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IRS Tax Liens: What You Need to Know

An IRS tax lien is the government’s legal claim against your property when you have an overdue tax debt. The lien protects the government’s interest in all your property, including real estate, personal property and financial assets. A federal tax lien exists after the IRS:

  1. Puts your balance due on the books (assesses your liability);
  2. Sends you a bill that explains how much you owe (Notice and Demand for Payment); and
  3. You neglect or refuse to fully pay the debt in time.

The IRS will file a public document, the Notice of Federal Tax Lien, to any other creditors that the government has a legal right to your property. This can negatively impact your ability to obtain new credit, such as a car or home loan. As a general rule, the IRS will not file a lien against a taxpayer who owes less than $50,000 and has entered into a valid installment agreement.

If you have an overdue tax debt, contact a Los Angeles tax attorney at Disparte Tax Law today to discuss what your options are to prevent an IRS lien or to get rid of an existing IRS lien.

How an IRS Tax Lien Affects You

An IRS tax lien can affect you or your business in various ways.

  • Assets — An IRS tax lien attaches to all of your assets (such as property, securities, vehicles) and to future assets acquired during the duration of the lien. Therefore, any equity in the properties would be paid to the IRS upon sale. In addition, the lien will make selling property difficult as buyers won’t buy a property with a tax lien because the lien stays with the property.
  • Credit — Once the IRS files a Notice of Federal Tax Lien, it may limit your ability to get credit. Even if the tax liability is paid in full and the lien is released, it still may affect your credit for years to come. One way to resolve this is to request that the IRS withdraw the lien, which will completely erase the fact that the IRS placed a lien on your credit.
  • Business — The lien attaches to all business property and to all rights to business property, including accounts receivable.
  • Bankruptcy — If you file for bankruptcy, your tax debt, lien, and Notice of Federal Tax Lien may continue after the bankruptcy. Even if the tax debt is discharged, the tax lien may continue unless you request otherwise.

How to Get Rid of a Lien

The IRS will release your lien within 30 days after you have paid your tax debt in full. The IRS will also release all tax liens after it accepts an Offer in Compromise.

When conditions are in the best interest of both the government and the taxpayer, other options for reducing the impact of a lien exist. Following are examples of such scenarios:

Discharge of property

A “discharge” removes the lien from specific property. There are several Internal Revenue Code (IRC) provisions that determine eligibility. Often if the taxpayer has no equity in real estate or if the taxpayer agrees to provide all equity to the IRS, the IRS will agree to discharge the lien for that particular property to facilitate a sale.

Subordination of an IRS tax lien

“Subordination” does not remove the lien, but allows other creditors to move ahead of the IRS, which may make it easier to obtain a loan or refinance a mortgage. The IRS will also agree to subordination to facilitate pulling equity from a property via a second loan or line of credit on the condition that the equity will be used, at least in part, to pay the tax debt in full.

Withdrawal of an IRS tax lien

A “withdrawal” of an IRS tax lien removes the public Notice of Federal Tax Lien and assures that the IRS is no longer competing with other creditors for your property or damaging your credit score. However, withdrawals are permitted by the IRS only under certain circumstances.

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

One option may allow for withdrawal of your Notice of Federal Tax Lien after the lien’s release. General eligibility requirements include the following:

  1. Your tax liability has been satisfied (paid in full or resolved through an Offer in Compromise) and your lien has been released;
  2. You are in compliance for the past three years in filing – all individual returns, business returns, and information returns; and
  3. You are current on your estimated tax payments and federal tax deposits, as applicable.

The other option may allow for 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 requirements include the following:

  1. 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)
  2. 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)
  3. Your Direct Debit Installment Agreement must full pay the amount you owe within 60 months or before the Collection Statute expires, whichever is earlier
  4. You are in full compliance with other filing and payment requirements
  5. You have made three consecutive direct debit payments
  6. You can’t have defaulted on your current, or any previous, Direct Debit Installment agreement.

Contact a Los Angeles Tax Attorney for Free Consultation

If you have an overdue tax debt or an IRS tax lien, contact a Los Angeles tax attorney at Disparte Tax Law today for a free consultation.