5 Commonly Used Ways To Deal With IRS Debt

Faced with large tax debt and feeling hopeless? Take heart…if you are willing to create a “strategy” and combine it with some hard work and patience, there may be a real solution. The following are the most 5 common methods people use to deal with tax debt.

1. Use the IRS Statute of Limitations to Your Advantage

Congress limited the time the IRS has to figure out how to get paid.  26 U.S.C Section 6502 provides this limit and as a result, the IRS has ten years to get the debt collected. Many people with IRS debt buy the time necessary to get to the 10-year period by negotiating an installment agreement or non-collectible status placement.

An example:

Imagine a tax debt of $120,000.00 and that the IRS has let 7 years pass without fully attempting to collect the debt, but they are now at the doorstep. The debt has grown to $200,000.00 with penalty and interest over time, but the taxpayer can only afford to pay $100.00 per month toward the balance. If the taxpayer were able to negotiate such a payment, only $3600.00 of the $200,000.00 would be paid before the debt disappeared.

The above scenario happens more often than you would think. However, there are things people do that stop the ten-year clock from running. Filing an offer in compromise, a bankruptcy, a collection due process appeal, or anything else that stops the IRS’ ability to collect also stops the statute of limitations clock from ticking. It isn’t always advisable to do anything other than to negotiate the payment plan or non-collectible status as a result.

2. Challenge the Tax Debt

What about a situation where the IRS assessed a debt against you that you know isn’t correct.

Usually, this is the result of an audit “gone bad” or the creation of a tax return by the IRS, because you didn’t file it yourself.

Audit Appeal

IRS Audits that go badly can be appealed. If done right, they can be appealed to the US tax court. If your audit result is wrong, you have a limited amount of time to bring the appeal, so call someone now.

Substitute Tax Return Appeal

Tax returns filed by the IRS come with appeal rights as well. Most people don’t respond in time and lose them, however. Thankfully, the assessment of the tax from the incorrect return can be challenged using the IRS audit reconsideration process.

Challenge Trust Fund Recovery Assessment

There are other things the IRS does to assess tax debt that can result in an incorrect debt amount, like the assessment of the trust fund recovery penalty against a responsible party.

Where the business has withheld the employee portion of the payroll tax but didn’t send it in, the IRS stick the amount on you personally as a penalty if you are the “responsible” party.

There are defenses to this, however, and the assessment of the debt can be challenged as a result.

Innocent Spouse Relief

Sometimes the tax is correct but it just isn’t fair that the spouse should be stuck with it. The law provides the ability to challenge the debt based on some theories about innocent spouses.

3. File an IRS Offer in Compromise

26 U.S.C Section 7122 provides the basis for the settlement or one-time reduction of the tax debt. In essence, you would be making an offer to compromise and settle the back tax liability. But this isn’t horse-trading.  The amount that the law requires the IRS to settle for is based on objective criteria. The criteria is called the IRS reasonable collection potential or the RCP.

In theory, the RCP is the amount that the IRS could collect from you before the statute of limitations period on collection runs out.

The vast majority of offers filed in the last several years fail primarily because the RCP calculation is rigged a bit in the IRS’ favor. The IRS is allowed to use as a starting point for calculation purposes, a budget that is based on averages they have created.

For instance, they may have pre-determined that a family of four only needs $1650.00 per month to pay for all housing and utilities expenses. That family may be actually spending $2100.00 per month. If in the end, the IRS were able to use the $1650.00 figure to determine the RCP, then the amount of extra income per their calculation would be at least $450.00 per month.

If the statute of limitations period remaining on collections is 8 years than the RCP, just based on this number could be as high as $43,200.00

Typically, the IRS must use a smaller multiplier than the statute period, but even then, you can see how quickly the RCP can grow.

Successful Offers in Compromise, require much thought and planning as a result. They shouldn’t be entered into lightly.

4. Bankruptcy

Bankruptcy and its relation to tax debt are misunderstood. Many people including many attorneys believe that bankruptcy can’t resolve income tax debt. Nothing could be further from the truth.

In fact, the treatment of the tax debt is not up to the IRS. The Bankruptcy Code governs the treatment of the debt. The Bankruptcy Code says that income tax and certain other tax debts can be wiped away in bankruptcy, if it meets certain date requirements and the taxpayer didn’t cheat.

