let’s jump right in and demystify this critical topic. Here’s what we’ll cover (you can jump to the section you care most about):
A federal tax lien is a legal claim by the Internal Revenue Service (IRS) against the property and assets of a taxpayer who fails to pay their federal taxes. It is essentially a way for the government to secure the amount owed and ensure they have a claim on the taxpayer’s assets until the debt is satisfied. This claim is typically filed when a taxpayer owes a significant amount in taxes and has been delinquent in their payments for an extended period.
Simply put, a federal tax lien is a legal encumbrance on taxpayers’ property. It serves as a notice to other creditors and potential buyers that the IRS has a claim to the taxpayer’s assets. This lien attaches to all of the taxpayer’s real and personal property, including homes, cars, bank accounts, and even future assets acquired during the duration of the lien. The IRS does not obtain ownership by filing a tax lien. But once a federal tax lien exists, the IRS does have a right to take any proceeds from the sale of the property.
When a federal tax lien is filed, it becomes a matter of public record and can negatively impact the taxpayer’s financial reputation. It can make it difficult for the taxpayer to obtain credit, secure loans, or sell their property without first satisfying the tax debt.
It is important to note that a Federal Tax Lien does not automatically result in the seizure or sale of the taxpayer’s property. Instead, it establishes the government’s legal right to the assets and warns other creditors that the IRS has a priority claim.
Under Internal Revenue Code section 6321, a tax lien arises by operation of law against all of a taxpayer’s property, including any property the taxpayer acquires in the future. This is a general tax lien. This can only happen after a tax assessment. Even after a general tax lien arises, the taxpayer still owns the property. The federal tax lien helps determine which other creditor has priority over an asset. For instance, a taxpayer owns a home with a mortgage from ABC Bank. If a federal tax lien is attached to the property, the bank would have priority over the federal tax lien and be paid before the IRS receives any money.
The federal tax lien is for all the federal taxes owed, including any accrued interest or penalties. Federal tax liens are very broad. It reaches every interest the taxpayer might have, including interest in personal property.
There are three legal requirements for the lien to be valid. It must (1) identify the lienor, (2) identify the property subject to the lien, and (3) it must identify the amount of the lien. These don’t need to be listed on the federal tax lien for it to be valid. It doesn’t require that the specific property be identified. It’s only required that the property can be identifiable.
There are additional safeguards in place that give taxpayers rights regarding federal tax liens. The taxpayer must be notified in writing for a filed federal tax lien. The notice must explain the amount of the unpaid tax and the appeal rights available to the taxpayer. It must also advise of the right for a Collection Due Process hearing under Internal Revenue Code section 6320. The notice must be given to the taxpayer in person, left at the taxpayer’s home or business address, or sent by certified mail to the taxpayer’s last known address.
Now that we understand the definition and the role of the IRS in the process of a federal tax lien let’s delve into the specific steps involved.
Tax debt results from a valid tax assessment, which means you filed a return and owed money, or the IRS changed your tax return via an audit or automatic adjustment. The IRS cannot file a lien without a valid tax assessment.
Once there’s a valid tax assessment, the billing process begins. The IRS issues a computer-generated notice called the Notice and Demand for Payment. It’s also sometimes referred to as the 6303 notice, which is the Internal Revenue Code section that requires the notice. This is sent within 60 days of the tax assessment. The notice informs you of what is owed and gives you ten days to pay it. Once this notice is issued and the allotted period passes, the failure to pay penalty starts to accrue, which is one-half of one percent a month.
This notice is either sent to your house or your last known address. Unfortunately, you may never receive this notice if the IRS has the wrong address on record.
Quick aside: We once represented a taxpayer who used a very shady tax preparer. The tax preparer had changed the taxpayer’s address to the tax preparer’s address, so the taxpayer wasn’t receiving any notices and wasn’t aware of the tax assessment — be careful!
A federal tax lien exists after the 6303 notice is issued and you do not pay. The tax lien is automatically attached to all of your property. The lien is in effect as of the date of the tax assessment. No further notice is needed, so it’s sometimes called a secret tax lien. This secret tax lien attaches to all property you currently have and any property you acquire in the future, so long as the lien is still in effect.
