What Every Attorney Needs Know About IRS Tax Liens
By John Pontius
The IRS is authorized to file tax liens against taxpayers who do not pay their taxes. The lien attaches to all of a taxpayer’s property at the time the lien is filed as well as all subsequently acquired property. This includes real estate, personal property, and financial assets. A lien typically becomes an issue if a taxpayer wants to sell their house or secure financing for the purchase of a new home. A lien is different from a levy, which seizes personal property to collect on a tax debt. The IRS is authorized to file tax liens after taking the following steps.
First, a tax assessment must be made. This can be from a taxpayer filing a tax return or an IRS audit. A tax assessment also occurs when the IRS prepares a substitute for return in the case of a taxpayer who did not file a return but had a filing obligation. Second, the IRS will send the taxpayer a notice of the tax bill and demand payment. Third, the taxpayer does not fully pay the tax within 10 days. Then an “assessment” lien arises without any further action by the IRS under Internal Revenue Code (“IRC”) Section 6321. This is sometimes called a “secret” lien because only the IRS knows about the lien. If the amount of the tax due is over $10,000 the IRS is more likely to file a Notice of Federal Tax Lien (“NFTL”). The NTFL is filed in the county courthouse where the taxpayer resides as well as any jurisdiction where the taxpayer owns real property and provides notice to creditors that the government has a legal right to the taxpayer’s property. The NFTL filing generally gives the IRS priority against other creditors and in bankruptcy proceedings.
The IRS will release the lien within 30 days after the taxpayer has fully paid the tax debt. See IRC 6325(a). However, a released lien will typically stay on a taxpayer’s credit report for seven years. Generally speaking, the IRS only has 10 years to collect taxes after an assessment. See IRC 6502. Note that the collection statute of limitation tolls during an Offer in Compromise, bankruptcy filings and Collection Due Process hearings. After 10 years, the IRS can bring an action in federal district court to seek a judgment which will result in a further extension to the collection period; the length of the extension will vary based on local law. See IRC 7401 and 7403. The IRS will modify the lien if it is in the best interest of the IRS and the taxpayer.
A discharge from the tax lien removes specific property from the tax lien. This option can be considered if it qualifies under IRC Section 6325(b). To make the request for discharge, file Form 14135, Application for Certificate of Discharge of Property from Federal Lien. If the IRS accepts the discharge from tax lien, it will provide the taxpayer with Form 669, Certificate of Discharge of Property from Federal Tax Lien. However, the tax lien will still be in effect on the taxpayer’s remaining property.
A subordination of the tax lien allows other creditors to move ahead of the IRS’ security interest. See IRC Section 6325(d). Subordination may make it easier to get a loan or a mortgage. The IRS will maintain its security interest position with the remaining creditors. To request subordination, file Form 14134, Application for Certificate of Subordination of Federal Tax Lien. Upon acceptance of the subordination, the IRS will issue Letter 4053, Conditional Commitment to Subordinate Federal Tax Lien and Form 669, Certificate of Subordination of Property from Federal Tax Lien.
IRC Section 6323(j) provides for the withdrawal of the tax lien for individuals, businesses with only income tax liabilities and closed businesses with all types of taxes. This removes the public NFTL as if it were filed in error. This is the best option for taxpayers because they can sell assets or secure financing without the burdens of a tax lien. Withdrawal of a tax lien may be more difficult if the tax debt is large. Please note that after any lien modifications the taxpayer is still liable for the taxes.
The IRS will withdraw the NFTL if the tax liability has been satisfied and the lien has been released. Additionally, the taxpayer must be in filing and payment compliance for the last three years.
Alternatively, the IRS will withdraw a tax lien if the taxpayer owes $25,000 or less. If the taxpayer owes more than $25,000, the balance can be paid down to $25,000 before requesting withdrawal of the NFTL. The taxpayer must enter a direct debit installment agreement to full pay the taxes within the earlier of 60 months or before the collection statute expires. The taxpayer must be in filing and payment compliance. The taxpayer cannot have defaulted on the current or any previous direct debit installment agreement. After three consecutive direct debit payments, the taxpayer can file Form 12277, Application for Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien. If the IRS agrees to withdraw the NFTL, it will send the taxpayer Form 10916 A, Withdrawal of Filed Notice of Federal Tax Lien After Release. It is recommended that the taxpayer mail a copy of the Form 10916 A to the credit reporting agencies to improve the taxpayer’s credit report.
The best advice is to avoid a federal tax lien by filing and fully paying the taxes on time. If the taxpayer cannot fully pay the taxes, the IRS provides many payment options to settle the tax debt over time.
Originally published in Tax Talk by the Tax Section of the Maryland State Bar Association.