The IRS Tax Lien. Yuck.
Believe it or not, this IRS Lien exists the moment you have a new tax debt. This is why the IRS doesn't have to sue you to garnish your paycheck or levy your account like a normal creditor. The subsequently recorded Notice of Federal Tax Lien also makes it difficult to sell your home, can hurt your credit, and it gives the IRS the power to “foreclose” on the lien and take your stuff… including, at least in theory, your home.
The IRS will record this Notice in almost every instance where you aren't agreeing to pay the debt in full and further, it will record the Notice even if you are agreeing to pay the debt in full but the debt is over $50,000.00
GETTING THE LIEN REMOVED
So how to deal with it?
The truth is that removing the Notice of Federal Tax lien is difficult to do.
It isn't removed by the IRS just because you ask, or because your situation is dire. The primary reason for this is that it's existence isn't really about you. It's about making sure that other potential creditors know that the IRS has priority status as to your stuff. The IRS doesn't have much of an incentive to help you as a result.
Despite this lack of incentive, there are some very specific ways the law provides to help you remove the IRS Lien:
- The IRS will withdraw the lien notice if you can prove that it filed the lien notice too soon or that it didn't follow it's own rules. This usually comes into play when you are trying to sell property on a short timeline and realize the Notice of Lien has been filed, but incorrectly.
- If you provide a “bond” to the IRS for the amount you owe in total tax/penalty/interest, the IRS will release the lien. If you are disputing the debt, this may help while that process is pending. (May be difficult to find a company willing to provide a bond)
- When you win an Offer in Compromise, pay the settlement amount, and the debt is considered paid in full….the IRS will release the lien.
- If you survive until the 10 year statute period has run, the IRS lien notice will auto-release assuming the IRS hasn't filed an extended notice.
- A chapter 7 bankruptcy discharge of the underlying tax debt will result in the release of the lien once the IRS collects the assets that were subject to the lien or agrees the assets are worthless.
- The IRS will withdraw the lien if doing so will be in the best interest of the Federal Government. This usually means that withdrawing the lien will directly help you pay the tax debt.
- If you are trying to sell a piece of property, the IRS will agree to a “discharge” of the lien notice so that it gets paid from the proceeds and you get to pass clean title to the property.
- The IRS will withdraw the lien if you owe $25,000.00 or less and you agree to pay the balance within 60 months by electronic bank debit. The payments must be made for 3 months first.
- The IRS will sometimes show the lien notice as released and withdraw the lien history… if you pay the tax debt in full
- The lien can be “crammed down” in a chapter 13 bankruptcy if the underlying tax debt is dischargeable and the value of your assets on the date of filing are less than the dischargeable tax amount. At the end of the plan the unpaid remainder of the tax lien is discharged.
LIEN RELEASE VS. LIEN WITHDRAWAL
As you read the above, you probably wondered why we use the words “release” and “withdraw” and not always one or the other.
It's because Lien Release and Lien Withdrawal are two different things.
The IRS Lien Release is a document that tells the world that the recorded Notice of Federal Tax Lien is no longer valid. If the 10 year statute period has been reached, the Notice of Federal Tax Lien itself contains language indicating that the lien has been auto-released and is no longer in effect or valid.
The Lien Withdrawal is more substantive than the Lien Release. It includes a notice that can be provided to credit reporting agencies telling them that the lien is being withdrawn. The credit reporting industry has agreed that if withdrawn, it will remove the IRS Lien history from the report much sooner than the normal waiting time than if the lien were just released (typically seven years).
If you've been able to obtain an IRS Lien Withdrawal...you should let the Credit Reporting Agencies know this by following the normal dispute process and including in your request the copy of the IRS provided form – Withdrawal of Filed Notice of Federal Tax Lien.
(Update: Credit Reporting Agencies have stopped reporting IRS Lien Notices)
LIENS VERSUS LEVIES (OR GARNISHMENTS)
REMEMBER…an IRS tax lien notice and an IRS levy or garnishment are two different things.
The tax lien notice is the IRS' way to show everyone that you have a tax debt and that it has priority over any potential creditors. In Arizona, IRS Lien Notices are usually only filed with the County Recorder in the County in which real property you own is located. (or where you live)
An IRS Levy or Garnishment on the other hand is the actual grabbing of your property like money in accounts, wages, money owed to you by vendors, social security income etc. etc. The IRS also seizes property in limited circumstances – cars, jewelry, real property…and in certain limited circumstances, even your home.