A secret tax lien has issues, primarily that other creditors do not know of its existence. As such, the IRS has a process of filing a Notice of Federal Tax Lien. The Notice of Federal Tax Lien secures the IRS’s priority over certain other creditors who may file liens after that. The Notice of Federal Tax Lien is sent to the taxpayer after it is filed. Other than the 6303 notice mentioned above, no further warning is given.
The Notice of Federal Tax Lien is filed according to each state’s requirements. Generally, this means recording the tax lien at the County Recorder’s office where the taxpayer is located or has property. The Notice of Federal Tax Lien outlines the amount owed, the taxpayer’s rights, and the appeal rights for the taxpayer.
Upon receiving the Notice of Federal Tax Lien, the taxpayer may experience various emotions, from confusion to anxiety. They may wonder how this situation came about and what it means for their financial future. The taxpayer needs to seek professional advice at this stage to fully understand their options and potential consequences.
Once the taxpayer acknowledges the Notice of Federal Tax Lien, they may start to feel the weight of the situation. The realization that their property and assets are at risk can be overwhelming. They may begin to consider the various actions they can take to prevent the filing of the lien, such as negotiating a payment plan or seeking an offer in compromise.
How does a tax lien impact you? There are a few considerations.
Once a federal tax lien exists, the IRS has priority over certain other creditors. If the property is sold, the IRS gets paid before those other creditors.
Generally, priority is determined by “first in time, first in right,” meaning whoever perfects their lien first has priority. There are some exceptions. Some purchasers or other creditors will have superpriority over the IRS, even if the IRS’s tax lien arises first. Some examples:
Let’s run through an example. The IRS filed a tax lien for $10,000. After that, you sold your vehicle to John Doe, who did not know of the tax lien. Since John Doe didn’t know about the tax lien, he’ll have clear title to the vehicle. If John Doe did know about the tax lien, the IRS could go after the vehicle since the federal lien attaches to the vehicle.
A tax lien is nothing more than a security interest in property. However, a tax lien can be enforced by a levy or seizure of property.
Before seizing your property, the IRS must mail a Notice of Intent to Levy letting you know if the IRS plans to enforce the tax lien. The notice must include the procedures relating to the levy as well as alternatives to avoid the levy. It must also give you 30 days to appeal.
The Notice of Intent to Levy does not need to specify the property they intend to seize. As discussed, once the federal lien exists, it applies to all property you had or acquired.
A levy can be made on all of your property. Generally, the levy applies to any property you have when the levy is issued, but there are some exceptions. The IRS can levy or garnish your wages on an ongoing basis.
Unfortunately for the taxpayer, a federal lien is a public filing. A tax lien is often filed with the county recorder’s office. This makes it accessible for anyone looking. Tax professionals often comb the county recorder records for new federal tax liens and send solicitation letters to the taxpayers.
This can be quite damaging to an individual or business’s reputation as it shows an outstanding tax debt and the amount of the tax debt on the federal tax lien.
Federal tax liens are filed with the appropriate state office. A tax lien is not filed with private entities like a credit bureau. Before 2018, federal tax liens would negatively impact your credit score. However, starting in April 2018, the major credit reporting agencies stopped doing this and removed federal tax liens from credit reports.
Nevertheless, a federal tax lien is still a public document anyone can access. As such, a third party might still use the federal tax lien as a basis for denying a loan or financing.
Certain legal rights arise when a federal tax lien is filed. Under Internal Revenue Code section 6320, the taxpayer has 30 days to appeal the filing of the federal tax lien through a Collection Due Process (“CDP”) request. This is a crucial appeal deadline, but it only comes into play once the federal tax lien exists.
A CDP request appeals the filing of the federal tax lien. It sends the case to the IRS Independent Office of Appeals for resolution. This is an opportunity not only to appeal the filing of the federal tax lien but also to dispute the federal tax liability and propose a solution to the tax debt.
It’s rare for there to be federal tax lien errors, but if that’s the case, Appeals may remove the federal lien filing records themselves. Most often, the lien filing stands. However, filing the CDP in response to the federal tax lien has other significant benefits.
