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By Michael S. Anderson of Anderson Tax Law logo for Arizona tax attorney Michael S. Anderson P.C.
  • How to Deal with an IRS Tax Lien

    elephant leaning on mom-thumb-375x282-55228IRS Regularly Records Tax Liens

    The IRS likes to file Notices of Federal Tax Liens. It will do it even when you don’t have any property, when you enter into an agreement for a payment plan and whenever your debt amount reaches a certain level…usually more than $25,000.00

    IRS Liens Recordings Create Problems

    These Liens create problems. For some of us they are big problems. An IRS tax lien will typically lower a credit score by 100 points or more making it more expensive for you to borrow money. They make it more difficult to find certain jobs; in fact, if you are a federal contractor you can’t do business with the government as a result of the lien. They complicate the home buying and selling process especially when a short sale is needed.

    There are ways to deal with an IRS Lien Recording

    There are several options to deal with the negative impact of the lien recording. Some of these options are simpler and can be handled by the average person and some require legal work and expertise.

    1. Pay or Settle the Underlying Debt

    If you have access to the money to pay the debt, it will probably make sense to do so. The Tax Lien is doing its damage and possibly more than you realize. Once paid off, the IRS is supposed to remove the lien automatically, but sometimes you will have to nudge them along.

    If you don’t have the money available to pay the underlying debt, but you are able to obtain an Offer in Compromise settlement, you can request that the IRS remove the lien. The IRS won’t remove the lien upon the acceptance of the offer but only after the Offer in Compromise is paid in full.

    The problem with the offer in compromise is that most that are filed will fail. Historically, the average acceptance rate is less than 25%. Many people who file Offers in Compromise shouldn’t have bothered as they just aren’t good candidates, didn’t do the planning necessary to make it work, didn’t follow the rules during the process, or really can’t afford to pay the offer amount.

    2. Lien Discharge

    When the IRS records the Notice of Federal Tax Lien, it does so typically after your mortgage company has recorded its lien. Therefore the IRS is “behind” the bank in line for the equity in your home. The IRS will often agree to the removal or “discharge” of the Notice in instances where you are trying to sell the property and the lien is causing a problem with the sale.

    An example:

    Imagine that you own a home in Mesa and the value has dropped so much that the home is now worth $100,000.00 less than you owe the mortgage company. You would like to short sell the home but the buyer is hesitant because he sees the IRS lien record on the title history and is afraid he will have to purchase the home subject to that lien. The lien is preventing the sale.

    You approach the IRS properly and it agrees to discharge the lien only as to the home and not as to any of your other assets because it realizes it has no interest in the property and it doesn’t want to be sued to quiet title.

    These lien discharges happen routinely but again…the notice is only discharged as to the home in question not as to your other assets.

    3. IRS Lien Withdrawal

    An IRS Lien withdrawal is exactly what the names implies. The IRS agrees to withdraw or remove the notice of filing the lien. This is a much better outcome than when the IRS agrees to release the lien. When the IRS simply releases the lien, the credit report will show that the debt was paid off, but the fact that the lien existed in the first place will stay on the credit report for several years.

    Imagine if you were applying for a job and both you and your competition had very good credit scores and resumes. The only difference was that your credit report showed that a few years ago the IRS had released a tax lien related to a serious tax debt. You may very well lose the job opportunity as a result.

    Just because the lien has been released…doesn’t mean your tax problem is over. The Notice of Federal Tax Lien is removed from the County Recorder records, but it remains on the credit report. There are only two ways to remove it from the credit report.

    Time will do it eventually

    Most negative entries on a credit report should be removed by the credit reporting agency at 7 years from the date the bad info was entered or the last date the underlying issue was resolved. If the underlying tax debt is paid or settled and the lien released, the fact that the lien existed will be removed from the credit report 7 years later.

    Lien Withdrawal

    Short of that, a Lien Withdrawal must be requested. If withdrawn, the lien will be removed from the County record but also the credit report. The trick is to convince the IRS that the Notice of Federal Tax Lien on your credit report will make it very difficult for you to pay the money back. This can be hard to do and will often require the appeal of the notice filing and possibly even the involvement of the IRS Taxpayer advocate office.

    If the debt is below $25,000.00 or the original principal balance was below $25,000.00 and you are on a direct debit installment agreement with the IRS that pays the debt over 5 years and have been making payments for at least 3 months on that plan, the IRS should withdraw the lien upon request.

    4. “Subordinating the Lien”

    Lien subordination is a process that moves the IRS lien down the list of lienholders on our piece of real estate. The Lien isn’t removed; its placement is adjusted in order to facilitate a situation that could result in the IRS getting paid faster.

    An example:

    You owe $250,000.00 on your home and it is worth $200,000.00. You aren’t filing for bankruptcy and you don’t want to sell. You approach the bank about a loan modification and as a result a reduction in your monthly payment of $500.00.

    You have a tax lien though and the bank doesn’t want to record its lien and wind up with a second position on the home behind the IRS lien.

    You convince the IRS that if it will “subordinate” it’s lien or agree to place it second in line to the newly modified loan, you can use the savings from the lower monthly mortgage payment to pay your IRS debt off sooner.

    The IRS agrees and issues the subordination certificate. The bank is satisfied and the modification goes through.

    5. “Stripping” the Lien

    A bankruptcy is required to “strip” the lien. This stripping process only works if two things are true.

    a. The underlying tax debt is dischargeable in bankruptcy

    Bankruptcy does wipe away your personal obligation to pay certain tax debts. We do this alot and for many people it makes alot of sense.

    b. The property that is subject to the tax lien must be worth less than the tax debt

    If your assets are worth $10,000.00 and the tax lien is worth $100,000.00, it is possible to pay the IRS just the value of the lien over the course of 3-5 years in a chapter 13 bankruptcy or to treat the lien as worth only $10,000.00 at the conclusion of a chapter 7 bankruptcy case.

    At the conclusion of a chapter 7 bankruptcy case the IRS will often agree to remove the tax lien if it sees that it’s lien is not worth much as a result of the discharge of your personal obligation to pay the debt and the low value of the property that existed on the date of filing.

    6. Certificate of No-Interest

    Sometimes people have the same or similar names. One of the people with the same name owes the IRS money and has a tax debt; the other person owns a home that he or she is trying to sell.

    The person selling the home is unable to convince the potential buyer that no lien exists as to the home so he approaches the IRS and the IRS issues a “Certificate of No – Interest” and that is given to the buyer’s representative to prove that the buyer is taking the home free and clear of any tax lien.

    7. Ignoring the Tax Lien

    Eventually, the law itself will kill of the tax lien. The IRS has 10 years to collect on the underlying date and that 10-year date governs the life of the lien as well. Once the underlying debt is gone, the lien is gone as well.

    The problem here is that the IRS is going to continue to collect during this 10-year period and may even try to seize the property that is subject to the lien in some cases.

    As a result of this threat, many people who are relatively close to the 10-year date will negotiate a payment plan or non-collectible status situation with the IRS and wait out the clock. This is often cheaper and easier than an offer in compromise or a bankruptcy.