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The IRS can place a legal claim on a taxpayer's property and/or assets to ensure payment of tax debt. This is known as a Federal Tax Lien and is one of the IRS' most aggressive methods of securing payment. If the taxpayer makes no effort to resolve the debt after the placement of a federal tax lien, the IRS moves to place a tax levy. A levy involves seizing a taxpayers' property or assets and selling the seized property or assets to fulfil the tax debt.
Once it is placed, a federal tax lien is public record. The IRS files a public document, the Notice of Federal Tax Lien, to inform creditors of the government's claim to the taxpayer's property and/or assets. A federal tax lien damages a taxpayer's ability to take credit and may also endanger a taxpayer's professional licensing and their ability to receive security clearance.
Fresh Start Notice of Federal Tax Liens
Under the Fresh Start Notice of Federal Tax Liens, the IRS' threshold to file a tax lien has been increased from $5,000 to $10,000. This means that in most circumstances, the IRS will file a Notice of Federal Tax Lien only on tax debt amounts that exceed $10,000. However, if the IRS deems it appropriate, they will still file a lien on tax debt amounts less than $10,000, but such cases are rare. These new guidelines do not apply to federal tax liens filed before the Fresh Start was initiated.
Paying in Full
The simplest way to get a lien removed is to pay the tax debt in full. After a tax debt is paid in full, the IRS will release the lien within 30 days. If the entire tax debt cannot be paid in a lump sum, the IRS may consider other arrangements for removing the tax lien, such as subordinating the lien to allow other creditors to move ahead of the IRS or discharging property from the lien to allow it to be sold. However, the IRS only grants such requests if it is in the best interest of the government, i.e. if it puts the taxpayer in a better position to pay some or all of their tax debt.
Release of the tax lien does not necessarily remove the lien from public record; this is done with a withdrawal of Notice of Federal Tax Lien.
Withdrawal of Notice of Federal Tax Lien
Withdrawal of Notice Federal Tax Lien removes the lien from public record. After a lien has been released, if a taxpayer wishes to have the Notice of Federal Tax Lien withdrawn, they must complete Form 12277, Application for Withdrawal, in writing and submit it to the IRS. The general eligibility requirements for Notice of Federal Tax Lien withdrawal are:
- The tax liability has been satisfied.
- The IRS has released the Federal tax lien.
- The taxpayer has filed all individual and business returns for the past three years.
- The taxpayer is current on his or her estimated tax payments and federal deposits, if applicable.
Federal tax liens can be very damaging to a taxpayer's reputation and financial situation. To avoid a federal tax lien it is important to file and pay taxes on time. If this is not possible, taxpayers should not ignore any correspondence they receive from the IRS and should make arrangements to resolve their tax debt with one of the IRS' repayment plans as soon as possible.