If you dispute the tax debt, you may be able to contest it at the Appeals hearing. You can also request the penalties abated if there’s reasonable cause. You can also resolve the tax debt during a CDP hearing by agreeing to a resolution, such as a direct debit installment agreement.
If you find yourself facing a federal tax lien, there are steps you can take to resolve the situation and alleviate the consequences. At the core, the issue is resolving the tax debt that caused the lien filing in the first place.
A Federal tax lien can be a daunting situation, but it is important to remember that options are available to help you resolve the issue. By taking the right steps, you can work towards resolving the tax debt and getting your financial affairs back on track.
The most straightforward way to resolve a federal tax lien is by paying the tax debt in full. Once the tax debt is paid, the IRS will release the lien, and it will no longer have any claim to your property. This is often the preferred method as it allows for a clean slate and eliminates further consequences.
However, paying the full tax debt may not always be feasible for everyone. It is important to assess your financial situation and determine if this option suits you. If it is, you can contact the IRS to discuss payment arrangements and ensure the lien is released once the debt is fully paid.
If paying the total amount is not feasible, the IRS offers the option of entering into an installment agreement. This allows you to make monthly payments towards the tax debt over an extended period. It is important to note that this option may still result in a lien being filed, but it provides a structured plan for resolving the debt over time.
When entering into an installment agreement, it is crucial to review the terms and conditions set by the IRS carefully. You should ensure that the monthly payments are affordable and that you can adhere to the agreed-upon schedule. By making consistent and timely payments, you can gradually reduce your tax debt and eventually resolve the lien.
If a federal tax lien exists, you may be able to get it removed through a specific payment plan. For this to happen, certain conditions must be met:
If the federal tax lien exists, it will be removed if these conditions are met.
In certain circumstances, the IRS may accept an Offer in Compromise to settle the tax debt for a lesser amount than what is owed. This option is typically reserved for taxpayers who cannot pay the entire debt and can demonstrate financial hardship. The IRS will review the taxpayer’s financial situation and determine if they qualify for this settlement option.
Submitting an Offer in Compromise requires careful preparation and documentation. You must provide detailed financial information, including income, expenses, assets, and liabilities. The IRS will evaluate your offer based on your ability to pay, income level, expenses, and asset equity. If your offer is accepted, you must make the agreed-upon payment and fulfill any other conditions set by the IRS. If a federal tax lien exists, it will be released after the offer is completed and paid for.
It is important to note that the acceptance rate for Offers in Compromise is relatively low. However, if you believe that you meet the eligibility criteria and can demonstrate your financial hardship, it may be worth exploring this option with the assistance of a tax professional.
Resolving a federal tax lien can be a complex and challenging process. It is advisable to seek professional guidance from a tax attorney or a certified public accountant specializing in tax matters. They can provide expert advice and help you navigate the various options available to resolve your tax debt and release the lien.
There are three types of federal tax lien “removal” once a federal tax lien exists.
We’ll first discuss a federal tax lien subordination. A federal tax lien subordination essentially allows other creditors to jump ahead of the IRS’s priority. There are several ways to qualify for the IRS tax lien subordination.
An IRS tax lien subordination may be granted if you pay an amount equal to the lien or interest. Let’s run through an example to help clarify: You own a home worth $400,000. The federal tax lien attaches to your home. The mortgage is currently $290,000. The federal tax lien is $20,400.
You want to refinance the mortgage and get a loan for $320,000, using cash to pay off the federal tax lien. The IRS would likely grant the subordination in this case since they are fully paid.
The IRS may also subordinate a federal tax lien if the IRS believes the government will receive more money and make collection of the federal tax collection liability easier. A simple example would be if you refinance your mortgage to pay less monthly. This means there’s more money left over to pay the federal tax debt every month, and they’ll subordinate the federal tax lien.
To get a federal tax lien subordination, you must complete Form 14134, Application for Certificate of Subordination of Federal Tax Lien. You’ll need to include supporting documentation, such as an appraisal or valuation, the notice of federal tax lien, the proposed loan agreement, a current title report, and a proposed closing statement.