Sometimes the date requirements haven’t been met yet and we guide our clients in negotiating a payment plan or non-collectible status to help them avoid collection activity while they wait for those dates to arrive.

5. Penalty Abatement

As a taxpayer, you have the right to request the cancellation of any IRS penalty. There are more than 140 penalty provisions and they all have a good faith exception.

If you have been penalized for something like a failure to pay the tax on time, but you acted in good faith and there exists some reasonable basis for the failure, then the penalty can be removed along with interest on it. This removal often makes it easier for you to deal with the underlying debt.

 

Written By:

Michael S. Anderson, Attorney
2158 N. Gilbert Rd. Ste 101
Mesa, Arizona 85203

Phone: (480) 507-5985
Fax: (480) 507-5988
Email: [email protected]
Website: www.taxlawyeraz.com

3 Problems IRS Liens create if a bankruptcy is filed

elephant leaning on mom-thumb-375x282-55228When the IRS is owed more than $10,000.00, it will record a notice of federal tax lien in the County in which you or your real property are situated.  It will do this unless you’ve arranged a streamlined installment agreement, or you file a bankruptcy case before the recording occurs.

The recorded document puts the world on notice that the IRS has a lien on your stuff and makes it impossible to sell your home without obtaining the Government’s “permission”.

We’ve reviewed IRS liens and the options that exist to deal with them several times inside this blog.  Start here to read more about how liens are dealt with outside of bankruptcy.

When a bankruptcy case is filed, and the Filer has equity in a home and/or other substantial assets, another layer of complexity is added to the mix.  There are 3 problems IRS liens create if a bankruptcy case is filed after the lien notice has been recorded

IRS LIENS POST-DISCHARGE – CHAPTER 7

If the IRS has recorded it’s lien prior to filing the chapter 7 bankruptcy case,  and the underlying obligation to pay the debt is removed, the lien itself isn’t removed.  Bankruptcy exemption laws don’t apply to IRS Liens.

If the bankruptcy filer has equity in a home or other assets that were subject to the lien prior to the bankruptcy filing, those same assets will be subject to the lien after the bankruptcy case is over.

In certain situations this isn’t a terrible thing.  Where the equity in the assets is low, the IRS will sometimes just release the lien or agree to release the lien just because you asked.  Sometimes an amount offered that is less than the value of the asset(s) is paid in exchange for a release.

Even when the equity is large, it will make sense in certain situations to file the chapter 7.  As an example:

Mr. F owed the IRS $250,000.00 and his home had an equity value of $75,000.00 at the time of filing.  That equity was exempt in bankruptcy and safe from creditors, but not the IRS’ lien. He also owed other creditors $50,000.00.  He wasn’t a great candidate for an offer in compromise but he did qualify to file a chapter 7 and was able to discharge his tax obligation and credit card debt.  Post bankruptcy the equity in the home had climbed to $85,000.00 making the lien more valuable but the IRS approached him and he agreed to pay them $50,000.00 in exchange for a release of the lien.

BANKRUPTCY TRUSTEE AND SECTION 724(b) OF THE BANKRUPTCY CODE – CHAPTER 7

I mentioned above that the exemption law that might protect home equity during a bankruptcy, doesn’t protect that home’s equity from a tax lien.  This problem shows up post bankruptcy when the IRS tries to collect on the assets as described above.

That same lien however does something that would surprise most bankruptcy filers.  It gives the Bankruptcy Trustee the ability to snatch the equity in the home under Bankruptcy Code Section 724(b).

The Bankruptcy Trustee rarely uses this power because it tends only to benefit the IRS and the IRS can collect it’s own equity post bankruptcy.

What needs to be understood though, is that many people file bankruptcy to discharge IRS debt and they understand that the lien will survive.  They’re taking the calculated risk that the IRS won’t try to collect the assets subject to the lien before the 10 year statute runs on collection post bankruptcy discharge.  Surprisingly this happens quite a bit.

Section 724(b) adds another layer of complexity to that decision, because the Trustee can use the lien to take the home, the filer has assume the additional risk that the home equity may be grabbed before the bankruptcy case ever ends.

