How Does a Federal Tax Lien Release Work?

Dealing with debt is never easy, but it can become more complex when your creditor is the US government. The IRS is well-known for deploying multiple collection actions to try and coerce payment. The collections enforce payments down to wage garnishment and property levies. Wherein the IRS claims a portion of every paycheck until your debt is paid or claims and sells any non-exempt assets or property under your possession. But that’s where a tax lien release can be of value.

Acting is key to avoiding these collection actions. The more you owe, the more likely the IRS is to act on your tax account – usually starting with a notice of federal tax lien.

What is a Federal Tax Lien?

A lien is a legal claim on everything you own. When a creditor files for a lien, they effectively secure their debt by limiting their ability to seek financing or liquidate assets without first satisfying their debt.

Because the IRS represents the government’s interests, its lien supersedes the claim of any other creditor. This means that a federal tax lien can affect your ability to pay off any other debts you might have and hinder your ability to seek financial help without first addressing your tax problems.

Liens are not a direct claim on any of your possessions or property. But they are a vital step in that direction. Ignoring a lien can quickly translate into a levy.

In the not-so-distant past, any notice of federal tax lien also served as a warning sign to credit reporting agencies that you were in trouble with the IRS. The consequences of a tax lien on your credit score were roughly equal to filing for bankruptcy and lasted about as long. This is because federal tax liens are not just sent to you but filed as a matter of public record.

However, in 2018, the US’s three major credit reporting agencies officially ended the incorporation of federal tax liens in credit reports. They retroactively removed a federal tax lien’s effect on countless accounts.

The official explanation was the IRS issued too many liens to people with good credit and no tax debt. The issue was a lack of communication between the IRS and these credit reporting agencies. In addition, because liens are a matter of public record, they were being reported. Still, it was easy to make a mistake when linking an IRS judgment to the respective taxpayer.

But that doesn’t mean federal tax liens have lost their teeth. A tax lien still means the government becomes your priority creditor, which can severely limit your ability to seek financing or deal with other debts without contacting the IRS.

Liens vs. Levies

Liens and levies are the two most powerful tools the IRS can utilize to coerce payment – its two most effective collection actions. Whereas liens represent the government’s legal claim, a levy is a physical claim. Through a levy, the IRS can claim the contents of a bank account, claim investment properties, claim vehicles, or issue wage levies until your debt is satisfied.

Not all taxpayers can be subject to levies. The IRS must ensure that its collection actions are not leading to financial distress. Even if your income is high enough to support yourself and your dependents, the IRS is limited to claiming about 15 percent of your weekly earnings through different types of wage garnishment, depending on the number of dependents you back, your filing status, and other factors. Note that federal levies and state levies are separate, just like federal taxes and state taxes. There are several different state-specific lien and levy rules. However, the application of liens is for everyone – including taxpayers who are currently not collectible or have low income.

Tax Lien Release

There is generally only one way to release a federal tax lien – pay off your tax debt. The IRS will release your lien within 30 days after your debt has been fully satisfied. If your lien is not cleared by the end of the 30 days, you can contact the IRS and request a release through Form 13794, Request for Release, or Partial Release of Notice of Federal Tax Lien.

To reiterate, you might not necessarily have to satisfy the entirety of your tax debt to issue a federal tax lien removal. The IRS requires that you either:

  • Satisfy your tax liability;
  • Enter into an installment agreement, agree to automated withdrawals, and make at least three successful and consecutive payments to the IRS; or
  • Reach a point where your tax debt is no longer legally enforceable (the tax debt has expired).

If your tax debt is not something you can pay off in a few months, entering into an installment agreement with the IRS and agreeing to automated withdrawals may lead to your lien being released prematurely. The IRS can immediately reinstate your lien if you default on any of your payments, and they will not remove it again until you have satisfied your tax liability.

Withdrawal of Notice of Federal Tax Lien

Once a lien is released, the IRS can withdraw the notice of federal tax lien from the public record. Lien releases will generally take some time, and the IRS will not remove any information after releasing your lien.

While credit reporting agencies no longer check for federal tax liens when calculating credit scores, a tax lien remains a matter of public record. The public record might affect your ability to seek financing for a home or business capital, or it may come up if potential investors do due diligence on your finances. The withdrawal of a notice of federal tax lien can help make the consequences of your tax lien disappear.

Subordination and Discharge

While liens and levies are severe issues for any taxpayer, the IRS is not inflexible. You may have the option of seeking a lien subordination or a lien discharge to help pay off your taxes.

A lien subordination allows you to choose a creditor to supersede the IRS. This will enable you to pay off a vital debt while your account is under a tax lien. A lien discharge removes the IRS claim from a single item.

In general, the IRS will offer lien subordination or lien discharges if they ultimately serve to help the IRS collect its money faster.

When it comes to tax debt, time is of the essence. Your tax debt continues to grow while you’re paying it off, and doing nothing can make it grow faster. Let us help you tackle your tax problems and minimize your tax debt at Rush Tax Resolutions.