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By Michael S. Anderson of Anderson Tax Law logo for Arizona tax attorney Michael S. Anderson P.C.
  • IRS Lien – 6 ways to deal with it

    elephant leaning on mom-thumb-375x282-55228The IRS Likes to Record Liens

    The IRS enjoys recording a Notice with the County Recorder that a Tax Lien exists. This is how it protects its ability to get paid as to any assets that exist. It likes to do it so much that it will file a Notice of Federal Tax Lien with Arizona County Recorder’s Office where the taxpayer lives, even if the Taxpayer has no assets.

    IRS Lien Notice Recordings are Trouble

    These Notices can wreak some havoc. The recording will lower the credit score making it more difficult to borrow money, they make job-hunting more complicated, and they can ruin the sale of a home.

    Fortunately, there are some legal options to deal with IRS Lien recordings.

    There are a number of legal methods to help alleviate the IRS lien recording. The most common ones we use are listed for your enjoyment.

    1. Pay up or Negotiate

    The simplest thing to do is just to pay the debt. If the debt is paid, the lien is worthless. The IRS will usually remove the lien filing when the balance is 0. Sometimes you have to push them.

    If you don’t have the funds available to pay it…like most people, you may be a candidate for an IRS Offer in Compromise. This process is formal and legal and requires that you meet certain criteria.

    If you do and the whole thing works out the payoff can be huge. We have successfully used this program to help our clients get rid of thousands of dollars in tax debt. As an added bonus, if the Offer in Compromise is successful and paid, the lien will be removed.

    2. Lien Discharge – Removing the Lien From the Home to Facilitate the Sale

    The Mortgage Company has recorded its lien before the IRS does. The Mortgage Company Lien has dibs on the equity and the IRS gets what is left if any if the home is foreclosed on or sold.

    These days…this is an issue when the homeowner is trying to short sell the home.

    Example:

    Taxpayer owns a Mesa, Arizona home that is worth $50,000.00 less than what is owed on the mortgage. The home is listed and a buyer is found. The buyer sees the IRS lien on the Title History and is concerned that he or she may have to purchase the home subject to the Lien or at least that the Lien is going to make the purchase of the home much more difficult.

    If the IRS agrees that there is nothing in it for them, it will agree to discharge the lien as to the home so that the buyer is comfortable and the sale can go through more easily. The IRS doesn’t want to get involved in a quiet title action over nothing.

    The Notice of Lien remains in place as to the Taxpayer’s other assets.

    3. Withdrawal of the Tax Lien.

    The IRS will agree to “withdraw” the IRS Lien if it can be convinced that the withdrawal of the lien will facilitate the payment of the tax. This is difficult to do as you are trying to get the IRS to agree that no record of the lien on the County Recorder Site AND on the Credit Report will increase ability to borrow or to get a job. This involves a bit of speculation unless you actually have a credit turn down letter citing the lien or an employer notice that indicates the job requires you to be lien free.

    It will also withdraw the lien if your tax debt is less than $25,000.00 – read more by visiting this page.

    Withdrawing the lien therefore is a better option than releasing the lien if it can be done as the history of the lien recording is removed from the credit report. When the lien is just “released” the fact that it existed remains on the credit report for several years.

    4. IRS Lien Subordination

    The IRS will agree to move its priority downward in relation to other creditors and the subject property if it thinks that this will result in faster payment of the underlying debt.

    Example:

    Home is valued at $150,000.00 and a mortgage is recorded at $225,000.00. A bankruptcy is out of the question and the homeowner loves the home and doesn’t want to move. A modification is proposed and the bank agrees to reduce the monthly payment by $350.00

    The catch? The IRS’ Notice of Lien causes the bank to hesitate about recording the new modification, as it may end up in second position to the IRS.

    If the IRS can be convinced that the reduction in the mortgage payment will increase it’s monthly take from the taxpayer, it will agree to “subordinate” the lien behind the new mortgage recording.

    5. Discharge the underlying debt in Bankruptcy – “Stripping the Lien”

    If the underlying tax debt is discharged in a bankruptcy and the property that is subject to the lien is worth less than the tax debt amount, the lien is effectively stripped as a result of the bankruptcy discharge.

    Example:

    Taxpayer’s assets are worth $5000.00 total. Tax debt that meets criteria for discharge in Bankruptcy is $125,000.00. Chapter 7 bankruptcy is filed, obligation on underlying debt is discharged and lien is worth only $5000.00 at the conclusion of the case.

    Example:

    Taxpayer’s assets are worth $5000.00 total. Tax debt that meets criteria for discharge in Bankruptcy is $125,000.00. Chapter 13 bankruptcy is filed, obligation on underlying debt is treated as dischargeable debt but taxpayer pays value of lien or $5000.00 over the life of the case to the IRS, 3 to 5 years.

    6. Just Ignore It

    If the lien is ignored, the law will kill it. The IRS can collect its debt if it does so within 10 years from the assessment date. When the underlying debt has been wiped out by the 10-year statute on collection the lien goes with it.

    This is more common than imagined by most. Many taxpayers arrange a payment plan or other agreement that pays less than the overall debt by the time the 10 years is up and let the statute take care of the rest.

     

    Photo Credit: The Catholic Realist