PAYING LIEN VALUE IN CHAPTER 13 BANKRUPTCY

A chapter 13 bankruptcy isn’t a “liquidation” case like a chapter 7 bankruptcy.  Nobody is taking anything in a chapter 13 unless you ask them to.  The trade-off is that certain debts have to be paid over time to the Trustee for distribution to creditors in order to obtain a confirmed plan and an eventual discharge. Most secured debts have to paid to the Trustee through the plan.

If the IRS has recorded it’s lien and you have equity in assets, the IRS is a secured creditor as well.  In order to receive a confirmed plan and eventual discharge in the bankruptcy case, that lien’s value as of the filing date, has to be paid to the IRS with interest during the plan period.

Despite the fact that this sounds awful, it is often the case that the overall situation lends itself to a chapter 13 filing. Chapter 13 Bankruptcy and it’s potential value has to be viewed with the big picture in mind.

Conclusion

If you have a large IRS debt and assets that would normally be exempt or safe in bankruptcy AND the IRS debt would potentially be discharged in bankruptcy, you will want to file a bankruptcy before the IRS records it’s lien notice if you were going to file a bankruptcy at all.  This would remove all 3 of the above problems.

Talking to an attorney who is experienced in bankruptcy and IRS debt sooner rather than later is absolutely necessary.

What is the IRS Fresh Start Program?

download (4)The IRS Fresh Start program was created a few years ago.  It’s claim at the time was that “struggling” taxpayers needed some help so it changed some of the ways it did business with taxpayers.  The changes were done in three areas.  IRS Liens, IRS Installment Agreements and IRS Offers in Compromise.

It is debatable whether or not these changes have actually made the process of dealing with the IRS much easier, but if you owe the IRS money or have an IRS Lien, you should be aware of them.

IRS Lien and the Fresh Start Program

The IRS increased the threshold for filing a tax lien notice from $5000.00 to $10,000.00.

This wasn’t a large jump in amount.  In my opinion, it should have been at least a $25,000.00 limit.  I think that the IRS debated this issue as it did change it’s policy regarding the withdrawal of liens and used $50,000.00 as the thresh-hold amount.

Withdrawal of Notice of Tax Lien

Individuals

As mentioned, the IRS also changed it’s policy toward the withdrawal of a notice of lien when it added the ability for individuals, businesses with income tax debt, or entities that have gone out of business to request the withdrawal of a lien notice under circumstances.

The requirements for individuals to get the lien notice withdrawn are:

1.  The assessed balance must be $25000.00 or less;

2.  There must be full compliance, meaning un-filed returns;

3.  3 consecutive direct debit payments have to have been made and all the payments must be made by direct debit.

4.  You can’t have had a previously lien withdrawal for the same tax (unless lien was improperly filed);

5.  You can’t have defaulted on your current or any previous direct installment agreement.

6.  And the debt must be paid in full within 60 months or before the CSED Expires, whichever time is shorter.

Small Business

Small Businesses can qualify in much the same way, but only have 24 months to pay.

IRS Installment Agreement and the Fresh Start Program

If the assessed debt is $50,000 or less, the IRS now allows you to set an installment agreement without providing full financial information.  The debt is spread out of 6 years (used to be 5) or the length of time left in the CSED.  (Collection Statute Expiration Date)

In theory, this is a big deal.  People with higher incomes that are going to have large installment payments if the financial information is provided, can now avoid the large payments by paying the assessed balance down to the $50,000 threshold and setting one of these up.  They are relatively easy to set up and I have posted elsewhere instructions about how to do it.

The IRS’ generally won’t record an IRS notice of lien if one of these types of arrangements are set if it hasn’t filed one already.

If the assessed balance is less than $25,000.00 no financial information is necessary to set the payment plan up, and as mentioned above, if you are able to meet those lien notice withdrawal criteria that is an added bonus.

If a business is operating and it owes payroll taxes, the business may be able to take advantage of the “fresh start” program in relation to installment agreement if:

1.  The debt is $25,000 or less at the time of the agreement

2.  The payment plan is 24 months or less

3.  The payment is made by direct debit if the amount is between $10,000 and $25,000

4.  The taxpayer/business must be in compliance in all filing and payment requirements

Two benefits to this are:

1.  No financial statement is required.  This is great because it can be a real burden on a small business to put this together.

2.  No trust fund penalty is assessed against the owner for the trust fund portion of the payroll tax.  At least it isn’t supposed to be.