A subordination of a federal tax lien does not necessarily permanently remove the lien. Instead, if you still have tax debt, it allows other creditors to jump ahead of the IRS’s priority. The IRS tax lien will be refiled once the loan goes through, but the bank or other creditors that gave you the loan will now have priority over the IRS.
If your application for subordination of a federal tax lien is denied, you can appeal through a Collection Appeal Request.
A certificate of discharge from a federal tax lien removes the IRS tax lien from the property named in the certificate. Generally, you want to submit the request for a certificate of discharge from a federal tax lien at least 45 days before the transaction date.
Several different provisions allow for a federal tax lien discharge. First, the IRS may discharge the federal tax lien if you have other property encumbered by the federal tax lien whose value is at least twice as much as the tax liability. Let’s say you have two properties — a primary residence and a second home. The second home is owned free and clear, and you’d like a discharge of your primary residence. So long as the value of the second home is twice the tax liability, the IRS should discharge the federal tax lien for the primary residence.
Second, the federal tax lien may be discharged if the tax liability is partially paid with an amount not less than the IRS’s interest in the property being discharged. For example, you’re selling your home for $430,000. You have a mortgage on the property for $270,000. Settlement costs are $30,0000, and the IRS tax lien is $400,000. After the mortgage and closing costs are paid, there’s not enough to satisfy the IRS debt. However, the IRS will still discharge the federal tax lien against the property since they are getting the full value of their interest.
You’ll need to submit similar documentation as you would in a lien subordination. In particular, it’s essential to have a third-party appraisal ready because the IRS wants to ensure you are not selling the property for less than fair market value.
Third, the IRS may discharge a property if it’s determined that the IRS’s interest in the property has no value. For instance, you’re selling your home for $400,000. The mortgage is $370,000 and closing costs are $30,000. There’s simply no money left for the IRS. As such, it will discharge the federal tax lien so the transaction can go through.
You can also ask the IRS to withdraw the federal tax lien. A withdrawal of a federal tax lien is not the same as a release of a federal tax lien. A withdrawal removes the effect of the tax lien, whereas the certificate of release releases the filed lien and extinguishes the statutory tax lien.
There are four scenarios where the IRS may withdraw a federal tax lien:
Even if one of these situations applies, the IRS still does not have to withdraw the federal tax lien — it’s still at their discretion. The only exception where a federal tax lien must be withdrawn is when a federal tax lien is filed in violation of a bankruptcy court’s automatic stay.
Let’s dig into some of these scenarios a bit deeper:
This is one of the more gray area reasons for a federal tax lien withdrawal. There are nine factors the IRS considers:
The IRS gives some scenarios that may meet this criteria. For example: A federal tax lien has been filed in the name of a taxpayer with no assets, is unlikely ever to acquire assets of any real value, and has no other secured creditors. The taxpayer agrees to pay the tax balance due through payroll deductions at a rate higher than the IRS can obtain through a wage levy to withdraw the federal tax lien. The federal tax lien may be withdrawn because doing so will facilitate the collection of the tax liability.
A federal tax lien has been filed for a taxpayer owning minimal distrainable assets who is currently unemployed. The taxpayer is offered employment provided she is bondable. However, the bonding company refuses to issue a bond because of the federal tax lien. The taxpayer agrees to pay the tax balance due through payroll deductions if the federal tax lien is withdrawn and she can begin working. The federal tax lien may be withdrawn, with the provision that it will be filed again in case of default because doing so will facilitate the collection of the tax liability.
A taxpayer has been making installment payments for the past year and has two years of payments remaining. The taxpayer is a salesman and needs to purchase a new automobile to continue generating the income used to make the installment payments. The taxpayer verifies that he cannot obtain a new car loan or a lease because of the federal tax lien. The federal tax lien may be withdrawn, with the provision that it will be filed again in case of default because doing so will facilitate the collection of the tax liability.
We’ve also been successful in getting a federal tax lien withdrawn because the taxpayer had a special license that was up for renewal. We had a written letter stating the taxpayer’s license would not be renewed because of the federal tax lien; as such, the taxpayer would lose their job and ability to make monthly payments. The IRS was willing to withdraw the federal tax lien in this scenario.
