No one likes to get in trouble with the Internal Revenue Service (IRS). But if you have not paid your taxes in full, you are very likely to hear from the IRS. In such cases, the IRS can file a claim on your assets, known as a tax lien, until you pay what you owe.
A tax lien is among the harshest of tools the IRS can use against you. Until you address the lien, the IRS can seize your wages, repossess your vehicles, and even sell your real estate – all in an effort to get you to pay your tax debt.
The IRS instituted the Fresh Start Program in 2011 to help people in these situations. We’ll dive into this program more, but first, let’s go over what it means to have a lien.
What is a tax lien?
A tax lien is the legal route the government can take to impose its right to your assets when you haven’t paid your taxes. They can ultimately seize your property if you continue to leave the tax debt unpaid.
What does it mean when a tax lien is released?
A tax lien release occurs when a lien is removed from your property. A tax lien release can happen when the tax debt is paid in full or when the IRS runs out of time to take action on collection.
When do tax liens expire?
Tax liens endure for ten years, starting from the time you receive the lien. There are some exceptions to this rule. For instance, the IRS can refile the lien, which would extend the expiration date.
How long does a lien stay on your credit record?
Tax liens traditionally remained on credit records for seven years, which burdened people seeking to remove tax liens from their credit report. As of 2018, the three largest credit bureaus completely stopped including tax liens on credit reports. While tax liens should no longer have a bearing or show up in a credit report, they are still a matter of public record.
Understanding the Fresh Start tax program
The IRS’s Fresh Start Program is a way for the government to help individual taxpayers and small businesses with liens. After the financial crisis of 2008, many Americans found themselves out of work and unable to pay their taxes.
The Fresh Start program was an effort by the IRS to stand in taxpayers’ shoes following the worst recession in a generation.
The Fresh Start program helped with these cases by raising the tax liability amount for taxpayers to above $10,000 for a federal tax lien. In most cases, you would have to owe the IRS more than $10,000 for them to issue a lien.
Why lien withdrawal is a powerful tool
A helpful resource offered by Fresh Start is to withdraw a filed Notice of Federal Tax Lien (NFTL). To understand how important this is, you should first know how devastating an NFTL can be.
When the IRS attaches a federal tax lien to your property, it’s initially a private matter between you and the IRS. (Here are some steps you should take during this time). However, if you don’t make arrangements to pay back the debt within 30 days, they file a public notice with your local courthouse.
This information is visible to potential lenders and employers. The lien will also attach itself to any new assets you acquire for as long as it exists. Even though credit rating agencies started removing liens from their reports in July 2017, the public information can follow you in other ways.
That’s why getting a lien withdrawal is vital. In contrast to a lien release, where tax lien removal occurs but the record is still public, withdrawal means that any public record of the lien is expunged as though it never existed.
What is the process for an IRS lien withdrawal?
When you want to withdraw a lien, you first need to file the tax lien withdrawal form, Form 12277. There are several reasons you can ask to remove the lien notice. We’ll go into a few of these in-depth later. Some examples are:
- A premature filing of the NFTL or one that doesn’t follow IRS procedures
- Having an installment agreement with the taxpayer where there is no provision for an NFTL to be filed
- Being under a Direct Debit Installment Agreement with the taxpayer
- When withdrawal will facilitate the collection of the tax
- When the taxpayer or Taxpayer Advocate believes withdrawal is in the best interests of the taxpayer and the government
After you fill out the form with a thorough explanation for your withdrawal request, you then mail the form to the IRS office assigned to your account.
Common ways to get a federal tax lien withdrawal
The most obvious way to get a federal tax lien withdrawal is to pay your tax debt balance in full. If covering your total debt isn’t possible, there are other avenues to withdraw the lien notice. Let’s explore the most common options.
Direct Debit Installment Agreement
Some taxpayers qualify for a Direct Debit Installment Agreement. An installment program is possible if your tax debt balance is $50,000 or less.
You can spread out tax payments via direct debit from your bank account over six years. The program does not request financial statements to qualify for this arrangement. If your balance is over $50,000, you may have to provide a financial statement and fill out more forms to get a lien withdrawal.
If you default on the installment agreement, the IRS can file another Notice of Federal Tax Lien.
An offer of compromise for your lien
Fresh Start also gives you the option to pay back less than the settled amount, known as an offer of compromise. It looks at your income, property, and other assets to determine if you are unable to pay back the balance of your tax bill in full.
According to the IRS, it “will accept an offer if it represents the most the agency can expect to collect within a reasonable period.” (Source) However, if they think you can pay the full amount, you won’t get a compromise.
Working with a tax relief company
Having a tax relief company on your side also helps. The best tax relief companies have tax lawyers and enrolled agents on staff, provide a money-back guarantee, and charge competitive rates. You will have to do your research to find out which tax relief company is the best fit for you.
Always consult with a tax attorney before providing personal financial information to the IRS.
The road to no more tax liens
Lien withdrawal is a good step toward financial health. But the best option is to avoid the lien altogether by paying all debts, including taxes, in full and on time. Working with a certified public accountant or financial advisor can help you avoid trouble in the future.
As John Ulzheimer, a credit specialist and former manager at credit score provider Experian, said, “Just because the lien or judgment information has been removed and someone’s score has improved doesn’t mean they’ll magically become a better credit risk.” (Source)
Withdrawing a federal tax lien from your public record gives you more financial freedom. Armed with this information, you can be diligent to avoid it moving forward.
Andrew is the Content Director for SuperMoney, a Certified Financial Planner®, 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.