IRS Offer in Compromise and the Fresh Start Program

The OIC program allows qualified taxpayers to negotiate a settlement for an amount that is less than the tax owed. An OIC agreement won’t be accepted by the IRS if it believes that the outstanding liability can be paid in full in a lump sum or via a payment arrangement. The IRS reviews the taxpayers’ income, potential income, past income, expenses, assets, past assets and liabilities very closely to make a determination about the ability to pay.

Most people fail the above part of the test because they rely on the IRS’ pre-qualifier, or some bad advice and don’t fully understand as a result that the IRS won’t agree to settle if  it believes that the debt can be paid in full before the CSED ends.

But the IRS did make a big change for people who can’t pay the tax debt in full before the CSED ends, when it altered the way it multiplied excess income under the Fresh Start program.

Previously the IRS would multiply excess income when it was calculating how much you could afford to pay by 60 and 48.  60 if the offer amount was to paid over time, and 48 if the offer was a cash offer.

Under the Fresh Start program, these multipliers are 24 and 12.

Now a person with no assets and $1000.00 in excess income will pay $12000 instead of $48,000 toward the debt and $24,000 instead of $60,000 if the settlement is going to be paid over time.

This is probably the most important overall change made to tax collection by the Fresh Start program but specifically in the offer compromise area.  It roughly doubled the numbers of offers that are being accepted from about 20% to about 40%.

The offer in compromise program was affected in other ways as well.  The second best thing it did was to change the allowable expenses category to include more things like:

  • 200.00 per month for car allowance on older cars
  • Student loan payments
  • Some credit card payments
  • A portion of payments made to state and local tax authorities

IRS Penalty Abatement and the Fresh Start Program

If an offer is accepted it settles the debt and the penalty entirely, so in that sense I suppose you could argue that the penalty abatement under the fresh start program exists… but in reality this isn’t a “fresh start” program for IRS penalties.  Don’t let the salespeople fool you.

When looking for penalty relief, you have to go through the same process that has already been in place for a long time.

 

How many years will my IRS currently non collectible status stay in place?

calendar-thumb-375x250-49268When you are in an IRS currently not collectible status (CNC status) you are protected from IRS collection enforcement.  The IRS can’t levy or garnish and other than possibly filing a notice of tax lien, it leaves you alone.

This sounds great,  but in order to be placed in this status you have to convince the IRS that paying would be a real financial hardship.   For some people this is difficult to do.  Despite this, the U.S. Treasury Inspector General consistently reports that a few million people are in this status at any given time.

Many of our clients use CNC status in combination with the IRS’ statute of limitation on collection to get rid of the debt entirely.  An example:

Mr. Smith owes the IRS $100,000.00 and is now facing IRS enforced collection.  6 years of the IRS’ 10 year statute on collection have passed and Mr. Smith has 4 years remaining until the statute removes the debt permanently.  He is retired and living on social security and a small pension.  The IRS agrees that he qualifies for currently not collectible status and discontinues collection activity.  Other than receiving reminders from the IRS about the debt amount, the IRS makes no attempt to collect for 4 years and Mr. Smith’s debt is wiped away.

Sounds great of course, but the IRS also removes people from currently non collectible status on a regular basis for the following reasons:

1.   Failure to file and pay all future taxes

The most common reason we see for people being removed from this status is the failure to file a subsequent tax return and/or the failure to pay subsequent taxes when they come due.  Nothing will get you booted sooner because the IRS system can easily ascertain when a return is late or a payment is late.

2.   Increase in Income

When you file a tax return the IRS can see whether your income situation has improved and will often as for an updated set of financials to determine whether your can afford making a payment.  When it sees the financials and a new ability to pay, you will be removed and a payment plan will have to be negotiated.

3.  Formal Review

The IRS will often mark your file for a formal review when it agrees to place you on CNC Status.  Every few years the system will issue a request for updated financial information from you.  The revenue officer or collections will do this when they believe that your income may go up in the future.

4.  Right to Review at any time

In the end, the IRS has the ability to review CNC status for any reason at all.  If you have several years remaining on your 10 year statute period, you will want to look at other long term options like an IRS offer in compromise or bankruptcy in order to avoid this.

