Understanding Federal Tax Liens

Posted by on Tuesday, October 3rd, 2017 at 12:16pm.

On par with having a root canal, interacting with the Internal Revenue Service is one of the most unpleasant experiences those in America encounter. The IRS is relentless, and you may be understandably worried if there is a federal tax lien on a residential or commercial property you own.  Here are a few key things to know about federal tax liens.

What is a Lien?

federal tax lien is a legal claim by the government when one doesn’t pay a tax debt. This may happen when not making a payment on time or not making a full payment. The lien protects what the government is owed and shows that the government has a right to the property. This essentially puts the government at the front of the line ahead of many other creditors. The government does not take property by placing a lien.  If the government takes property to pay off tax debt, this is called a levy. To avoid a levy, one must make plans with the IRS to settle a debt.

Liens are typically filed if one owes the government $10,000 or more. However, the IRS can decide to place a lien on someone who owes less.  Tax liens have a 10-year statute of limitations that start when a tax has been assessed.  

What does a lien do?

A Notice of Federal Tax Lien is filed by the IRS to show creditors about the government’s interest in a property. This can hurt one’s credit. The lien is also attached to assets and business property and can be continued after filing for bankruptcy.

The Fresh Start Initiative was established in 2011 and can help those who owe the IRS. This makes it easier to withdraw a Notice of Federal Tax Lien. You may be able to remove this even when still owing a tax debt. A direct debt installment agreement allows the IRS to deduct a monthly amount from wages or a bank account. After making three consecutive payments, one can request a lien withdrawal.

Removing A Lien

After getting a Notice and Demand for Payment from the IRS, one must decide how to act. One can pay off tax debt to get rid of lien, and there are payment plans available. Entering into an agreement with the IRS helps one reach a Currently Not Collectible status. This stops enforcement efforts.

Once a debt has been settled, the IRA is supposed to release a lien within 30 days. Those familiar with the slow pace of bureaucracy will not be surprised to find that this does not always happen in a timely manner. You may need to contact the IRS if the lien isn't removed.

Selling A Home

Property can be sold with a lien, even if not paying the full amount owed. When selling, you can apply for a discharge. This allows the lien to be removed from the property when transferring to a new owner. It is important to submit an application for a discharge at least 45 days before the sale.

There are two common reasons for discharge:

  1. IRC § 6325(b)(2)(A). A discharge may be issued under this provision when the tax liability is partially satisfied with an amount paid that is not less than the value of the U.S. government’s interest in the property being discharged.
  2. RC § 6325(b) (2) (B). A discharge may be issued under this provision when it is determined that the government’s interest in the property has no value. The debts senior to the federal tax lien are greater than the fair market value of the property or greater than the sale value of the property.

With the first option, the IRS receives part of the money it is owed. The lien amount is reduced and applied to other assets while the property is sold without the lien.

Debts like a first mortgage payoff take precedence over an IRS lien. If the sale goes to this debt and no money is left, a discharge could be given through the second option.

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