What Is a Tax Lien and How Can You Resolve It?

Receiving a notice of a tax lien can be intimidating, but what is a tax lien and how can it be resolved? Here’s what you should know.

When the IRS recognizes that a taxpayer is far behind on their obligations, they have extraordinary debt collection powers. One of the most important tools in their toolkit is the federal tax lien.

Receiving a Notice of Federal Tax Lien can be terrifying – but there are plenty of options for resolving and even appealing a tax lien, and if you act fast and responsibly, it may not even leave a mark on your credit score.

What is a Tax Lien?

A tax collection system without any teeth wouldn’t last very long – which is why the IRS sports some of the most aggressive and wide-reaching debt collection powers in the US.

The tax lien is a prime example of this, representing the government’s legal claim against your assets and property so long as you remain indebted to them. Tax liens are a label the IRS uses to ensure that their debt takes precedence over any other creditor.

A tax lien does not mean you need to rush to liquidate your assets to pay off your debt to the IRS (unless that’s your only financial option). It is meant to pressure taxpayers into settling their debt in one way or another while claiming the government’s right to your property as collateral.

A lien also makes it incredibly difficult to get credit or a loan, as the IRS takes precedence over any creditors, and lending companies have no interest in giving money to someone who can’t pay them back. If you manage to pay off your debt and get the tax lien released, you will still bear a mark for it on your credit score for up to ten years as tax liens are a matter of public record.


A Tax Lien vs. a Tax Levy

Where a tax lien is a warning, a tax levy is an action – and a frightening one at that. A “levy” occurs when the IRS pulls money out of your account or claims your assets and property to settle your liability. If you simply ignore the IRS’s notice and go about your business, they have the power to seize what you own.

Because of the threat of a levy, it’s always in your best interest to resolve a tax lien as quickly as possible. Thankfully, the IRS is quite flexible when it comes to working with taxpayers to help them pay their back taxes. You have a few different options for dealing with a tax lien, based on your circumstances.


Pay Your Back Taxes

It’s a bit painfully obvious, which is why we’re mentioning it upfront – but the easiest way to get a tax lien on your property removed is to pay what you owe. If you simply hadn’t realized that you were in trouble with the IRS, and you have the means to pay your tax bill, then go ahead and do so. In some cases, that might be your only option for lifting the lien.

If you can’t pay outright, you can still work with the IRS to develop a payment plan. A payment plan consists of different ways you can pay the IRS a little bit now and cover the rest later. This represents a commitment that you’re able and working towards discharging your debt, and it will usually convince the IRS to lift the lien (if you’re eligible for a plan, that is).

If you can’t pay outright, your payment plan options are limited to a short-term plan (splitting the bill into smaller payments within a time limit of 120 days) and a long-term plan (monthly installments over more than 120 days). Some considerations:

    • A short-term payment plan is limited to a total tax debt of $100,000 or less (including penalties and interest).
    • A long-term (installment) payment plan is limited to a total tax debt of $50,000 or less (including penalties and interest).
    • There’s a $31 setup fee on an installment plan if you agree to monthly automatic (direct debit) withdrawals from your account, and a $149 fee if you agree to monthly withdrawals from a non-automatic (non-direct debit) account.
    • Low-income individuals are eligible to lower fees.
    • It costs $10 to revise your payment plan if you need to renegotiate.


You Can Discharge Property from a Lien

If it helps your financial situation and lets you get into a better position to pay off your debt without plummeting into poverty, you can fill out a Form 14135 to apply for a Certificate of Discharge From Federal Tax Lien. Through this form, you can apply for certain property to be discharged from the tax lien, thereby giving you the option to sell and refinance without immediately sending every dime to the IRS.

Another way to pay debts while having a tax lien over your head is to apply for a Certificate of Subordination of Federal Tax Lien. This requires filling out Form 14134, and it lets you name a creditor to take precedence over the IRS.

The reason the IRS lets taxpayers consider these options is because they might help the taxpayer better position themselves to pay the debt off in full. The IRS isn’t in the business of scaring taxpayers into bankruptcy, but in collecting as much tax revenue as possible. They will prefer win-win options. Whether seeking a discharge or a subordination is in your best interest, however, depends on a wide variety of factors.


Seeking an Offer in Compromise

When you’re strapped for cash and assets and have no hopes of successfully paying off your tax bill even after liquidating everything you own, the IRS offers a last-resort option known as an offer in compromise.

An offer in compromise allows you to make an offer to the IRS based on what you can realistically pay them without crippling yourself financially, alongside a slew of information to help them determine whether that estimate is correct. They then calculate a reasonable collection potential (RCP) based on your income, assets, eligible liabilities, and other factors, and if your offer matches their RCP, they may accept the offer.

There are other prerequisites to fulfill before you can make an offer in compromise, such as being up to date with your estimated and required tax payments, as well as your tax returns. Even if you can’t pay your taxes, you need to show that you’ve been trying.

If your offer is accepted and you’ve completed your renegotiated payment plan, the IRS will lift the tax lien as though you had paid the debt in full. If it isn’t accepted, you can appeal the rejection and seek a representative.


Tax Liens and Bankruptcy

Bankruptcy may be another option for a taxpayer to get their debt discharged, as long as they fulfill their continuing obligations to pay incoming fees based on their current income and continue to file tax returns during the bankruptcy proceedings.

However, while bankruptcy can discharge the debt, it won’t discharge the lien. Entering a bankruptcy proceeding does give you the option of negotiating a lien withdrawal with the IRS afterward, though. If the IRS didn’t collect enough through the bankruptcy proceeding to release the lien during your bankruptcy case, then you can contact them and negotiate a new payment plan based on your current circumstances.


Getting a Tax Lien Withdrawn

The IRS retains the power to withdraw and effectively reverse a tax lien. They also give out a certificate the taxpayer can use to reassure lenders and consumer credit reporting companies that their tax lien is not in effect and never was.

If the IRS:

    • Failed to send you prior notice before issuing a federal tax lien
    • Issued a lien too soon or not in accordance with their policies, or
    • Issued a tax lien despite the agreeing not to in a previously accepted and ongoing payment plan

You can argue that they should get their tax lien withdrawn through a Form 12277, as it was “filed prematurely or not in accordance with IRS procedures”, or because you had already entered into an agreement “for which the lien was imposed and the agreement did not provide for a Notice of Federal Tax Lien to the file.”

You may have more than one option for getting the IRS off your back, and a reputable tax professional can help you navigate the rulesets of the IRS, and ensure that you aren’t filling out the wrong form for your particular situation.