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 there are steps yo you can take, such as setting up an installment plan, applying for an offer-in-compromise, or requesting a certificate of subordination.
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
Having a tax relief professional, such as a tax lawyer, CPA, or enrolled agent on your side can be valuable in some cases. If you are concerned about your tax debt, consider talking about your options with a qualified tax professional. You may even qualify for a free consultation. The companies have tax attorneys and enrolled agents on staff and provide a free initial consultation.
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 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. However, the IRS will only consider 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 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.
Frequently asked questions about tax liens
If you are struggling to pay off your tax debt, you are not alone. An estimated 17 percent of federal taxes go unpaid every year. To secure the money they’re owed, the government files tax liens.
Receiving notice of a tax lien can be a scary and confusing affair. This guide will help you understand what a tax lien is, how it affects your credit, and what steps you must take to resolve the issue.
What is a tax lien?
A tax lien is a claim by the state or federal government against your assets following your failure to pay a tax debt on time. This can include your possessions, your property, and your financial assets.
The government uses tax liens as a last resort to force delinquent taxpayers to pay up. Federal, state, and local governments can place tax liens for unpaid income or property taxes. Most tax liens come from the Internal Revenue Service (IRS), but tax liens can also come from a failure to pay state or even local taxes.
What triggers a federal tax lien?
The IRS files a notice of federal tax lien after other steps fail to result in payment of outstanding tax debt. Three things must occur before the federal government files a tax lien notice:
- The IRS determines how much you owe.
- The IRS sends you a bill explaining how much you owe — this is called a Notice and Demand for Payment.
- You neglect or refuse to pay the debt in time.
After these three things happen, the IRS may file a public document called a Notice of Federal Tax Lien. This document alerts creditors that the government has an interest in your property because of taxes that you owe. A notice of tax lien is automatically filed if your tax debt is over $10,000 but may also be filed for a lesser debt at the discretion of the IRS. This notice is typically filed in your county of residence or, in the case of a business, in the county in which you do business.
Is there a difference between a tax lien and a tax levy?
Tax liens and tax levies are two different steps in the same process.
A tax lien is a legal claim against your property. This property may include real estate, personal property, and financial assets. When you have a tax lien against your property, you cannot sell it without first paying the IRS whatever you owe.
A tax levy is the actual seizure of the asset to pay off a tax debt. If you don’t pay your taxes or arrange to settle your debt, the IRS may seize and sell any of your real or personal property. This includes both property and both your current and future income.
The good news is that if the IRS sent you a notice of tax lien, you could still prevent a tax levy. The government does not actually want to take your property. They would much rather receive their money. In 2016, the government filed 470,602 notices of tax liens but only performed 436 actual levies (Source: IRS).
How do tax liens affect your credit?
Tax liens no longer appear on credit reports, so they can’t hurt your credit score. However, tax liens do appear on public records, so they can hurt your chances of qualifying for a loan. This is because lenders will typically check public records when determining whether a borrower qualifies for a loan. Obviously, having a tax lien doesn’t shout “reliable debt payer,” so it is a good idea to try to remove tax liens from the public record. This article explains how to do it.
How else will a tax lien affect your finances?
A tax lien on your credit report can also affect your chances of getting a job. Employers often check the credit reports of candidates before hiring them or giving them an interview, particularly in industries that provide financial services.
Tax liens may also lead to wage garnishments. A wage garnishment is a type of tax levy wherein the IRS tells your employer to withhold a portion of your wages. Your employer then forwards these withheld wages to the IRS to apply to your outstanding tax debt. This can have a significant impact on your take-home pay and your budget.
A tax lien attaches not only to your property at the time the notice was filed but also to any property you acquire for the duration of the tax lien. This includes business property you may own as well as rights to business assets like accounts receivable.
Can filing for bankruptcy remove a tax lien from your property?
Some people in hot water with the IRS believe that filing for bankruptcy may be the best way to handle a tax lien. However, there’s a flaw in this logic. A tax lien attaches to all your assets, including your future assets and business property. That means that even if you file for bankruptcy, your tax debt and liens may continue afterward. Also, bankruptcy negatively affects your credit score. Needless to say, bankruptcy is rarely, if ever, a smart option for dealing with a tax lien.
How can you avoid tax liens?
The best way to avoid a tax lien is to file and pay your taxes on time, every time. If you fall on hard times and are unable to pay your tax obligation in full, you may still avoid a tax lien by proactively setting up an installment agreement with the IRS. In general, the more you are able to pay down your tax debt, the more options you will have for repayment.
What should you do if you receive a notice of federal tax lien?
Don’t panic. Assistance is available from both the IRS and other agencies and companies that offer tax relief services. The Fresh Start Program is an IRS-run series of programs to help taxpayers to get out of debt.
The Fresh Start Program’s tax relief opportunities include:
- Installment agreements allow taxpayers to pay back their tax debt in monthly payments. In this option, the IRS will automatically deduct payments from your bank account for up to 72 months.
- Applications for tax lien withdrawal let you request that the government remove your lien. You can qualify for withdrawal if you’ve paid your debt in full or if you enrolled in a viable direct deposit installment agreement.
- Offers in compromise let you settle your tax debt for less than the full amount. Not everyone will qualify for this option. The IRS must confirm your inability to pay the debt in full.
Can a tax relief company help remove a tax lien?
Yes. Tax relief companies can negotiate with the IRS on your behalf. Of course, you can do it on your own also. A good tax relief company can help you reduce or eliminate tax debt and save you time, stress, and money. But beware of scammers looking to take advantage of financially vulnerable taxpayers. It’s important to do your research and make sure that your chosen tax relief company is reliable, legitimate, and well-reviewed. The best tax relief companies have tax lawyers and enrolled agents on staff, provide a money-back guarantee, and charge competitive rates.
Need help getting started? SuperMoney can help you find the right company with side-by-side reviews and ratings of top tax relief companies.
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.