HOW DOES A FEDERAL TAX LIEN AFFECT ME?

A federal tax lien is an instrument used by the IRS. The Illinois Department of Revenue and other state tax departments have similar liens. 

 

This federal IRS tax lien is not just a document. Instead, it is a claim of IRS’s financial interest in all assets that the lien attached. The tax lien actually attaches to all the assets of the person who owes tax. This helps to secure the government’s ability to collect tax owed. It protects the government’s interest in the event that property is sold, or to maintain the “priority” of governmental interest if the taxpayer filed for bankruptcy.

 

The IRS tax lien remains in place until the tax is paid, otherwise satisfied, or simply becomes no longer enforceable.

 

THE TAX LIEN IS PUBLIC INFORMATION

 

IRS collection enforcement (liens, levies) requires adequate Notice must be given. When the IRS issues a federal lien, it will send IRS Form 668Y, Notice of Federal Tax Lien directly to the person that owes the tax (“the taxpayer”). This Form 668-Y is the taxpayer’s copy of form filed with the County Recorder, wherever the taxpayer lives. 

 

The Internal Revenue Service no longer files the Notice of Federal Tax Liens with the credit bureaus (Equifax, Transunion, Experian, Dun & Bradstreet). However, these agencies are able to detect the lien details, because the digital information is still available to the public.

 

The lien negatively affects the taxpayers’ credit profile and score. That tax lien can also seriously affect your rights in property, particularly in real estate. Even a state tax lien can prevent someone from selling or refinancing their real estate.

 

HOW TO REMOVE AN IRS FEDERAL TAX LIEN

 

There are several ways to “remove” a tax lien. These include: 

  • Release
  • Withdraw
  • Subordination
  • Discharge (Non-Attachment)

 

Withdrawal of the lien is the best way for it to be removed. The withdrawn lien is treated like it was cancelled, as if it never happened. It is not exactly removed, but those records are treated as if to be disregarded.

 

Once the fact requirements are met, the process of Federal Tax Lien withdrawal begins by completing IRS Form 12277, Application for Withdrawal of Tax Lien.

 

The application form asks specific details about the lien. It is very helpful to have a copy of the federal tax lien notice when preparing the Form 12277. However, that lien document is often not readily available. A tax lawyer can usually arrange to recover that information directly from the IRS, maybe even receive a photocopy of the Form 668-Y.

 

THE MOST IMPORTANT THING

 

Again, the purpose of the lien is to protect the government. In order for a lien to become withdrawn, or “cancelled”, there must be a most compelling reason. Usually that reasoning is that the government did something incorrect when filing the IRS tax lien. Otherwise, there may be a public policy reason, or simply that it makes sense to withdraw the lien, because tax collection becomes easier.

 

Here are several of the main conditions of why IRS will withdraw a tax lien:

  • For Premature or Inadvertent Lien Filings
  • For lien Notices Filed in Designated Disaster Areas
  • In Certain Installment Agreement Situations
  • Where Withdrawal Will Facilitate Collection
  • Where Withdrawal is in Best Interest of the Government

 

Public policy reasons why a lien should be withdrawn often include a financial hardship, where the lien proves damaging to the taxpayer’s health and welfare. In those cases, failure to withdraw the lien could prove to be very embarrassing for IRS officials.

 

This reasoning is answered in Questions 11 and 12 of the Form 12277. That is where the IRS expects taxpayers to make their best arguments. It is important to provide:

  1. A statement of the desired outcome;
  2. The basis of law, in justify lien Withdrawal;
  3. Taxpayer’s facts, as applied to that specific law justifying the withdrawal;
  4. Any exceptions to the law which could become a basis for denying withdrawal.

 

These elements should be clearly communicated to the IRS, in writing. As well, any written request for withdrawal will require a well-organized set of supporting documents. The documents must prove the taxpayer’s cited facts, and how those facts align with the law. The taxpayer’s “burden of proof is high. The Form 12277 application should not be casually prepared. A structured, formalized request is usually more effective. 

 

When handled by an experienced IRS tax lawyer, the lien withdraw process may take 3-6 months.

 

  1. Anton Collins is a Naperville IL based tax lawyer with Tax Law Offices and Business Tax Settlement Corp.