A federal tax lien is the IRS’s way to get the attention of delinquent taxpayers. It works. When the IRS files a federal tax lien against you, it holds a claim on everything you own and anything you may acquire in the future until you repay your taxes. That’s just the beginning. Once the IRS has a tax lien on your property it can start to levy (i.e. empty) your bank accounts, sell your property, take possession of your vehicles, and even garnish your wages. The good news is that it doesn’t have to end like that.
Unfortunately, many taxpayers are like deer caught in the headlights when hit with a tax lien. The biggest mistake when facing a tax lien is to do nothing at all. Consider a tax lien as a wake-up call. It’s time to get busy. Here are 10 things you can do.
1. Hire a tax relief professional
You may not know it yet, but you need a tax relief professional, such as a tax lawyer, CPA, or enrolled agent on your side. Get some advice. Fast. Talk to a tax expert about your options. You may even qualify for a free consultation. Complete this short survey to see if you qualify for a free initial consultation with a senior tax professional. No strings attached.
Although there are things you can do by yourself when dealing with the IRS, negotiating the release shouldn’t be one of them. If you already have a federal tax lien, you probably owe the IRS more than $10,000. That is the minimum liability for filing a tax lien. It used to be $5,000 but the IRS Fresh Start Program raised the threshold to $10k.
If you owe a lot of money to the IRS, it can help to have a tax relief company on your side. The best tax relief companies have tax lawyers and enrolled agents on staff, provide a money-back guarantee and charge competitive rates.
2. Contact the IRS immediately
Further ignoring the IRS will only make things worse. A federal tax lien is a shout for attention, a warning shot across your bow. Call the number on the tax bill (CP-501 notice) the IRS sent you. Even better, get your tax representative to call for you. A tax lien is serious. Treat it like you would treat a DUI charge or a messy divorce. Hire a qualified lawyer, call the IRS and explore your options.
3. Appeal the tax lien
You have the right to appeal when the IRS files a tax lien. The IRS is a huge organization but it’s understaffed and overworked. During the busy seasons, it has to employ temporary workers that are paid little more than minimum wage. Mistakes happen. Hire a CPA or tax attorney to go over your paperwork. It’s possible the IRS messed up even if it’s on a technicality and you have grounds to appeal the decision.
Once you receive written notice of a tax lien, you have 30 days to appeal to the IRS Appeals Office. Get your tax representative to request a telephone conference with the manager of the IRS unit that is filing your lien. If that doesn’t work, your tax professional will probably file a Form 9423.
Tip: Check with a tax professional before appealing a decision. Having the IRS re-checking your tax account may be the last thing you want.
4. Pay in full
This may seem like an obvious one but it is the fastest way to get rid of a tax lien and remove the tax lien notice from your credit report. If you haven’t got enough cash, consider selling some assets, or tapping into your retirement funds. You may even want to get a loan, while you still have the credit to do so. The interest rates charged by many banks are lower than the interest and penalty fees charged by the IRS, not to mention the damage to your credit. However, before getting a loan, talk to a pro. There may be better options for you, such as an offer in compromise.
5. Negotiate an offer in compromise
The IRS is not above negotiating a settlement with taxpayers who are not able to pay their debt in full before the statute of limitations on their tax debt expires. Since the IRS Fresh Start Initiative began in 2011, it is much easier to qualify. Read more about offers in compromise and how to calculate the lowest offer the IRS is likely to accept. It’s not uncommon for tax relief firms to have success rates of 90% when negotiating offers in compromise.
6. Set up a payment plan
Offers in compromise are only for taxpayers who have serious financial difficulties. If you have substantial assets (a home, a couple of new cars, some savings, or a 401k), you may not qualify for an offer in compromise. Applying for an installment agreement or payment plan is much easier. Read more on how to apply for an installment agreement and other tax relief programs.
7. Apply for a certificate of subordination
Even if the IRS does not remove the entire tax lien, it may grant the subordination of a specific property listed on the tax lien. What this means is the IRS will allow another creditor to have first dibs on a property. By doing this, you may increase your chances of getting a loan or a mortgage. Mind you, the IRS will only consider a subordination if you can prove it will increase its chances of getting paid.
8. Request a certificate of release of a Federal Tax Lien Notice
Thanks to the new tax relief measures included in the Fresh Start Program, the IRS can now remove tax lien notices from your report. Even better, credit reporting agencies have recently agreed to completely remove tax liens from credit reports when the IRS releases the lien. Previously, tax liens remained on your credit report for 7 years. Find out more on how to remove a tax lien notice from your credit report.
9. Sue the IRS for damages
Suing the IRS. It has a nice ring to it, doesn’t it? Granted, this doesn’t happen every day but if 10 years have passed since your tax was assessed and the IRS has not released the tax lien on your property, you have the right to sue the federal government for damages. Before you get too excited, make sure you the IRS has not re-filed a lien on a more recent tax debt. Again, hiring a tax professional in these cases is a smart investment.
10. Act now
The most important thing to remember when you’re hit with a tax lien is that you need to take action. There are plenty of options available but most work best if you are proactive. Take control of your tax situation. Complete this short survey and see if you qualify for a free tax relief consultation with a senior tax professional. It won’t cost you a dime and you will find out what tax relief programs you may qualify for.
Andrew is the managing editor for SuperMoney and a certified personal finance counselor. He loves to geek out on financial data and translate it into actionable insights everyone can understand. His work is often cited by major publications and institutions, such as Forbes, U.S. News, Fox Business, SFGate, Realtor, Deloitte, and Business Insider.