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Personal Finance Tax Relief

How to Get Rid of a Tax Lien

State and federal governments have no problem letting you know if you owe money in back taxes. If you fail to pay your delinquent taxes (or negotiate a payment plan) after receiving those notices, the IRS or your state government may choose to place a lien on your assets.

A lien is a legal claim to those assets to satisfy your debt. The lien is public and can have many far-reaching impacts, so you’ll want to get rid of it as soon as possible. Keep reading because we’ll dive into a tax lien’s potential effects and how to go about removing it.

How to remove a tax lien

Your best option for handling a tax lien is to avoid one in the first place. Once a tax lien is placed, though, you have several options to remove it:

File an appeal

Here are the steps you can take.

  1. Determine eligibility: If you believe your tax lien was filed in error, assess if you’re eligible to appeal with the IRS or your state government.
  2. Submit your protest: Use the IRS Collection Appeals Program (CAP) to submit your protest. Access the program details and submission portal here.
  3. Choose representation: Decide whether to represent yourself or to hire an attorney, CPA, or other qualified professional for the appeals process.
  4. Seek low-income assistance: If you qualify as a low-income taxpayer and need assistance with a federal tax lien, consider representation through a low-income taxpayer clinic either free of charge or for a small fee.

Pay your tax bill

Here’s what you can do.

  1. Review your bill: Acknowledge the validity of your delinquent tax bill. Remember, fees and interest accrue from the original due date.
  2. Consider payment: If paying off the balance after a lien is filed isn’t feasible, you may need to set up a payment plan.

Set up an IRS payment plan

Take the following steps to set up a plan.

  1. Evaluate your situation: Determine whether you can pay your overdue taxes in full.
  2. Understand your options: Review possible IRS payment plans, including short-term (180 days or less) or long-term installment agreements.
  3. Consider plan costs: Be aware that setup fees may apply, and penalties and interest will accrue until you’ve paid the debt in full.
  4. Choose your application method: Apply for a payment plan online (if you owe $50,000 or less for long-term plans, or $100,000 or less for short-term plans), by mail, over the phone, or in person based on your eligibility.
  5. Avoid or withdraw a lien: Establish a payment plan promptly after being notified of a lien to avoid it being filed against your property or to enable withdrawal of a Notice of Federal Lien.
  6. Consider professional help: If unsure about starting or if you need guidance, a tax relief firm can assist in communicating with the IRS and establishing a payment plan.

Offer in compromise

Here are the steps you can take.

  1. Assess your eligibility: Consider an offer in compromise (OIC) if paying the full tax liability is not feasible or would cause serious financial hardship.
  2. Understand the process: Know that the IRS considers income, expenses, assets, and repayment ability when evaluating OICs.
  3. Choose payment type: Decide on a lump sum or monthly installments for the settlement.
  4. Pay the application fee: Be prepared to pay a $205 nonrefundable application fee.
  5. Use the online tool: Check your preliminary eligibility for an OIC using the IRS’s online tool. Note that applicants with open bankruptcy proceedings are ineligible.
  6. Get professional assistance: For help creating and filing an OIC, consider hiring a tax relief firm familiar with the negotiation process.

File for bankruptcy

Here’s what to do if this is an option.

  1. Consider the implications: Understand that filing for bankruptcy is a severe action and may not eliminate IRS tax debt or liens.
  2. Seek advice: If uncertain about how bankruptcy affects your federal tax obligation, contact the Centralized Insolvency Operation at 800-973-0424 for guidance.

How does a tax lien affect you?

A tax lien can have many impacts, whether you’re hoping to borrow money, sell an asset, or refinance a loan.

First, liens can be placed on various assets if you owe back taxes. A state or federal tax lien can be filed against real estate assets (e.g., your home), personal property assets (such as a vehicle), or financial assets (a checking or savings account). This lien works to protect the government’s interest in your property until you repay your debt.

Once that lien is placed on your assets, its impact begins.