For a tax lien withdrawal to be in the best interest of the IRS and the taxpayer, two conditions need to be met:
There are five factors the IRS will consider in making its determination:
As you can tell from the list, this is essentially a last resort. Here are some examples the IRS gives:
A taxpayer contacts the Taxpayer Advocate Service (TAS) and requests that the notice of federal tax lien filed in their name be withdrawn because it is in their best interest as well as in the best interest of the government. TAS determines that it is in the best interest of the taxpayer that the notice of federal tax lien be withdrawn. TAS contacts Collection, requests that the notice of federal tax lien be withdrawn, and, upon review, Collection determines that it is in the best interest of the government that the notice of federal tax lien be withdrawn. Because TAS and the IRS agree that it is in the best interests of both, the notice of federal tax lien may be withdrawn.
A taxpayer requests that the notice of federal tax lien be withdrawn so that he can refinance his home mortgage. In addition to refinancing the existing first mortgage, the taxpayer offers to borrow an additional amount to be applied as a partial payment of the liabilities listed on the notice of federal tax lien . The taxpayer’s lender will not make the loan unless the notice of federal tax lien is withdrawn. Although withdrawal of the notice of federal tax lien would be in the best interest of the taxpayer, and withdrawal of the notice of federal tax lien would result in partial payment, it is not in the best interest of the government to withdraw the notice of federal tax lien. A subordination certificate will better protect the government’s interest by allowing for partial payment of the liability while continuing to secure the government’s interest for the remaining taxes due.
The taxpayer in the above example requests that the notice of federal tax lien be withdrawn so that he can refinance his home mortgage. In addition to refinancing the existing mortgage, the taxpayer offers to borrow an additional amount and full pay the liabilities listed on the notice of federal tax lien. The taxpayer states that his lender will not make the loan unless the notice of federal tax lien is withdrawn, even though a payoff statement is provided, the lender is aware that the notice of federal tax lien will be paid off from the loan proceeds, and a revenue officer offers to attend the loan closing and provide an immediate lien release upon receipt of full payment. Further questioning of the taxpayer reveals that the notice of federal tax lien is preventing the taxpayer’s mortgage broker from placing the taxpayer’s loan with a lender. While other secured creditors have refused to give up their secured status in exchange for a promise of full payment, the taxpayer is hopeful that the government will agree to do so. Although withdrawal of the NFTL is in the best interest of the taxpayer, it is not a good business practice nor is it in the best interest of the government to relinquish its secured creditor status in exchange for a promise to pay.
A taxpayer enters into a two-year installment agreement conditioned upon the recording of an notice of federal tax lien. One year later she requests withdrawal of the notice of federal tax lien. All payments have been made timely and the taxpayer is requesting the withdrawal because it is harming her credit worthiness. Although withdrawal of the notice of federal tax lien is in the best interest of the taxpayer, it is not a good business practice nor is it in the best interest of the government to relinquish its secured creditor status.
Personal property is essentially any property that is not real estate. Personal property includes both physical property (like that fancy watch collection) and intangible assets (like valuable intellectual property). Personal property also includes stocks.
Once a federal tax lien arises in the county where you reside, the lien attaches to both the real estate you own and your personal property.
This came up in a recent bankruptcy case in Tennessee. In that case, the IRS filed a tax lien in the county where the taxpayer’s mother resided. The taxpayer, however, lived in a different county. The court found that the tax lien did not attach to the personal property since the tax lien was recorded in the wrong county.
But what if the taxpayer subsequently moves after the tax lien is filed? Once the federal tax lien arises and is properly recorded where the taxpayer resides, it doesn’t matter if the taxpayer moves. For federal tax law purposes, the lien still attaches to all personal property the taxpayer has or obtains in the future.
It depends on the real or personal property. Personal property includes things like money in the bank account and your paychecks. It’s common for the IRS to go after these types of personal property through a bank levy or wage garnishment once a federal tax lien exists.
But what about other types of personal property, like that fancy watch collection or your vehicle?
This is less common, but the IRS occasionally seizes this personal property. For instance, we had a case where the taxpayer owed several million to the IRS. After an IRS agent contacted the taxpayer about the debt, he bought a BMW (i.e., personal property) for $95,000 in cash.
