A lien is a security interest over property to secure the payment of a debt. For example, in the case of a home mortgage, the bank files a mortgage lien on the property until the mortgage is fully paid. A federal tax lien is created after the IRS assesses the tax liability and the taxpayer fails to pay the tax within 10 days of IRS written notice. This lien covers all the taxpayer’s real and personal property (i.e. house and car) as well as rights to property (i.e. wages and bank accounts). It is called a secret lien because it not public information. The IRS lien has a 10-year statute of limitation subject to tolling events, such as filing an Offer in Compromise, requesting a Collection Due Process (CDP) Hearing or filing for bankruptcy. If the amount of tax due is over $10,000 the IRS is more likely to file a Notice of Federal Tax Lien (NFTL). The NFTL is filed in the county courthouse where the taxpayer resides. The NFTL gives the IRS priority over subsequent creditors.
A federal tax lien will negatively affect a taxpayer’s credit score. The IRS is required to send the taxpayer a copy of the NFTL along with CDP Hearing Rights. The CDP Hearing is held with IRS Appeals which is independent from the compliance side of the IRS. In this Hearing the taxpayer can challenge the legality of the NFTL if IRS procedures were not filed. Also, the taxpayer could request a collection alternative to the lien. The IRS will release the lien within 30 days of the taxpayer’s full payment of the tax debt. However, a released lien will stay on a taxpayer’s credit report for seven years. The taxpayer can request specific property (i.e. personal residence) to be discharged from the lien to allow the taxpayer to make a payment on the underlying tax debt. However, the tax lien will still be in effect on the taxpayer’s remaining property.
Another option is for the taxpayer to request subordination of the tax lien to allow other creditors to move ahead of the IRS’ security interest. Subordination may make it easier to get a loan or mortgage. The IRS will maintain its security interest in position with the remaining creditors. If the taxpayer can pay down the tax balance to under $25,000, he or she can request a lien withdrawal after entering a direct debit installment agreement to fully pay the tax due within the earlier period of 60 months or the expiration of the collection statute of limitations.