Tax Liens – What You Need to Know.
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 the lien is to protect the government’s interest in the taxpayer’s assets.
The IRS often files a Notice of Federal Tax Lien to let creditors know that money will be paid to the IRS first. Unsecured creditors will be behind the IRS in priority. This is a public document.
If you owe $10,000 or more in taxes, there is little you can do to the stop the filing of 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.
Federal tax liens are often superior to other types of creditor liens. However, they do not automatically jump ahead of mortgages, Uniform Commercial Code filings or previously filed liens.
Withdrawal of Tax Liens
Taxpayers who owe $25,000 or less to the IRS may request their tax lien to be withdrawn if they enter into a direct-debit installment agreement to pay off their tax.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.
If taxpayers meet this exception, then they may request that the their federal tax lien be withdrawn after making three monthly installment payments to the IRS.
Tax Liens are Self-Releasing
Federal tax liens are automatically released when the 10-year statute of limitations on the tax debt expires. There is no need to request the release of a lien. Nevertheless, the taxpayer may file a written request to the IRS lien unit to have a lien formally released after the expiration of the statute of limitations or the payment of the tax, if requested by a bank or other lender.
Right to a Hearing
The filing of a Notice of Federal Tax lien provides the taxpayer with a right to a hearing. During the hearing, the taxpayer meets with a Settlement Officer to discuss the lien. The taxpayer may also use the hearing to discuss methods to resolve the debt, such as an 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.
Discharging Assets from a Tax Lien
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:
- 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.
- 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.
- 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.
Subordinating a Tax Lien
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:
- 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.
- 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.
- 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.
Federal tax liens are 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 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.
Founded by Gary Massey, CPA, Massey and Company is a boutique CPA firm located in Atlanta, GA, serving the needs of small businesses, business owners and individual taxpayers. Our services include tax preparation, tax planning, taxpayer representation, IRS audits, monthly bookkeeping and accounting.