 

 

 

Tax Debt as a result of IRS Audit? Do I have options?

samp01The result of an IRS audit is often a balance due.  We are often asked several questions at the end of an Audit as a result.  Questions like:

  • Will the IRS accept an amount less than what I owe and forgive the balance?
  • Will the IRS agree to a payment plan?
  • Will the IRS place a lien on my property if I am in a payment plan?
  • Can I use Bankruptcy to get rid of the debt?

Shortly after the audit related debt is placed in the IRS’ books it will start shooting letters to you.  “Balance Due” letters and “Final Notice” letters will issue over a period of several weeks.  You’ll receive a letter at the end of the string of letters called a “Final Notice of Intent to Levy”.  This letter is important because it provides you the ability to challenge collection action by the IRS and request an alternative solution IF you properly reply to it within 30 days of it’s mailing date.  The time between the assessment of the new debt and the date you get to discuss alternative solutions with the IRS usually provides enough time to analyze and plan your case.

Back to the common questions above:

Will the IRS accept an amount less than what I owe and forgive the balance?

The IRS will settle the debt IF you can prove that your “reasonable collection potential” (RCP) is less than the amount of the debt during an Offer in Compromise proceeding.  Proving your RCP isn’t done by discussing your situation with the IRS.  It is based on a formula.  The formula is simple in theory, but the majority of people who try and prove that their RCP is low enough to require settlement of the debt…fail.

They fail for all sorts of reasons, but primarily because the filers aren’t great candidates.  Or in other words, the RCP is high enough that the IRS believes it can collect all of the debt before the statute of limitations on collections runs out.

No matter what the IRS Offer in Compromise calculator you are seeing online says about your RCP, be skeptical, and get a second opinion from someone experienced with the process.

If you are a good candidate for an Offer in Compromise, then the answer to the question is yes, the IRS will likely settle the debt for less than what is owed and forgive the rest.

Will the IRS agree to a payment plan?

Yes in almost every case.  There are several types of payment plans and which type you request and end up getting will depend on the amount of the debt, the time left in the statute of limitations period, your income, your budget, the budget the IRS believes you should have and your assets.

The most common type of payment plan(s) we see are streamlined plans.  The debt in these types of plans are less than 50000.00 and the taxpayer can afford to pay the balance over 72 months.  These types of plan allow the taxpayer to avoid submitting a full financial statement and if done properly can even prevent the filing of an IRS lien.

If the taxpayer can’t afford to pay the debt over 72 months or if the debt is greater than 50000.00, than the solution becomes a bit more complex and the factors mentioned above become very important in determining how much a payment plan will be.

In some situations it is possible to convince the IRS to take very small amounts each month or even nothing each month even if the debt is very high.

Will the IRS place a lien on my property if I am in a payment plan?

If the debt is less than 25000.00 and you enter into a certain type of payment plan, the IRS won’t record a lien notice.  If they already have they will release it and even withdraw it from your credit report if you follow certain steps.

If the debt is less than 50000.00 and no lien notice has been recorded AND you enter into a streamlined payment plan that allows the IRS to take the payment from your bank or pay, the IRS won’t (or shouldn’t) file the notice of lien.

If the debt is above 50000.00 or one of the above two situations don’t apply, bets are off.  You can expect the lien and will have to formally request that the lien notice not be filed and have a very good reason why it shouldn’t be.

A successful Offer in Compromise will result in a lien release as will an eventual bankruptcy where the debt is paid or discharged and there are few assets for the lien to remain attached to.

Life after an IRS audit involves dealing with the IRS Collection Division.   In audits that result in money owed,  it is recommended to be pro-active and to understand the next step that awaits you – IRS collections.  There is no substitute for preparation.

Can I use bankruptcy to get rid of the tax debt?

A very strong…”it depends” applies here.  Bankruptcy will discharge an obligation to pay income tax debt, penalty on income tax debt and interest on penalty and income tax debt.  It will also discharge the obligation on certain other types of tax debt…but two things have to be true:

1.  The tax debt has to meet the criteria for discharge both date criteria and other criteria.  (Learn More)

2.  You need to be a good candidate for bankruptcy.

If you have new debt which is the result of an audit, the debt won’t be dischargeable in bankruptcy from a date standpoint for at least 3/4 of a year depending on how old the tax year is.  It may be 3+ years before it is dischargeable in bankruptcy from a debt standpoint.

