The Federal Tax Lien: A Staple of IRS Enforcement Action

The Federal Tax Lien

Every year the Internal Revenue Service files hundreds of thousands of tax liens against individuals and businesses that have not paid their taxes.  Federal tax liens jeopardize your assets, affect your credit, and can lead to more serious IRS action like wage garnishments and bank levies.

If you have fallen behind on paying your taxes, you need to understand the basics about federal tax liens, how they will affect you, and how you can get them removed from the public record.

Federal Tax Lien Basics

A lien is a claim or encumbrance against the property of another as security for a debt or obligation.  A federal tax lien is therefore the government’s legal claim against your property when you fail or neglect to pay tax.  It attaches to all property that you own including real estate, personal property and financial assets.  It even extends to property acquired after the lien comes into existence.

A federal tax lien will arise by operation of law when:

  1. The IRS assesses a tax against you (which can include processing the tax return that you filed),
  2. The IRS sends you a notice and demand for payment, and
  3. You neglect or fail to pay the tax due.

The tax lien will continue until the tax liability is satisfied or the collection statute expires.  Generally, the IRS has ten (10) years to collect on a tax debt before the statute expires.  However, it can refile a tax lien and in effect generate another ten (10) years within which it will have to collect.

Notice of Federal Tax Lien

A Notice of Federal Tax Lien (“NFTL”) is a document that is publicly filed with state and local jurisdictions to put other creditors on notice of the government’s legal claim to your property.  Accordingly, the NFTL does not create the lien but rather notifies others of a lien that already exists by statute.  The date of the NFTL is relevant in determining the IRS’ priority as a lienholder among other creditors.

Internal Revenue Code section 6320 gives taxpayers the right to challenge the NFTL via a Request for Collection Due Process Hearing or a Request for Equivalency Hearing with IRS Appeals.  The IRS is required to notify the taxpayer within five (5) days of having filed the NFTL of its due process rights in this regard.  Generally, an appeal of the NFTL must be made within either thirty (30) days from the date of the IRS notice (Collection Due Process Appeal) or within one (1) year from the date of the IRS notice (Equivalency Appeal).

How a Tax Lien Can Affect You

As mentioned above, a federal tax lien attaches to all property that the taxpayer owns.  If the taxpayer is an individual, it will attach to any personal assets, bank accounts, securities, vehicles, real property, etc.) owned by the taxpayer including future assets acquired during the life of the lien.

If the taxpayer is a business, it will attach to any business assets such as equipment, accounts receivables, bank accounts, vehicles, or real property owned by the business, including after acquired assets.

Although tax liens were removed from credit reports in 2017, they can still affect a taxpayer’s credit and reputation negatively.  The tax lien is filed in the local county recorder’s office and becomes a matter of public record.  Loan applications and applications for employment often involve background searches which will disclose that a tax lien that has been filed.  A lender, for example, will be reluctant to loan money to an applicant who already has a debt with the IRS.  A tax lien may also frustrate efforts to rent an apartment, get a car, get a job, and establish credit.

If you own property that becomes subject to a tax lien, you will not be able to refinance or sell the property without first satisfying the tax liability associated with the lien.  For example, if you own a home and the IRS files a tax lien against you, you won’t be able to access the equity in your home without first paying the IRS.

Also, even if your tax debt is discharged in bankruptcy, a tax lien may survive the bankruptcy proceedings and remain in existence unit it is paid in full or until it expires.

Perhaps most concerning, when the IRS files a NFTL it means that your case has been placed in active collections.  You will need to resolve the outstanding tax liability to avoid bank levies and wage garnishments.

How to Remove a Tax Lien

The simplest way to remove a tax lien is to pay the outstanding tax liability associated with it or successfully complete an Offer in Compromise with the IRS.  Once a tax debt is paid in full, the lien gets released within thirty (30) days.

If you receive a Notice of Federal Tax Lien filing, you can file a Request for Collection Due Process Hearing or a Request for Equivalency Hearing to challenge the tax lien on appeal.

If you own property but cannot sell it because of the tax lien, you can apply to the IRS to have the lien discharged or subordinated.  In the former, the IRS removes the lien from a specific piece of property under certain circumstances, In the latter, the IRS allows another creditor to take priority over its interest in the property so that the sale can proceed.  These are discussed in more detail in a separate article, “Selling Property Subject to a Federal Tax Lien.”

Lastly, you can request that the Notice of Federal Tax Lien get withdrawn from the public record (however you are still liable for the amount due) if the following conditions exist:

  • You are a qualifying taxpayer,
  • You owe $25,000 or less,
  • The withdrawal request is in writing,
  • You have a direct debit installment agreement which fully pays the amount you owe within the earlier of sixty (60) months or before the collection statute expires,
  • You are in full compliance with other filing and payment requirements,
  • You have made three consecutive direct debit payments, and
  • You haven’t previously defaulted on any installment agreement.
Do You Need a Tax Attorney?

Given that having a tax lien on your public record can significantly and negatively impact you, it is advisable to consult with a tax attorney who can challenge the tax lien by filing an appeal or assist with removal of the tax lien (e.g., satisfaction, discharge, subordination, withdrawal) if your circumstances warrant same.

Typically, there are limited time periods within which the taxpayer must respond to a Notice of Federal Tax Lien filing and therefore you are encouraged to act promptly, whether you intend to retain counsel or proceed without representation.  If you do not act, you will likely become subject to other IRS enforcement action in the form of bank levies and wage garnishments.

The experienced attorneys at Segal, Cohen & Landis have successfully represented thousands of clients with federal tax liens and in many cases been able to get the tax lien removed from the public record.  Some of the services we provide in this regard include:

  • Successful completion of an Offer in Compromise,
  • Release of tax lien following satisfaction,
  • Appeal of the Notice of Federal Tax Lien via Request for Collection Due Process Hearing or Request for Equivalency Hearing,
  • Lien Subordination,
  • Lien Discharge,
  • Withdrawal of the Notice of Federal Tax Lien via Direct Debt Installment Agreement.

If you are interested in having a complimentary consultation with one of our partner attorneys regarding your tax matter, please feel free to contact us at 866-505-1872.  We would be happy to speak with you and will advise you how we can resolve your case and how much it will cost.