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What is an IRS Tax Lien?
An IRS tax lien is a legal claim against your property when you neglect, fail or are unable to pay back taxes. An IRS tax lien protects the government’s interest in all your property, including real estate, personal property and financial assets. An IRS tax lien exists after the government:
- Assesses your tax liability;
- Sends you a bill that explains how much you owe (Notice and Demand for Payment); and
- You neglect, refuse or are unable to fully pay the debt in time.
The IRS files a public document, the Notice of Federal Tax Lien, to alert creditors and all others that the government has a legal right to your property.
How long does it take to release an IRS tax lien?
Once a tax debt is satisfied, the IRS will release the tax lien within 30 days.
What are the mechanisms that can lead to the release of an IRS tax lien?
- Successful completion of an Offer in Compromise
- Full payment of the tax liability
- Automatic payment agreement via a streamlined installment arrangement
- Execution of a collateralization agreements
- Purchase of a surety bond
- Expiration of the statute of limitations
How can a tax lien affect you?
- Assets – a lien attaches to all of your assets (such as property, securities, and/or vehicles) and to future assets acquired during the duration of the lien.
- Credit – once the IRS files a Notice of Federal Tax Lien, it may limit your ability to get credit.
- Business – the lien attaches to all business property and to all rights to business property, including accounts receivable.
- Bankruptcy – under certain circumstances, a tax lien may survive a bankruptcy action.
Lien vs. Levy
A lien is not a levy. A lien secures the government’s interest in your property when you don’t pay your back taxes. A levy actually takes your property to pay the tax debt. If you don’t pay or make arrangements to settle your tax debt, the IRS can levy, seize and sell most types of real or personal property that you own or in which you have an interest.
What you need to know about a Tax Lien:
- Tax liens are filed by the IRS to secure their right to collect money against you as a priority creditor. For example, you would be unable to utilize any equity you may have in your home without first paying the IRS.
- When the IRS files a tax lien, it means that you matter has been placed in active collections and you need to take action to avoid bank levies and wage garnishments. Usually bank levies and wage garnishments follow the filing of a tax lien by about 60 days.
- Tax liens will substantially damage your credit score. However, once the underlying tax problem is solved and the tax lien is released, your credit score will be substantially improved.
- Once a tax lien is filed, taxpayers have a right to Appeal the filing of the lien. The Appeal can be made on the basis that the tax is not due; or that the tax should be negotiated and settled; or that the filing of the tax lien will hamper your ability to pay the tax and as such, it should be released.
- There are two critical times in which to appeal the filing of the tax lien. The first critical time period is 30 days after the filing of the tax lien. Filing an appeal during this period of time will allow for judicial review if the initial appeal to the filing of the tax lien is not successful. The second critical time period is within 1 year after the filing of the tax lien. An appeal filed within 1 year of the tax lien will be heard by the Regional Board of Appeals, however, judicial review is not available.
- Once an appeal is filed, the IRS, in most circumstances will cease all collection action until the appeal is considered.
- Tax liens do not last forever. Usually, they expire after 10 years from the date the tax was assessed. It is possible that the ten year period can be extended if you have previously filed an Offer-In-Compromise or a Bankruptcy. If your tax lien is very old, it may be ready to expire soon and you then will not have to pay the tax due.
Featured Article on Tax Liens
An IRS tax lien; is it something to be feared or ignored?
For millions of American taxpayers every year an “IRS tax lien” is a familiar tax collection method. That’s because the federal government often uses an IRS tax lien against a taxpayer’s property when the government is trying to collect past due taxes. An IRS tax lien can be problematic, particularly for those taxpayers who rely on good credit to conduct their business and/or financial affairs.
An IRS tax lien is the federal government’s legal claim against your property when you have not paid your taxes. An IRS tax lien protects the government’s interest in all your property, including real estate, personal property and financial assets, to satisfy your delinquent tax obligations.
An IRS tax lien may only be issued after the government completes the following steps:
- An IRS tax lien will not be issue unless and until the IRS assesses your tax liability (in other words, the IRS must know what you owe);
- An IRS tax lien will not be issued unless and until the IRS sends you a bill which explains how much taxes you owe (Notice and Demand for Payment – so in other words, the IRS must tell you what it thinks you owe); and finally,
- An IRS tax lien will only be issued if you neglect or refuse to fully pay the tax debt on time.
In order to file an IRS tax lien against you, the Agency must file a public document, often referred to as a Notice of IRS Tax Lien (aka Notice of Federal Tax Lien). This Notice of IRS Tax Lien tells the world that the government has a legal right to your property. An IRS tax lien typically becomes evident to your creditors and/or potential creditors when they check your credit. Now days, an IRS tax lien is as easy to find as a few key strokes using a public Google search on your computer.
