How to Get Rid of an IRS Tax Lien
Paying your tax debt in full is the best way to get ride of a federal tax lien. The IRS releases your lien within 30 days after you have paid your tax debt. When that is not an option you will almost certainly need to get a tax professional involved because of the specific procedures and time lines required for success.
What is an IRS Tax Lien?
The IRS files a Notice of Federal Tax Lien, which is a public records document, to alert creditors that the government has a legal right to your property. An IRS tax lien is the government’s legal claim against your property when you neglect or fail to pay a tax debt.
The lien protects the government’s interest in all your property, including real estate, personal property and financial assets. A federal tax lien may be filed after the IRS:
- Registers a balance due (assesses a tax liability);
- Sends a bill that explains how much is owed (Notice and Demand for Payment); and;
- The balance due is unpaid on schedule.
Negative Consequences of an IRS Lien
- Bankruptcy — If you should decide to file for bankruptcy, an IRS lien remains after the bankruptcy.
- Credit — When a Notice of Federal Tax Lien is filed and the credit agencies downgrade your credit score, it typically hinders the ability to get any lending because the IRS will have priority over the lender.
- Assets — An IRS lien attaches to all assets, including vehicles, real property, equities and cash. It also attaches to future assets acquired while the lien is in effect.
- Business — Especially difficult for businesses is when an IRS lien attaches to business assets, including accounts receivable.
Options for IRS Tax Lien
When you (or more likely your power of attorney) has convinced the IRS that it’s in both the IRS’s and the client’s best interests to change the status of a lien, there are several options.
A subordination may be granted and if the IRS does not agree with your selection after its review, an explanation of the decision will be provided. Note that a subordination does not remove the lien. It allows other creditors to move ahead of the IRS, which may make it easier to get a loan or mortgage.
6325(d)(1) – a subordination may be issued under this section if you pay an amount equal to the lien or interest to which the certificate subordinates the lien of the United States. The following example uses an 80% loan to value and a 3% closing cost to financing ratio.
- Fair Market Value: $200,000
- Refinance: $160,000 (Original: $145,000)
- Closing Costs: $4,800
- United States Interest: $10,200
In this example the United States’ interest is the equity you obtain from your refinanced loan after paying off the existing loan of $145,000 and paying the closing costs to obtain the loan. ($200,000 property value x 80% loan to value ratio = $160,000 refinance loan amount. $160,000 – $145,000 loan payoff = $15,000 potential equity. $160,000 x 3% = $4800 closing costs to obtain the loan. $15,000 potential equity – $4,800 closing costs = $10,200) The IRS would ask for $10,200 in return for the United States subordinating its interest to the refinanced loan. The lien remains on the property but the refinanced loan has priority over the lien.
6325(d)(2) – a subordination may be issued under this section if the IRS determines that the issuance of the certificate will increase the amount the government realizes and make collection of the tax liability easier. This might involve a refinance to a lower interest rate which would, if the subordination were granted, allow a larger monthly repayment rate on the tax liability. Or the situation might be more complex. For example, AAA Auto Sales currently pays the IRS $2000 per month on a $120,000 tax debt. Their inventory needs replenishing but their wholesaler is reluctant to provide added inventory because of the federal tax lien. AAA requests subordination and provides the IRS with documentation that an inventory replenishment of 500 cars could allow them to increase their monthly payment to $3000 as well as increase their pay back rate to bi-weekly. In this example the United States’ interest would be second on the new inventory, if the subordination is granted.
Discharge of property
A “discharge” removes the lien from specific property. There are several Internal Revenue Code (IRC) provisions that determine eligibility.
Discharge of property from the federal tax lien may be granted under several Internal Revenue Code (IRC) provisions. After reviewing the discharge sections, explanations, and examples below, select the discharge section that best applies to your application. If the IRS does not agree with your selection after its review, an explanation of the decision will be provided.
6325(b)(1) – a discharge may be issued under this provision if the value of the taxpayer’s remaining property encumbered by the federal tax lien is equal to at least twice the amount of the federal tax liability secured by the lien and any encumbrance entered into before the IRS led its public notice of the lien. If there are mortgages, state and/ or local taxes, mechanics liens, etc., the amount of these debts would be added to the amount of the tax liability and multiplied by 2 (two).
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 United States’ interest in the property being discharged. For example, the IRS has a lien totaling $203,000 and with the…
- Property selling for: $215,000
- Minus encumbrances senior to IRS lien: $135,000
- Minus proposed settlement costs: $15,000
- The IRS lien interest equals: $65,000
After the IRS receives and applies the $65,000 in partial satisfaction of the tax liability, there remains an outstanding tax debt of $138,000.
In the case of Tenancy by Entireties property, the United States is generally paid one-half of the proceeds in partial satisfaction of the liability secured by the tax lien.
3. 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. Submit a copy of the proposed escrow agreement as part of the application.
4. 6325(b)(3) – a discharge may be issued under this provision if an agreement is reached with the IRS allowing the property to be sold. Per an escrow agreement the sale proceeds must be held in a fund subject to the claims of the United States in the same manner and priority the claims had prior to the property being discharged. For example, there are two mortgages senior to the IRS tax lien totaling $32,000 and $5,000. The government’s interest in the property is $40,000 and there are liens on the property junior to the IRS lien in the amount of $3,000, $12,000 and $2,990. The proceeds from the sale would be dispensed by paying the debts in the following sequence:
5. 6325(b)(4) – a discharge will be issued under this provision to a third party who owns the property if a deposit is made or an acceptable bond provided equal to the government’s interest in the property. In the case of Tenancy by Entireties property, a deposit or an acceptable bond totaling one-half the government’s interest in the property must be made. If you are the property owner (but not the taxpayer, i.e., you are not responsible for the tax liability) and you make a deposit or post an acceptable bond to obtain a discharge under this section, you have 120 days to file an action in federal district court, under section 7426(a)(4), challenging the IRS’ determination of the government’s lien interest. This is the exclusive remedy available to the third party for the return of the deposit or accepted bond or a portion thereof. An administrative request for refund and a refund suit in district court is not available.
When the IRS withdraws an tax lien it essentially removes the public Notice of Federal Tax Lien and assures creditors that the IRS is not competing for your property. The 2011 Fresh Start initiative created a couple Withdrawal options. One option allows a withdrawal of a lien after the lien’s release. General eligibility includes that your tax liability is paid or resolved, your lien is released, you are in compliance for the past three years in filings, and are current on any estimated tax payments and federal tax deposits
The other option may allow withdrawal of the Notice of Federal Tax Lien if you have entered into or converted a regular installment agreement to a Direct Debit installment agreement. General eligibility includes:
- You can’t have defaulted on your current, or any previous, Direct Debit Installment agreement
- You are in full compliance with other filing and payment requirements
- You owe $25,000 or less
- Your Direct Debit Installment Agreement must full pay the amount you owe within 60 months or before the Collection Statute expires
- You have made three consecutive direct debit payments