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Federal Tax Liens

Preventing and Removing Tax Liens

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What is a Federal Tax Lien?

The Internal Revenue Service routinely files Federal Tax Liens against taxpayers who have unpaid tax obligations. A federal tax lien is a document filed with a county government (usually where the taxpayer lives or conducts business) notifying the general public that a taxpayer has an unpaid federal tax debt. Liens attach to the taxpayer's property (both real property and personal property). If property is sold while a lien is in effect, the IRS will be paid out of the sales proceeds before the taxpayer is paid.

Once a lien is filed, it becomes a matter of public record. Liens record the full amount owed to the IRS at the time the lien is filed. This information is routinely picked up by the various credit reporting bureaus, and so federal tax liens will eventually show up on your credit report.

Liens different than levies

Some people use the words "lien" and "levy" interchangeably. A tax lien is a document filed by the IRS to protect the government's ability to collect money. A levy is the forced collection of tax, for example by confiscating money directly out of a bank account or paycheck.

Preventing a Lien

Federal tax liens can be prevented from being filed in the first place by paying the tax in full and prior to any lien is filed by the IRS. Liens can also be prevented by setting up an installment agreement that meets the IRS requirements to avoid filing a lien. The IRS will not file a federal tax lien if a taxpayer sets up either a guaranteed installment agreement or a streamlined installment agreement. These types of installment agreements require that the outstanding balance be $10,000 or less in the case of guaranteed installment agreements or $25,000 or less in the case of streamlined installment agreements. If a taxpayer owes more than $25,000, a lien can be prevented if the taxpayer pays down the balance so that the balance is $25,000 or less and establishes a streamlined installment agreement.

Notifying Taxpayers that a Lien has been Filed

The IRS generally notifies taxpayers after a federal tax lien has already been filed. The IRS will send taxpayers a Notice of Federal Tax Lien after the IRS has already filed a lien with the county. Federal tax liens are effective beginning ten days after the IRS issues a written demand for payment of outstanding taxes.

Removing a Lien

The IRS will remove a federal tax lien if the lien was filed in error, if the outstanding balance is paid in full, if the outstanding balance is otherwise satisfied (for example through a successful offer in compromise), or if the lien becomes unenforceable (for example, because the lien has expired due to the ten-year statute of limitations).

There are two basic ways to remove a federal tax lien: withdrawal and release.

Withdrawing a federal tax lien means the IRS will rescind the lien, as if the lien was never filed in the first place. Lien withdrawals generally occur when the federal tax lien was filed in error (for example, if a lien was filed against the wrong person). If a lien was filed in error, you should contact the IRS right away. An IRS agent will review your account history to verify that you don't owe the outstanding tax, and will prepare the paperwork necessary to withdraw the lien. However, the IRS has instituted a fresh start program under which taxpayers may be eligible for lien withdrawal provided certain criteria are met.

Releasing a federal lien means that the lien no longer encumbers your property. Upon releasing a lien, county records will be updated to reflect that the lien has been released. However the fact that there was once a federal tax lien will remain on your credit report for up to ten years. Liens are released within 30 days of full payment of the outstanding tax obligations or upon setting up a guaranteed or streamlined installment agreement. Less frequently, the IRS may release a federal tax lien if that will speed up the collection of tax or is in the best interests of the taxpayer and the government. Most federal tax liens are automatically released by the IRS after full payment of tax. The IRS should provide you with a copy of the lien release, which you can forward to the credit reporting bureaus to update your credit reports.

Under the IRS's fresh start program, taxpayers may be eligible for lien withdrawal or release if their outstanding balance is under $25,000.

How a Federal Tax Lien Impacts Your Credit

Federal tax liens adversely impact the credit of taxpayers. Your credit score will likely suffer, and you may find yourself with less than ideal opportunities to obtain new credit or to refinance existing credit.

Tactics for Dealing with Liens

The best tactic is to prevent a tax lien from being filed in the first place. Consider bringing your outstanding balance under $25,000 and set up an installment agreement. This could result in you being eligible for a streamlined installment agreement, and no federal tax lien will be filed. If a lien has already been filed, you might be eligible for lien withdrawal under the IRS's fresh start program. You could bring your balance under $25,000 by transferring some or all of your tax to a credit card or home equity line, or by making payments to bring your balance under the $25,000 threshold.

After the IRS has filed a tax lien, your options are much more limited. You could bring your balance under $25,000 and set up a streamlined installment agreement in an attempt to take advantage of the fresh start program. You could also pay off the outstanding balance in full.

Liens are Not Updated on Your Credit Report

Unlike other credit and loan accounts, the IRS will not periodically update the balance on your federal tax lien. You can contact the IRS to obtain a letter showing the current payoff amount. However that updated payoff amount will be sent only to the taxpayer.

Taxpayers needing assistance in dealing with tax liens and tax collections should seek the advice of a federally authorized tax practitioner such as a tax attorney, certified public accountant or enrolled agent. Taxpayers can also receive free help from publicly-funded tax clinics and from the Taxpayer Advocate Service.

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