So if you are unfortunate enough to be the subject of an IRS tax lien, how can you extinguish or otherwise mitigate the effect of an IRS tax lien? Well the easiest way to extinguish an IRS tax lien is to pay the taxes you owe – in full. Ordinarily the IRS will release an IRS tax lien within thirty (30) days after you have paid your tax liability in full.
But, if you can’t pay your taxes in full there may be other options for dealing with an IRS tax lien. When the circumstances are right for both the government and the taxpayer, there may be other options for reducing the impact of an IRS tax lien. Consider the following:
- Discharge of property – An IRS tax lien may be extinguished by the discharge of your property. This option allows you to sell your property free of the IRS tax lien and then you may choose to use the proceeds from the sale to pay off your back taxes. The property’s seller or buyer can submit a Publication 783 to the IRS which provides instructions for how to apply for a certificate of discharge from your IRS tax lien;
- Subordination – Subordination is another option for trying to deal with your IRS tax lien. While subordination does not remove an IRS tax lien, it will allow your other creditors to move ahead of the IRS in order of priority, which may make it easier for you to get a loan or mortgage. You may go to the IRS website and find Publication 784, which provides instructions for how to apply for a certificate of subordination of your IRS tax lien; and
- Withdrawal – Withdrawal is still another option when dealing with an IRS tax lien. Withdrawal removes the public notice and assures that the IRS is not competing with other creditors for your property. If applying for the IRS to withdraw its IRS tax lien, you’ll need to use the IRS’s Form 12277, which is an application for the withdrawal of filed Form 668(Y), Notice of IRS tax lien.
So how can an IRS tax lien affect you?
An IRS tax lien attaches to all of your assets (such as property, securities, cars, etc.) and to future assets acquired during the duration of the IRS tax lien. An IRS tax lien can have negative consequences to your:
- Credit – After an IRS tax lien has been filed against you, the IRS tax lien will likely limit your ability to get credit;
- Business – An IRS tax lien attaches to all business property and to all rights to business property, including accounts receivable. Again, the filing of an IRS tax lien can have significant consequences to your business and/or business interests; and
- Bankruptcy – In the event you decide to file for bankruptcy protection, your tax debt and the IRS tax lien may continue after the bankruptcy. You will need to consult a bankruptcy attorney for details regarding how a bankruptcy filing might impact your tax liabilities and/or any IRS tax lien.
So how can you avoid an IRS tax lien?
Most tax experts say the easiest way to avoid an IRS tax lien is by simply filing and paying all your taxes in full and on time. If you can’t manage to file or pay your taxes on time, most tax professionals will tell you that you still shouldn’t ignore the IRS’s letters and notices. If you can’t pay your back taxes in full there are other payment options available to settle your tax obligations.
Taxpayers owing back taxes to the federal government may often avoid an IRS tax lien all together by working out payment arrangements with the government in advance of the Agency filing an IRS tax lien. Payment arrangements may include such methods as Offers in Compromise, Installment Plans, and/or streamline-payment plans.
Many taxpayers in trouble with the IRS become confused between an IRS tax lien and an IRS levy. An IRS tax lien secures the government’s interest in your property when you don’t pay your taxes. As compared with an IRS levy which is when the government actually takes the property to pay your past due taxes. If you don’t pay or make arrangements to settle your tax debt, the IRS can levy, seize and sell any type of real or personal property that you own or in which you have an interest.
Depending upon the status of your tax matter, to deal with the most typical IRS tax lien, you’ll most likely be communicating with the IRS’s Centralized Lien Processing. Here, taxpayers may contact the IRS to resolve basic and routine IRS tax lien issues: verify an IRS tax lien, request an IRS tax lien payoff amount, or release an IRS tax lien. Taxpayers may call the IRS at (800) 913-6050.
For taxpayers who would like to view the actual law in this area, you can review the Internal Revenue Code, section 6321, which provides:
Sec. 6321. IRS Tax Lien – FOR TAXES.
If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belong to such person.
Internal Revenue Code section 6322 provides additional information:
Sec. 6322. PERIOD OF IRS Tax Lien
Unless another date is specifically fixed by law, the lien imposed by section 6321 shall arise at the time the assessment is made and shall continue until the liability for the amount so assessed (or a judgment against the taxpayer arising out of such liability) is satisfied or becomes unenforceable by reason of lapse of time.
For those unfamiliar with the term “assessment,” it refers to the statutory assessment made by the IRS under 26 U.S.C. Section 6201 (which is the formal recording of the tax in the official books and records at the office of the Secretary of the U.S. Department of the Treasury). The “person liable to pay any tax” to whom the section refers needs to pay the tax within the allotted time, which is ten days of the notice.
If there is a failure by the taxpayer to pay the amount assessed and owed, the tax lien will arise automatically, which means that it will come through operation of law. It also has retroactive effects, meaning that it includes the period from the date of the assessment, despite the fact that the period allotted expires after the date the assessing was notified.
