IRS Tax Liens: The Basics

If you owe money to the IRS, then there is already a tax lien against you.

A federal tax lien comes into effect when a tax liability is assessed and the taxpayer does not pay the amount in full.  The lien attaches to all of the taxpayer’s assets, including assets that are acquired in the future.  The purpose of a tax lien is to protect the government’s interest in the taxpayer’s assets.

Federal tax liens are often superior to other types of creditor liens.  However, they do not automatically jump ahead of mortgages, Uniform Commercial Code (UCC) filings or previously filed liens.

Tax liens only apply to the person whose name is listed on the lien.  Thus, if the lien names one spouse and the other spouse owns the family home, then there is no impact on the title of the home.

Tax liens will continue until the tax debt expires at the end of the 10-year Statute of Limitations period (known as the CSED).  Alternative the tax lien will go away when the tax is paid or the government agrees to compromise the debt with an Offer in Compromise.

Notice of Federal Tax Lien

The IRS typically files a Notice of Federal Tax Lien when a taxpayer owe $10,000 or more in taxes.  The intent of the Notice is to let creditors know that money will be paid to the IRS first.  Unsecured creditors will be behind the IRS in priority.

The Notice of Federal Tax Lien is a public document.  It will be filed in the land records where the taxpayer lives.  It will also be filed with the Secretary of State where the taxpayer lives.  Banks, credit card companies and other creditors do check these records when considering to issue a loan or line of credit.

Expect to get letters in the mail from national tax resolution companies who buy list of federal tax liens.  The resulting flood of mail is a pain, but there is nothing you can do about it.  (My CPA firm does not engagement in this type of aggressive marketing.  Rather, we wait for people with tax lien problems to contact us, if they desire.)

There is little you can do to the stop the IRS from filing a Notice of Federal Tax Lien.  The best thing to do is to work with the IRS to resolve your tax matter.  Once the tax matter is resolved, the federal tax lien will be released within 30 days.  If the IRS deems a taxpayer to be uncollectible, the lien remains in place until the tax is paid, or the statute of limitations expires.  The same is true for taxpayers who are paying a tax though an installment agreement.

Withdrawal of a Federal Tax Lien

Taxpayers who owe $25,000 or less to the IRS may request their tax lien to be withdrawn if they enter into a direct-debit installment agreement to pay off their tax.  This means that the IRS withdraws a fixed sum of money from the taxpayer’s bank account on a given day each month.  

The IRS will required that three electronic monthly payments have been made.

If taxpayers meet this exception, then they may request that the their federal tax lien be withdrawn after making three monthly installment payments to the IRS.

For taxpayers who do not qualify for a withdrawal, a great strategy is to pay off the amount of the tax debt to below $25,000.  The IRS will then withdraw the lien, assuming the other requirements are met.

IRS Lien Release After 10 Years

Federal tax liens are automatically released when the 10-year statute of limitations on the tax debt expires (the CSED).  There is no need to request that the lien be released. 

When the lien is released, the taxpayer should file a formal Certificate of Release of a Federal Tax Lien with the land records of their county and the Secretary of State where they live.  The IRS usually sends this Certificate of Release to the taxpayer when the tax is paid or the debt is compromised (an Offer in Compromise).

However, the IRS does not automatically send the Certificate of Release to the taxpayer when the tax expires at the end of the 10-year Statute of Limitations period (the CSED).  In such case, the taxpayer or their CPA should submit a written request to the IRS Lien Unit to obtain the Certificate.  Once received, the Certificate should be filed with the land records and the Secretary of State.

Banks or other lenders may also request a copy of a Certificate of Release of a Federal Tax Lien when issuing a loan or line of credit. 

Collection Due Process Hearing

The filing of a Notice of Federal Tax lien provides the taxpayer with a right to a Collection Due Process Hearing (also called a CDP Hearing).  During the hearing, the taxpayer meets with a Settlement Officer to discuss the lien.  The taxpayer may also use the hearing to discuss one of the IRS Tax Relief methods to resolve the debt.  These methods include the Offer in Compromise, Installment Agreement or Uncollectible Status.

The request for a hearing must be filed within 30 days of the IRS filing a Notice of Federal Tax Lien.

IRS Lien Discharge

Homes on which there is a federal tax lien may still be sold.  This is done by “discharging” the house from under the lien.

Here are three examples that illustrate how it is done:

1. If there is equity in the house which can pay the tax in full, the IRS will provide a payoff letter and, once the house is sold and the tax is paid, will issue a lien release.
2. If there is equity in the house but not enough to pay the tax in full, the IRS will issue a lien discharge upon proof that the IRS is receiving all available equity in the house.  The IRS will issue a lien release once the house is sold and the funds are received to pay down the tax.
3. If there is no equity in house, the IRS will provide a lien release when the sellers prove that they are not receiving an equity from the sale.

In all three cases, the IRS will not hold up the sale provided that the above steps are followed.

IRS Lien Subordination

In the context of an federal tax lien, subordination refers to the government allowing the lien of another lender to take precedence over its lien on the taxpayer’s property.

Here are three examples of how a subordination works:

1. In the case of a loan refinancing, the IRS will agree to subordinate its lien to a bank or other mortgage lender if the new loan will be used to pay down the tax debt.
2. The IRS will also agree to a subordination of the new loan is used to improve the property and thereby create additional equity to secure the tax debt.
3. Lastly, the IRS will subordinate their lien if the new loan reduces the monthly mortgage payment, allowing the taxpayer to increase their monthly payments to the IRS to pay off the tax.

Tax Lien on Credit Report

Prior to 2018, tax liens had a significant impact on credit scores, typically pushing scores down by more than 100 points.

In 2018, the three major credit bureaus – Equifax, Experian and TransUnion – decided to remove federal and state tax liens from their credit reports.  This means that tax liens will no longer influence credit scores.

If you do see a tax lien on your credit report, be sure to dispute it with the credit bureaus.

To Conclude

Despite the good news about credit scores, federal tax liens remain effective and powerful.  They are a favorite tool of the IRS in its mission to collect unpaid taxes.  And they serve to get the attention of taxpayers when all else fails.

Our Atlanta-based firm represents taxpayers in a variety of tax issues, including back taxes, audits and the resolution of IRS notices.  When the issue includes a federal tax lien, we collaborate with mortgage brokers, bankers and real estate agents to get homes sold or refinanced, generally resulting in a favorable resolution of the tax debt.

The need for good taxpayer representation is exploding.  Be sure to work with a firm that knows how to handle these cases.

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Massey and Company CPA is a boutique tax and accounting firm serving individuals and small businesses in Georgia, Illinois and throughout the country.  Our services include tax return preparation, tax planning for businesses and individuals, IRS tax problem resolution, IRS audits, sales tax, and small business accounting and bookkeeping.