Federal tax liens are one of the IRS’ collection actions used to enforce payment for tax debt. Unlike a levy, a federal tax lien is not an actual claim of your property or assets. And unlike a levy, the IRS issues a federal tax claim on everything you own, all at once. The IRS will not issue a tax lien against you without first notifying you and giving you a chance to respond with an appeal against their decision. This appeal only happens if you have the evidence to suggest that they are making a mistake or can come to an agreement with the IRS to stop the lien.
If you fail to convince them to stop, the IRS will publicly announce the lien – in other words, a federal tax lien is known to you and your creditors. The purpose of a lien is to place a legal claim on your entire asset list so that you cannot liquidate assets, satisfy other debts, or seek financing without first dealing with your tax debt to the government. The point of a federal tax lien is to secure the government’s stake in your existing property and assets before resorting to a more serious claim. Thankfully, tax liens can be both prevented and removed, even if you are not in a position to pay off your debt.
Understanding why the IRS places and pulls liens can help you avoid getting in unnecessary trouble with the tax man and help you resolve your issues with the IRS.
Tax Lien vs. Tax Levy
First, let’s clarify the difference between a tax lien and a tax levy, the IRS’ two most potent collection actions. Whereas a tax lien effectively freezes your assets and keeps you from using them to secure another debt or seek financing, a tax levy is an invasive claim of a single asset or property or a sum of money from an account. The IRS can only enact a tax levy on your income through a form of withholding negotiated with your employer.
The IRS usually claims money out of your bank accounts when executing a tax levy if you are self-employed. Yes, the IRS can claim your primary residence, in theory. They can take your house. But speaking more practically, the IRS will usually stick to claiming investment properties and cash. You can keep them from claiming your home and cease most collection actions if the IRS declares you non-collectible.
Like tax liens, the IRS announces tax levies well before the IRS commits to them, giving taxpayers time. Taxpayers should use this time to either demand a Due Collection Process, appeal to a third-party such as the US Tax Court or the Independent Office of Appeals, or negotiate an agreement with the IRS to settle the debt.
In the not-so-distant past, receiving a tax lien also spelled doom for your credit score, dealing a blow equivalent to complete bankruptcy and lasting about as long (seven years or so). However, all three credit reporting agencies stopped taking tax liens into account against a consumer’s credit score after too many instances of penalizing the wrong person.
Ways to Deal With a Tax Lien
This does not mean that tax liens are harmless – far from it. A tax lien is not just a prelude or an ample warning for a tax levy. Tax liens can actively keep you from paying off other debts and will prevent you from seeking secured financing to cover ongoing expenses, which can be particularly detrimental in the current day and age. Thankfully, there are ways to deal with a tax lien. These are:
- Convincing the IRS that they made a mistake.
- Paying off your debt or getting into a payment agreement and committing to a payment plan.
- Bringing your debt under $25,000 through lump sum payments.
- Subordinate the lien for just one creditor so that you can pay off an urgent debt.
- Discharging the lien off of a single property or asset, so you can sell it to pay your debt or secure a loan for your tax debt.
What Is a Tax Lien Subordination?
You may subordinate a tax lien if you convince the IRS that allowing one creditor to supersede them will lead to your payment. For example, suppose you can’t pay the IRS because you have a more pressing debt that requires your immediate attention or your risk bankruptcy. In that case, you might be able to get the IRS to exempt that creditor from the lien so you can settle the debt and then focus on your tax liability.
What Is a Tax Lien Discharge?
A tax lien discharge is similar to a subordination, only that it revolves around a specific asset rather than a creditor. A tax lien discharge can exempt a single asset or property from the IRS’s claim so you can liquidate (sell) it or use it to secure a loan. As with subordination, lien discharge is usually only possible when the IRS is confident it will lead to a satisfied tax debt.
How Can I Get a Lien Released?
If neither discharge nor subordination can help you pay off your debt, your only option to get a lien released is to negotiate with the IRS. Doing this will narrow your choices to three:
- Pay everything upfront;
- In lump sums over 180 days;
- In monthly installments over 72 months.
Through the Fresh Start Initiative, you may discharge tax liens early if you can get your tax debt below $25,000 and agree to a direct debit plan. The IRS can automatically withdraw each monthly installment from your bank account. Sometimes, you may also get the IRS to release the lien on your invoice after a few months of making on-time payments. Defaulting your payment plan will lead to another tax lien on your account and an eventual levy.
Avoiding Liens Through Payment Plans
If you owe the IRS money, and can’t afford to pay them, then getting into an agreement plan can delay or even prevent a tax lien. A streamlined installment agreement available to taxpayers with a total tax debt of $25,000 or less can avoid a federal tax lien and a collection information statement before starting payments.
A collection information statement is a detailed financial report that the IRS requires for specific payment plans to ensure that you are financially eligible for the program. There aren’t many other ways to avoid an impending tax lien if you owe the IRS money. However, if you are convinced you do not, your priority should be to contact a tax professional immediately. Get legal representation and discuss your options before filing an appeal.