A Comprehensive Guide to IRS Tax Liens

What is the Tax Lien Process?

The IRS does not file a lien without warning. The process follows these specific legal steps:

1. Liability Assessment: The IRS determines you owe money (either via your filed return or an IRS-filed substitute return).
   
   
2. Notice and Demand for Payment: The IRS sends a bill (Notice CP14 or similar).
   
   
3. Failure to Pay: You fail to pay the debt or enter a resolution plan within the allotted time.
   
   
4. Public Filing: The IRS files a Notice of Federal Tax Lien (NFTL) with the local county recorder or Secretary of State to alert creditors that the government has a legal right to your property.

Destroys Personal Finances

Since 2018, tax liens do not appear on your three major credit reports (Experian, Equifax, TransUnion). However, they remain public record. Lenders and title companies conduct public record searches; a lien can lead to automatic loan denials or significantly higher interest rates.

Creates Problems when Selling Property

You cannot sell or refinance a home with a "clear title" until the lien is addressed. The lien must typically be paid out of the sale proceeds at closing.

Difficulty Obtaining a Loan

The presence of an IRS tax lien can significantly hinder an individual's ability to obtain loans or credit. Lenders typically view tax liens as a warning sign of potential financial instability. As a result, individuals with an existing lien may face higher interest rates or outright denial of loan applications, limiting their financial options during a critical time.

Moreover, the impact of a tax lien extends beyond just initial loan applications. When potential creditors evaluate an applicant's creditworthiness, the existence of a tax lien can lead them to become more cautious in their lending decisions. This heightened scrutiny can create additional barriers for borrowers who may have other factors in their favor, making it even more challenging to secure necessary financing.

Professional Licenses may be Revoked

Many states take tax compliance seriously, and failure to address tax obligations can result in the suspension or denial of professional licenses in certain fields. For instance, individuals holding licenses in healthcare, real estate, or law may find their ability to practice curtailed if they have not resolved their tax issues, leading to lost income and career setbacks.

Tax Refunds May Be Seized

An IRS tax lien can directly affect future tax refunds and credits. When taxpayers do not resolve their tax obligations, the IRS may apply any forthcoming refunds to settle outstanding debts. This action can leave individuals without the financial relief they may have anticipated from their tax refunds, further complicating their financial situations.

Pay off your IRS Tax Debt in Full

If you pay your tax liability in full, the lien will no longer be necessary, and the IRS will release it, thereby removing the government's claim and restoring your full rights to your property. This release of the lien is crucial as it clears your financial record, allowing you to regain control over your assets and improve your creditworthiness.

Enter into A Payment Plan

You might be able to have the lien lifted (and possibly even removed) by establishing a monthly payment plan with direct debit from your bank account. If you already have an installment agreement, the IRS might also consent to lift the lien if you arrange for direct debit on that plan.

To be eligible for a lien withdrawal by establishing a direct debit payment plan, you need to satisfy the following conditions:

• You owe $25,000 or less.
• Your payments are enough to pay off the tax liability by the earlier of 60 months or before the collection statute expires.
• You’re compliant with all filing and payment obligations.
• You haven’t defaulted on your current or previous direct debit installment agreements.

If you fulfill these conditions, the IRS is expected to remove your lien once you have made three successful direct debit payments. Keep in mind that these guidelines are applicable to individuals. Businesses can have a lien removed only through a direct debit installment agreement if they are no longer operational or owe only income tax.

Sell your Property

The IRS might also release a lien to allow you to sell the property and settle the tax bill. To request a discharge, use Form 14135 (Application for Certificate of Discharge of Property from Federal Tax Lien).

Subordination

Using Form 14134, you don’t remove the lien, but you allow a lender (like a bank) to move ahead of the IRS in priority. This is commonly used to refinance a mortgage.

Successfully Complete an Offer in Compromise

If you qualify for an offer-in-compromise, you have the opportunity to settle your tax debt for an amount that is less than the full amount you owe. This means that you can negotiate with the IRS to pay a reduced sum, and once this agreed-upon amount is paid, the IRS will forgive the remaining balance of your tax debt. This process not only helps you manage your financial obligations more effectively but also satisfies the requirements for releasing any liens that may have been placed on your property due to unpaid taxes.

Research to See When the Statute of Limitations Expires

If the 10-year statute of limitations, which begins from the date your tax returns were processed, reaches its expiration, you have the right to formally request that the lien placed on your property or assets be released. This process involves ensuring that the IRS collection period for any outstanding tax debt has elapsed, thereby allowing you to seek removal of the lien.