Arizona

Tax Debt and Bankruptcy Blog

480-507-5985Free Phone Consultation With Attorney

By Michael S. Anderson of Anderson Tax Law logo for Arizona tax attorney Michael S. Anderson P.C.
  • IRS Lien Release and Withdrawal – Can I have both?

    bigstock-stop-irs-conceptual-road-sign--45833749An IRS Tax Lien – What is it?

    The IRS has a number of tools in its box to help collect tax debt.  One of them is the IRS “lien”.

    If a tax debt exists and you fail to pay it after the IRS demands the money… a lien automatically arises or exists in favor of the U.S. Government.  This lien attaches to all of your property and all of your rights to property.

    But…

    Unless the IRS “perfects” the lien by recording a “Notice of Federal Tax Lien” with the County Recorder, your other creditors will have priority over the IRS.  The IRS records liens to protect itself as a result.

    An example:

    John owes the IRS $50,000.00.  He also owns a home worth $100,000.00.  Before the IRS recorded a Notice of Federal Tax Lien, he gave a local Bank a security interest in his home in exchange for $50,000.00, which he spent.

    The Bank recorded its security agreement before the IRS.  The IRS lien became secondary to the Bank’s lien as a result.

    The Home was later foreclosed on and sold for $50,000.00.  The bank was paid the $50,000.00, and the IRS received nothing.

    Credit Rating and the IRS Lien

    Credit Reporting Agencies pick up the IRS lien’s existence when the IRS records the notice of lien.

    The agency than tells the world that the lien exists and knocks your credit score down a peg or two or…a few hundred.

    The reduction in the credit score is the biggest impact of the recording for many people.  It’s embarrassing, it makes it more difficult if not impossible to borrow money for a car or home, and it even affects many small business’ in their relationships with vendors and others.

    Getting rid of the IRS lien is important, but getting it removed from your credit report is often more important.

    Lien Release

    The IRS is required to “release” a tax lien, by issuing a document called a “Release of Lien”, no later than 30 days after the amount owed is satisfied.  It is considered satisfied when full payment is made or the debt becomes legally un- enforceable.  The debt becomes un-enforceable typically as a result of the expiration of the statute of limitation on collection or as a result of a successful bankruptcy.

    When the Credit Reporting agency receives a notice of release of the lien, it makes a note that the lien has been released in the credit report, BUT it doesn’t remove the references to the tax lien from your credit history.

    A released Notice of Federal Tax Lien remains on your credit history for seven years from the release date.  (Credit Reporting Agencies must remove a reference to a released lien after seven years as a result of the Fair Credit Reporting Act)

    The important thing to catch here is that:

    As a result of just obtaining a release, your credit report will remain damaged for a long time even though you no longer owe the money. 

    Lien Withdrawal

    The IRS can also “withdraw” the Notice of Federal Tax Lien in certain circumstances.

    1.              If filing of the Notice was premature or the IRS didn’t follow administrative procedure

    2.              If you entered into an installment agreement to satisfy the debt (in certain circumstances)

    3.              If withdrawing the lien will help the IRS collect the debt i.e. it will help you to continue making money so that you can pay the debt off.

    4.              With the consent of the taxpayer or National Taxpayer Advocate, the withdrawal would be in the best interests of the taxpayer and the U.S…Similar to number 3 above.

    When a lien notice is withdrawn, it is as if the lien never existed on your credit report.

    To repeat for emphasis:

    A withdrawal causes the lien to be treated as it never existed.

    Which is Preferable a Release or a Withdrawal?

    Easy answer…withdrawal right?  If you can get the lien withdrawn, it never existed.  But doing so isn’t always easy and it requires some action and argument.

    What if the lien has already been released and the debt doesn’t exist but…the lien still shows up on your credit report?

    If the lien has been released can it still be withdrawn?  Read on.

    IRS Office of Chief Counsel Role – Changes to Lien Withdrawal Rules

    The IRS Office of Chief Counsel took the position a long time ago that the IRS didn’t have the authority to withdraw a lien notice once it has been released.  Therefore, if you paid the debt off and the IRS released the lien, your credit remained damaged for several years anyway.

    In 2010, the IRS Office of Chief Counsel announced that the IRS can withdraw a Tax Lien even after the Lien has been released.

    So now, if the debt is paid in full (not discharged in bankruptcy), and the IRS releases the lien, it can still withdraw it, if it believes that doing so would be in the best interest of everyone involved…namely you and the IRS.

    The Office of Chief Counsel went further and decided that the term “best interest” applied to those whose liens had been released but needed withdrawal for credit score purposes.

    The way the IRS looks at it now is that a good credit score will help you comply with your tax obligations in the future.