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.
Essentially, a lien is a legal claim to those assets to satisfy your debt. The lien is publicly recorded and can have many far-reaching impacts, so you’ll want to get rid of it as soon as possible. Today, let’s dive a bit into a tax lien’s potential effects and how to go about removing it.
In this article:
- How does a tax lien impact you?
- Why it’s important to remove a tax lien
- How to remove a tax lien
- What’s the difference between a lien withdrawal and release?
- How long does it take to remove a tax lien?
- Can I remove a tax lien from some of my property?
- How to avoid a tax lien in the future
How does a tax lien impact you?
A tax lien can have many impacts, whether you’re hoping to borrow money, sell an asset, or refinance a loan.
First, it’s important to note that 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 (like homes), personal property assets (such as vehicles), or financial assets (like checking or savings accounts). This lien works to protect the government’s interest in your property until your outstanding debt is repaid.
Once that lien is placed on your assets, its impact begins.
- A lien can affect your creditworthiness. Until just a few years ago, tax liens were included on the credit reports of all three major credit bureaus. This had the power to impact one’s credit score and one’s ability to open new accounts. Tax liens are no longer included in these credit reports, but they are still publicly filed. This means that a potential creditor can (and likely, will) find out about a tax lien, which can be used to deem you less creditworthy.
- A lien can reduce your borrowing ability. Since lenders can see publicly-filed tax liens, they are likely to factor that into their lending decision if you are applying 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 also lays claim to your asset(s). Since assets are often factored 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 placed on that asset will effectively 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, though, is what can happen next: having a tax levy.
Why it’s important to remove a tax lien
As mentioned above, you’ll want to remove a tax lien as soon as possible if you have any plans 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 they take action. When a levy occurs, the federal or state government can step in and seize your assets in order to satisfy your outstanding debt. The following are some examples of what 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 and/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 action quickly. If a lien has already been filed, it’s important to remove it before it turns into a levy.
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 has been placed, though, there are a few different options for getting it released.
File an appeal
If you believe that your tax lien was filed in error, you have the option to file an appeal with the IRS or your state government.
Once an IRS lien has already been filed, you’ll need to submit your protest through the Collection Appeals Program (CAP). You may choose to represent yourself or hire an attorney, CPA, or other qualified professional to represent you in the appeals proceedings. For taxpayers who qualify and need help with a federal tax lien, a low-income taxpayer clinic may also represent you free of charge or for a small fee.
Pay your tax bill
If you don’t dispute the validity of your delinquent tax bill, your easiest option is to simply pay it. There will likely be additional fees and/or interest added to the balance from its original due date onward.
If the delinquency occurred because you were unable to pay your balance in full, however, paying it off after a lien may not be feasible. In this case, you may need to resort to a payment plan.
Set up an IRS payment plan
If you’re unable to pay your overdue taxes in full, the IRS offers payment plans to those who qualify. Possible IRS payment plans include a short-term plan of 180 days or less and a long-term installment agreement with monthly payments.
Depending on the plan and payment method chosen, there may be setup fees to establish the plan. Your balance will also continue to accrue penalties and interest during this time until the entire debt is satisfied.
You can apply for one of these payment plans online, by mail, over the phone, or in person. Applying online is only available to those who owe $50,000 or less in total and want a long-term installment plan or those with $100,000 or less in total who want a short-term plan. Everyone else will need to apply over the phone, by mail, or in person.
Once you’ve received notice from the IRS that you’re facing a lien, you can avoid it being filed against your property by establishing a payment plan to satisfy your debt. If you already have a lien, a payment plan can enable your Notice of Federal Lien to be withdrawn.
You also have the option to work with a tax relief firm. These companies offer IRS tax lien help, communicating with the IRS on your behalf to analyze the situation, establish a plan, and advise you of the best path forward. While you can set up a payment plan online (assuming you’re eligible), these agencies can help if you’re not sure where to start or you need guidance.
Offer in compromise
Whether you work with a tax relief agency or opt to tackle your IRS tax debt on your own, you may want to consider an offer in compromise. An Offer in Compromise (OIC) gives taxpayers a way to negotiate their debt with the IRS for less than they actually owe. This offer may be approved if taxpayers cannot satisfy their full tax liability or if doing so would cause them serious financial hardship.
When filing an OIC, expect that the IRS will consider many factors, from your income and expenses to your assets and general ability to repay the debt. When making your offer, you’ll be able to choose whether you want to pay that amount in one lump sum or monthly installments until the agreed settlement is paid. You’ll also need to pay a $205 non-refundable application fee.
The IRS has an online tool for pre-determining eligibility for an OIC. Applicants with open bankruptcy proceedings are ineligible.
Filing an OIC can feel like a daunting and overwhelming process. Many tax relief firms are well versed in negotiating OIC offers and may be able to help you create and file your offer for a fee.
File for bankruptcy
No matter your debt situation, filing for bankruptcy is a serious and drastic measure that should only be used as a last resort. While filing for bankruptcy may remove many existing debts, it is not guaranteed to remove an IRS tax debt and/or lien.
If you’re not sure whether an existing or potential bankruptcy filing would remove your federal tax obligation, or if you need related help with your IRS tax lien, you can call the Centralized Insolvency Operation at 800-973-0424.
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 a delinquent tax debt has been paid, 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.
Then there’s a tax lien withdrawal. This process also removes a public Notice of Federal Lien from your property, but it does not remove your obligation to pay the debt. The benefit is that since your public lien notice is gone, you will 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 a federal tax lien is placed, it attaches to all of your property. However, in some cases, that lien can be removed from particular assets.
With a discharge, for example, a federal lien can be removed 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, however, 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?
Both discharge and subordination can make it easier to buy, sell, or refinance property even with a federal tax lien, but there are important distinctions.
With a discharge, the federal lien is removed from a specific property, such as a home. This allows the taxpayer to conduct certain transactions involving the property, like selling it or using it as collateral.
A subordination, on the other hand, doesn’t remove the federal lien. Instead, it allows other creditors to jump to the front of the line ahead of the IRS. This means that if you were to, say, default on your home mortgage, another creditor (such as your mortgage lender) would get paid first from the proceeds, before the IRS would get their cut.
How to avoid a tax lien in the future
Taxes are an unavoidable part of life, so it’s important to plan ahead so that you can avoid penalties, interest, and ultimately liens in the future. 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 get 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 that a tax lien finds its way to your assets.