  • A lien can affect your creditworthiness. Tax liens are no longer included on credit reports from the three major credit bureaus, but they’re still public. This means a potential creditor can (and likely will) find out about a tax lien, which it can use to deem you less creditworthy.
  • A lien can reduce your borrowing ability. Because lenders can see public tax liens, they are likely to factor that into their lending decision if you apply for a new credit-based account. The reason is twofold: A lien indicates an unpaid debt, which may make a new lender hesitant to let you borrow, and a lien lays claim to your assets. Because lenders factor assets into collateral and net worth calculations, a government lien can be detrimental.
  • A lien can make it impossible to sell or refinance property. Whether you need to sell an asset or refinance a loan on a particular piece of your property—such as a home or vehicle—having a lien on that asset will halt your efforts.

It’s easy to see why having a tax lien can be a stressful situation. Even more stressful than having a lien is what can happen next: a tax levy.

Why it’s important to remove a tax lien

As we mentioned, you should remove a tax lien as soon as possible if you plan to borrow money, open new credit-based accounts, sell an asset, or refinance a loan. It is also important to remove a tax lien (and satisfy your tax debt) before it turns into a levy.

A tax lien is the government’s legal claim to your assets; a tax levy is when it takes action. When a levy occurs, the federal or state government can step in and seize your assets to satisfy your debt. That might include.

  • Garnishing a portion of your wages
  • Seizing and selling your personal property, such as a vehicle or boat
  • Seizing and selling your real estate property, such as your home or business
  • Freezing or seizing funds from a bank or other financial account that you own (including your retirement account)
  • Seizing rental income owed to you
  • Withdrawing and seizing the cash value of your life insurance policy

If you want to stop tax liens from being placed on your property, you need to take fast action. If a lien has been filed, it’s important to remove it before it turns into a levy.

What’s the difference between a tax lien withdrawal and a tax lien release?

In some cases, you may be able to get a tax lien withdrawn from a property. However, this option differs a bit from a true lien release.

Once you’ve paid a delinquent tax debt, the IRS will release the lien within 30 days. This process removes the Notice of Federal Lien from your property and public record and releases you from any further obligation.

A tax lien withdrawal also removes a public Notice of Federal Lien from your property, but it does not remove your obligation to pay the debt. Because your public lien notice is gone, you’ll regain your ability to open credit-based accounts, sell property, and refinance loans.

You may also qualify for a tax lien withdrawal if you meet certain eligibility requirements with your debt, including establishing a direct debit installment payment plan, owing $25,000 or less, and making a certain number of on-time payments.

How long does it take to remove a federal tax lien?

How long it takes for your federal tax lien to be removed depends on how the debt is managed or satisfied.

  • If you pay off your delinquent balance or submit a bond guaranteeing payment of the debt, your federal tax lien will be removed within 30 days.
  • If you establish a qualifying payment plan and make on-time payments for at least three months, you may be able to request a withdrawal of your Notice of Federal Lien.
  • If the debt remains unpaid, the IRS can pursue collection of the balance for a minimum of 10 years plus 30 days from the date that the tax liability was assessed.

Can I remove a tax lien from some of my property?

When the IRS places a federal tax lien on your property, it affects all of it. However, in some cases, you can remove the lien from particular assets.

A discharge can remove a federal lien if the government’s interest in a property is deemed to have no value or, in some cases, if the property owner wants to sell the property.

If you want to sell a property with a lien, the lien will typically be paid out following the sale. If you’re selling a home for less than the federal lien on the property, you may still be able to request an IRS discharge of the lien on that asset to proceed with the sale.

What’s the difference between discharge and subordination?

Discharge and subordination can make it easier to buy, sell, or refinance property even with a federal tax lien, but they have important distinctions.

A discharge removes the federal lien from a specific property, such as a home. This allows the taxpayer to conduct certain transactions involving the property, such as selling it or using it as collateral.

A subordination doesn’t remove the federal lien. Instead, it allows other creditors to jump to the front of the line ahead of the IRS. So if you defaulted on your home mortgage, another creditor (such as your mortgage lender) would get paid first from the proceeds before the IRS got its cut.

How to avoid a tax lien in the future

Taxes are an unavoidable part of life. It’s important to plan ahead so you can avoid penalties, interest, and liens. This could mean making estimated quarterly tax payments throughout the year to spread out the tax burden. It could also mean working with a professional to plan your taxes and find opportunities to reduce your tax bill.

If you receive a notice about back taxes, don’t ignore it. Failure to pay your debt or establish a payment plan is one quick way to ensure a tax lien is placed on your assets.