Tax Lien — Removable?
The Irs Lien
If you are visiting this page, I assume that you have attempted to refinance or buy a home and pulled your credit report as a result OR you have picked up a certified letter from the IRS.
Either way, you realize that the IRS has recorded a tax lien. You are now officially sick to your stomach and wondering what to do.
A good place to start is to understand what the tax lien is and how it is created.
The Long Definition
The tax lien is similar to a civil lien in the sense that it’s proper existence gives the filer the right to take another person’s property if payment is not made. The Internal Revenue Code (IRC) Sect. 6321 defines the federal tax lien as simply a failure to pay after valid demand by a person who owes the government money.
The difference between the IRS and say…Visa or Mastercard, is that the IRS doesn’t have to sue you and obtain a judgement to “lien” you.
The Federal tax lien is considered valid from the date the government “assesses” the tax, i.e. formally determines that a liability exists and enters the amount in the computer.
This type of lien is often considered to be a “secret” lien
Nobody is aware the lien exists outside of you and the government. Because it is a secret, the government does not necessarily have the first right or “priority” to your property.
In order to obtain that priority, they must file a “Notice of Federal Tax Lien” or the “NFTL”. Once the notice is public, the credit reporting agencies will pick it up and your financial world can be turned upside down. The IRS has priority over everyone.
Getting credit, a new bank account, selling property, filing bankruptcy all become infinitely more complicated.
Why do they record the lien?
The answer is obvious: To protect their interest in your assets. When you refinance or sell your home, you will be forced to pay. Try to borrow money for other reasons? Many lenders will want the lien to disappear from your credit report before they lend.
The lien is a big deal and the IRS knows that it is a big motivator. So continue reading to see what can be done.
Lien Options
Before the Notice Is Filed
A. Argue that the lien is invalid – procedures were not followed
The IRS is required to make reasonable efforts to contact the taxpayer before ”finalizing” an NFTL. These efforts are considered to be, the assessment of the tax, a demand for payment and the mailing of certain notices during the collection process as follows: a.Publication 594, what you should know about the IRS collection process b. Letter 501 – balance due statement c. Letter 504 – urgent notice d. Letter 1058 – Final notice of the IRS intent to file the NFTL and your right to appeal e. ACS Letters LT 39 Reminder Notice or LT11 Final Notice
The lien filing can be challenged if one or more of these technical requirements are not met including that the lien was filed in the wrong place. This type of challenge may or may not make sense dependent on your specific circumstance.
B. Argue Statute of Limitations has run
The federal tax lien created by the Tax Code has a ten year life. This life span can be extended by a number of different events called “tolling events”. Some of these events include past bankruptcies, offers in compromise and a request for collections due process hearing.
The calculation of the statute can be critical, use of that statute as an argument can prevent the filing of the lien.
C. Beg for Mercy - (Not literally)
You can request that the IRS use less intrusive means to collect the tax, appeal the lien decision to the IRS collection group manager or file a collection due process request and exhaust all avenues of appeal.
The problem: Revenue Officers are directed by the Internal Revenue Manual only to delay or withhold the filing of the lien if the NFTL will jeopardize the collection of the tax. This usually means that that the filing will actually disrupt your ability to earn income or borrow money to pay the debt. The argument that your credit score will be hurt will be ignored unless you can supply very specific proof of the damage AND that the damage will negatively affect your ability to pay.
D. Go for the home run (again…not literally)
Filing bankruptcy before the lien is recorded will protect property that is exempt via the bankruptcy code from the lien and collection forever, if the underlying tax is dischargeable. Visit my TaxBlog to learn more about the bankruptcy process.
The use of an offer in compromise or installment agreement will not necessarily stop the recording of the lien.
E. Post a Bond
The taxpayer can post a bond and avoid the lien filing.
After the Notice Is Filed
Most clients who contact me specifically about the lien, have already missed their opportunity to avoid it. Once the lien has properly been filed these are the legal methods used to deal with it.
A. Obtain a Certificate of Release - Thirty days after the debt is no longer legally enforceable as a result of the statute of limitations, bankruptcy discharge, offer in compromise completion, or full payment, the IRS must issue a certificate of release pursuant to IRC 6325(a)(1). If they fail to do so after a proper request, the taxpayer may be entitled to damages (IRC 7432)
B. Certificate of Discharge - The taxpayer can request that certain property is “discharged” from the lien’s effect. [See IRC 6325(b)]. Typically, the discharge occurs when the taxpayer has an asset they wish to sell. The equity from the sale ends up in the IRS’ hands.
C. Certificate of Non-Attachment - On occasion, the taxpayer will need proof that the lien does not attach to property. A circumstance would be where the certificate of release or discharge is not appropriate or available. The requirements include that the lien never attached to a property and a third party is negatively affected by the lien. Think of a situation where you own one-half interest in a parent’s home. The lien appears to be attached to the entire home. Your parents want to borrow against their half. They will need proof that the lien is actually only legally attached your interest.
D. Certificate of Subordination - The IRC Sect. 6325 (d) allows the IRS to subordinate voluntarily in order to give another creditor priority over it’s lien. The IRS will typically grant the certificate when they are receiving an amount equal to the debt to which it is granting the priority. An example: the owner of a home wants to borrow equity from the home to pay the IRS debt. The home equity lender will not agree to the loan unless their secured position is higher than the IRS’. In order to get at least some of the money that is owed, the IRS agrees to take a lesser position.
E. Certificate of Withdrawal - The IRS has administrative discretion to withdraw the tax lien notice and to even inform appropriate credit agencies. Typically the taxpayer must formally request the withdrawal and make one of the following arguments: a. The filing of the notice was premature and not in accordance with administrative procedure. b. An installment agreement has been proposed which will pay the debt in full. c. the taxpayer advocate has determined that a withdrawal would be in the best interest of the taxpayer and the government d. the withdrawal will facilitate collection e. the lien was filed in violation of the automatic stay of a bankruptcy filing f. taxpayer has credit that would satisfy the debt. See above.
F. Bankruptcy - While it may be surprising to many, bankruptcy will discharge income tax debt under specific circumstances. I have helped my client rid themselves of millions of dollars in tax debt using bankruptcy. Once discharged, the lien must be released. (see certificate of release above) (WARNING: Liens survive chapter 7 bankruptcy up to the value of the taxpayer’s interest in property that existed at the time of filing.)
G. Offer in Compromise - Offers in Compromise are widely touted as a tax debt and lien cure-all. The truth is somewhat different. However, if you qualify…an offer is an excellent way to solve the underlying tax debt and have the lien removed.
H. Statute of Limitations - If the ten year period that the IRS has to collect is close to an end, it is often wise to wait it out.