We have many clients who use bankruptcy to deal with tax debt but these types of cases require real analysis, comparison to other options and usually some time spent in a payment plan before bankruptcy ends up making sense.

Review

An IRS Lien release won’t remove the Tax Lien from your Credit Report…you must ask the IRS to Withdraw it

Antique_Mailbox-thumb-375x341-49286IRS Lien?

The IRS issues Notices of Federal Tax Lien (NFTL) with great regularity.  It’s own rules allow it to issue the NFTL if you owe more than $10,000.00.  There are a tremendous number of Americans who owe the IRS more than $10,000.00 and there are lots of NFTLs as a result.

I write and talk about the NFTL often, but there is a big issue that I think that many with people with tax lien problems miss and that is this:

If you have paid off a tax debt, discharged it in bankruptcy, settled it via an IRS Offer in Compromise, or if the IRS Statute of Limitations has wiped it out…the tax lien will be released.

When it’s released, it doesn’t exist for purposes of tying up a property etc.

But, the credit report will still show that the lien existed for several years, and will continue to damage your credit until the Fair Credit Reporting Act mandates it’s removal.

That’s not a happy thing.

The good news is that you can ask the IRS to “withdraw” the NFTL after the lien has been released and the withdrawal should remove the record from the Credit Report.

You can request the withdrawal in writing by using IRS Form 12277, Application for Withdrawal”.

In item 11, make sure and check the box that you believe that withdrawal is in the best interest of the taxpayer and the government.

You are basically making the argument that a person with a clean credit history has a higher chance of avoiding future tax problems than one with a bad credit history.  (Arguably untrue as well I suppose)

The general eligibility requirements to have the NFTL withdrawn are:

1.              It has been satisfied and released

2.              You have filed the last three years returns including all business and information return and:

3.              You are current on all estimated tax payments and tax deposits

 

 

 

 

 

IRS Lien Withdrawal – The $25,000.00 Rule

IRS Lien Withdrawal – Get to $25,000.00 and it can happen

IRS Lien Withdrawal - The $25,000.00 RuleThe IRS Tax Lien hurts your credit.  It really does, and everyone is afraid of it as a result.  There are a few ways to get rid of it though or even avoid it in the first place for that matter.  Read more here

This Blog Post is only about one thing.  Your ability to have the IRS withdraw a Notice of Federal Tax Lien if your debt is $25,000.00 or less.

So…a few things about this that are important to understand:

1.  The $25,000.00 amount isn’t calculated or at least it shouldn’t be calculated based on what you currently owe.  It is based on the original amount that was owed (including any portion of penalty and interest assessed back then) when the return was filed.  Your current debt is likely much higher than the original amount as a result of penalty and interest.

2.  You have to be able financially to pay the debt within 5 years OR the remaining period left in the statute of limitations on collection, whichever is shorter.  The payments you make need to made by direct debit from your account.

3.  You can’t ask the IRS to withdraw the Lien until you have made at least three payments via the Direct Debit Installment Plan you set up.

4.  If you qualify to do this, you don’t have to provide the IRS any financial information.  No work info, no property info, nothing but the account and routing numbers for the bank account you are going to use for direct debit.

5.  You can pay down the debt to $25,000.00 in order to qualify for this type of Lien withdrawal.  If you have $28,000.00 intotal tax debt and the original assessed balance is still $26,000.00, you would need at least $1000.00 in order to get to the $25,000.00 threshold and then you could pay the $28,000.00 over 72 months if directly debited or the length of time remaining in the statute period, whichever is shorter.

6.  If you are in a IRS payment plan, and the debt is paid down to $25,000.00 as a result, you can convert the payment plan to a Direct Debit Plan for this purpose.

7.  If you are in an IRS payment plan and the original debt was less than $25,000.00 you should consider converting to the Direct Debit Plan.

8.  The Baby Elephant doesn’t really have anything to do with this.

Michael Anderson, Tax Lawyer In ArizonaWritten By:

Anderson Tax Law
2158 N. Gilbert Rd. Ste 101
Mesa, Arizona 85203

Phone: (480) 507-5985
Fax: (480) 507-5988
Email: [email protected]
Website: https://taxlawyeraz.com

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