For those who have an outstanding balance to the IRS, there are few things fraught with more anxiety than a federal tax lien. A federal tax lien is a legal claim the IRS imposes against a Taxpayer's property when he or she neglects to pay taxes when due. This claim extends to all property, including real property, bank accounts, investment accounts and personal items. A federal tax lien exists after the IRS makes a tax assessment and provides notice of the amount you owe and a demand for payment. For those who file tax returns with balances due and no payment, a tax assessment happens once the IRS processes the return and puts the amount owed on the books. A notice and demand for payment comes in a letter from the IRS stating the balance due and a deadline for payment.
I. Filing Notice of Federal Tax Lien
Once the IRS assesses the tax and provides notice and demand for payment, it may file a Notice of Federal Tax Lien ("NFTL"). A Notice of Federal Tax Lien is a public document that puts all other creditors and potential lenders on notice of the IRS' claim to the property. Like other liens, such as mortgages, an NFTL follows the application rules on priority of claim. For example, if you own a property with a (recorded) mortgage, an NFTL filed later in time takes a subordinate position to the institution holding the mortgage.
II. Removing Federal Tax Liens
Federal Tax Liens are difficult to remove without full paying the balance. However, if you find yourself in the midst of a repayment plan but need to sell property or obtain credit, there are a few ways the IRS can help.
A. Discharge of Lien from Property
The first way is to request that the IRS discharge a lien from a specific piece of property. The IRS will do this under a few circumstances codified in the Internal Revenue Code §6325(b). These circumstances include the following:
•· If the Taxpayer's other property is valued at least twice the amount of the tax and other higher priority encumbrance,
•· The Taxpayer is planning to sell the property and remit the proceeds to the IRS,
•· The IRS determines the property has no value,
•· The Taxpayer makes a deposit to the IRS of the value of the property subject to discharge.
In some cases, the IRS may subordinate its lien to allow a junior creditor to move ahead of the United States in priority. This can be allowed when the IRS determines that by subordinating its lien, the value of the property will increase and ultimately increase likelihood of collection of the liability. For example, this situation could apply to a Taxpayer who, by refinancing his house to a lower rate, can increase his or her installment payments to the IRS.
C. Withdrawal of Federal Tax Lien
If the balance due is an agreed upon liability and there is no mistake in calculating the tax owed, the IRS will typically not withdraw a federal tax lien with an outstanding balance. There is a limited exception to this rule, which is when you enter into a direct debit installment agreement and your balance owed is $25,000 or less. Of course, the easiest way to remove a federal tax lien is by full paying the balance.