The terms of an IRS tax lien are further explained in the decision of Glass City Bank v. U.S., which states that an IRS tax lien is not limited to merely property and rights to property that a taxpayer owns when the assessment is made. It has further reaches, affecting property that is amassed during the time that the IRS tax lien is effective.
There is a time, though, that an IRS tax lien could become “unenforceable by reason of lapse of time.” The statute of limitations is expires 10 years after the date of the assessment for any assessments made on or after November 6, 1990. Section 6502 explains the statute of limitations is 6 years for those tax assessments that have been made before the November 5th date. There are several exceptions though, so contacting a tax attorney who is familiar with IRS tax liens and their limitations is a good idea.
Sometimes there are two creditors who have liens on the same property. The one who gets priority is the one whose lien was completed quicker than the other. Exceptions are an issue; so once again, contacting a tax professional would be beneficial.
When it comes to back taxes, the IRS is a considered a “creditor.” If the IRS has perfected its lien against a taxpayer, it will take precedence over another creditor that has not yet perfected the lien it is preparing.
For an IRS tax lien to be perfected against other entities that are not the taxpayer, in order to establish priority, the IRS must file the Notice of IRS Tax lien in the county or state record where the property is situated. Each state has its own laws regarding this, though, so those must be obeyed. It is after the lien notice is filed that a public notice is also given to third parties, which ensures that the IRS lien becomes the priority. The third parties are made aware that the taxpayer’s property, from the date of assessment and after the date of assessment, is under the IRS tax lien. This includes all of the property owned by a taxpayer. From homes to promissory notes, these are all included under the lien. Although, it isn’t until the Notice of IRS Tax Lien is filed that the priority against creditors that are of a third party arises. Federal law dictates the composition of the lien notice, which is a priority over any state or local laws.
The IRS tax lien is a collection action that has been the target of criticism from various sources, most notably the Taxpayer Advocate Service. Its use against the self-employed and small business people is the subject of their grievances. According to the Service, an IRS tax lien works against the IRS’ collection goals, as it prevents repayment by small businesses through its poor effect on the business’ credit. It contends that the collection action of an IRS tax lien more often than not causes more harm than good. Reports state that it is difficult for taxpayers who are struggling to get loans from banks to help resolve their IRS issues after liens have been place, as tighter regulations have forced bankers to turn away those who are “breaking the law.” Sometimes the taxpayer is even forced to close up his business instead of allowing him to pay back taxes owed.
The IRS, despite the criticism, has not slowed down its issuance of the IRS tax lien. The last ten years has seen an increase of almost five hundred percent, coming out to 1.1 million liens filed. The Taxpayer Advocate argues that IRS tax liens are “counterproductive business killers.” Congress, as well as the IRS, has been prompted by the TPA to be aware the hardship the liens are causing, and for the IRS to be more judicious with the filing of IRS tax liens. Some awareness of this has registered, but it may be too late for the small businesses who cannot survive with the added burden of the lien during a rocky economic period.
IRS tax liens can range from very simple to very complex. For the more complicated IRS tax lien issues, the IRS has created a Collection Advisory Group. Complex issues like discharge, subordination, subrogation or withdrawal are all covered in this group. Of course, if you are uncertain how best to deal with an IRS tax lien, you are strongly encouraged to seek help from a qualified tax professional.
Sometimes the government makes a mistake and files an IRS tax lien erroneously. Take the case of actresses/singer Dionne Warwick who recently became the subject of a mistakenly filed IRS tax lien. Although Ms. Warwick has had a number of run-ins with the IRS over the years, there was a $2.2 million dollar IRS tax lien filed against her in 2009. Evidently, this IRS tax lien was the bi-product of a tax liability due to unpaid taxes from the 1990’s. Remarkably, however, the Agency revoked its IRS tax lien against Ms. Warwick when it was revealed the IRS tax lien was the result of an accounting mistake made by the Agency.
Under certain circumstances like the one above, a taxpayer may seek relief from an IRS tax lien by appealing the government’s filing of a Notice of IRS Tax Lien. In the case of Ms. Warwick, the appeal was successful and the government withdrew its IRS tax lien. For information about filing an appeal, you may refer to IRS Publication 1660, captioned Collection Appeal Rights. Again, getting advice from a qualified tax professional is always the best way for handling an IRS tax lien, or any other IRS tax problem.
Ultimately, an IRS tax lien may be avoided through good tax planning and working closely with the IRS to resolve any delinquent tax issues. On those rare occasions when an IRS tax lien is unavoidable, prompt action may go a long way to mitigating the consequences of the IRS tax lien. Depending on your circumstances, an IRS tax lien may be waived or subordinated to permit a taxpayer to transfer property to get funds to pay the back taxes owing. In other circumstances, an IRS tax lien may be extinguished in return for the IRS getting a surety bond or other form of guarantee that your back taxes will eventually be paid. Again, getting competent advice from a tax professional before deciding how best to deal with an IRS tax lien is always the most prudent course of action.
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