The IRS agent was not pleased, to say the least. While some personal property is necessary for ordinary and necessary living expenses, a brand-new BMW paid for in cash is not the type of personal property the IRS will disregard. It enforced the tax lien and seized the personal property. Remember that the federal tax lien continues until the debt expires or is paid.
One common scenario is that a taxpayer wants to sell their home, but their realtor or real estate attorney says they can’t because of the tax lien. This is incorrect. So long as the property is sold to a third party for fair market value, the IRS will allow the sale to go through, even if they’re not getting any money from the sale.
You need to alert the IRS to the sale so that the tax lien can be removed from the property and the new owner can have “clear title” to the property. Otherwise, the lien attaches to the property, causing issues for the new owner.
Another thing to understand about real estate and a tax lien is priority. The IRS does not have any super-priority over other creditors. The general rule of “first in time, first in right” also applies to a tax lien. Once a federal tax lien attaches to a property, other creditors are now aware or should be aware of the tax lien.
Let’s run through an example. You own real estate worth $500,000, and you have a mortgage with ABC Bank for $300,000. A tax lien is filed for $100,000 after that. ABC Bank has priority over the IRS because it filed its lien first. If you wanted to pull equity from the home from XYZ Bank, they would be behind the IRS’s priority unless you obtained a lien subordination.
At the risk of going on a long tangent regarding the IRS’s Fresh Start Program, please know that what it is and does is particularly overblown by tax resolution companies who use the name for marketing purposes.
The Fresh Start program was simply a series of initiatives by the IRS to lessen the burden of having debt. Some of these changes include how the IRS handles a tax lien. Here’s what the changes included:
Remember that these changes were made in 2011 — so we are not exactly breaking ground at this point.
Obviously, the best way to avoid a tax lien is to pay the tax debt on time. If you’re a W-2 wage earner, this means making sure you have the proper amount withheld each pay period. The IRS has a helpful calculator to see if you’re on track.
Things are a bit tougher if you’re self-employed or have a business. But you need to make sure you are making estimated tax payments so you do not owe when you file the tax return. Estimated tax payments are made four times yearly, so you must plan.
Additionally, it is crucial to maintain open communication with the IRS. If you are experiencing financial hardship or cannot pay your taxes, contacting the IRS and explaining your situation can help prevent the immediate filing of a federal tax lien. The IRS may be willing to work with you to find a solution that allows you to fulfill your tax responsibilities without resorting to filing a lien.
You should, in theory, get a notice in the mail once a tax lien is filed. The tax lien notice is sometimes sent to an old address or “lost” in the mail. If you want to double-check if a tax lien has been filed, you can check your IRS account transcripts on the IRS’s website.
Yes, a taxpayer has the right to dispute a federal tax lien. If you believe the lien was filed in error or the amount owed is incorrect, you can appeal with the IRS. Gathering any supporting documentation and presenting a solid case to support your dispute is essential.
A tax lien is a public record. This can harm the reputation of you or your business. While it does not negatively impact your credit score, it can affect your ability to obtain financing. Other creditors will be reluctant to loan you money if they see a federal tax lien exists.
The tax lien notice will have a column showing when the lien is released. However, various events can give the IRS additional time. Moreover, as stated on the lien notice, the tax lien can be refiled.
Understanding the basics of a federal tax lien is essential for any taxpayer. By knowing what it is, how it can impact you, and how to address and prevent it, you can take proactive steps to avoid the negative consequences of this type of tax debt. Remember, seeking professional help and staying on top of your tax obligations are crucial to maintaining your financial well-being.
Once the IRS files a tax lien, it impacts all property you have and all property you acquire in the future. It doesn’t get much broader than that!
Yes, a tax lien can be released after the IRS files it. It can also be withdrawn or subordinated. We discuss the differences above. But a tax lien can be removed.
Need Tax Lien Help? Contact Paladini Law.
If the IRS has filed or is threatening to file a tax lien, you should probably hire a professional tax lawyer to help. Paladini Law has experience preventing tax liens and negotiating their release once filed. Call us at 201-381-4472 or contact us here.
