Sam Brotman, JD, LLM, MBA July 2, 2020 17 min read

The Complete Guide to IRS Tax Liens

IRS Tax Lien Release – Part One: Avoiding a Lien

Introduction to Tax Lien Release

One of the biggest debates in the tax practitioner community is the efficacy of IRS tax liens. On one hand, IRS tax liens help the government protect its interest in a taxpayer’s property and secure the underlying tax obligation with real or tangible personal property.

On the other hand, liens damage a taxpayer’s credit, place an obstacle in the way of the taxpayer selling that property or borrowing against it in order to pay off their liability, and generally do nothing to satisfy the immediate concern of the IRS. Furthermore, it is extremely difficult to get a lien release and liens are a noted hassle to dispose of once they have been filed against a taxpayer. 

However, there are a number of things that the taxpayer can do if they are affected by a federal tax lien in order to secure a lien release or achieve some other workable solution that allows them to make progress on the account. After all, the IRS is simply seeking a workable resolution to the problem.

Avoiding an IRS Tax Lien

First of all, although it may go without saying, the easiest way to not have to worry about federal tax liens is to not get them in the first place. Being compliant with your federal tax obligations is a 100 percent guaranteed way to avoid a tax lien. Even if you are not entirely compliant, getting a head start on a workable resolution is a great way to avoid a lien. 

Generally speaking, it is much easier to avoid a lien in the first place than having to worry about having to secure its release later. If you get out in front of your IRS tax obligation and are proactive about getting on a payment plan or making arrangements to pay the liability in full, you will likely avoid a lien. 

Tax liens, in any form, utilize IRS resources to get put into place. If the IRS knows that you are working on resolving your tax issue, it will likely deprioritize placing a lien on your account. As the IRS states on its websites, tax liens are reserved for taxpayers who are notified that they have a balance due and do not take steps to resolve their liability.[1] 

Simple contact with the IRS goes a long way in avoidance of a federal tax lien.[2]

Along those lines, the IRS generally does not go through the trouble of placing a lien on taxpayers who owe smaller liabilities. Under the new IRS Fresh Start Program, the IRS raised the threshold for placing a federal tax lien on an account from $5,000 to $10,000.[3] 

This does not necessarily mean that the IRS will not place a tax lien on you if you owe less than $10,000, but generally, absent truly compelling circumstances, it is not going to bother. If you owe slightly more than $10,000, you might consider making a partial payment to the IRS in order to drop yourself under that threshold. 

If you owe more than $10,000, but less than $25,000, placing yourself on an installment agreement prior to a lien being filed will also usually prevent a tax lien from being filed in the first place. 

In certain circumstances, usually by agreeing to have my clients set up on direct debit, I have also avoided tax liens for my clients who have balances of up to $50,000. In general, the IRS is going to take a harder look at accounts with balances over $50,000, so for lien avoidance purposes it is definitely advisable to keep yourself under this threshold.

[1] See http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Understanding-a-Federal-Tax-Lien

[2] Details about making payments to the IRS can be found here: http://www.irs.gov/Payments/Make-a-Payment

[3] Information on the IRS Fresh Start program can be found here: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Fresh-Start-Notice-of-Federal-Tax-Liens

IRS Tax Lien Release – Part Two: Lien Withdrawal

 

Strategies Once an IRS Tax Lien is in Place

Once the IRS tax lien is in place, it generally will not release it unless the balance owed is paid in full or there is another justification for removing it (such as it was filed erroneously or is for a year that is no longer subject to collections). 

Think of it from the IRS’s perspective. The government has a tangible security interest in your real or personal property. Why would they want to give up that interest without getting what is owed to them? IRS tax liens act as a security blanket for the government to ensure that their interest is protected just like any other creditor. 

Unlike a levy, liens create no immediate hardship to the taxpayer (other than the fact that they destroy the taxpayer’s credit). As such, it usually takes a compelling reason to convince the IRS to release a lien. However, with that said, there are a few remedies that may be helpful for taxpayers affected by a tax lien.

IRS Tax Lien Withdrawal

Lien withdrawal is one remedy that taxpayers can seek from the IRS. If possible, you want to try to get liens withdrawn than simply released or subordinated. The reason for this is that a withdrawn lien can be removed from your credit report and should not negatively impact your credit score. 

However, the IRS will only withdraw liens under certain circumstances. The negative impacts of a tax lien are a measure that is meant to provoke taxpayer compliance.[1] First, under the Fresh Start program, liens can be withdrawn if the underlying liability surrounding the lien has been paid in full and the taxpayer meets certain compliance requirements. 

In order to get a lien withdrawal granted, taxpayers must have filed all tax returns that are currently outstanding (including any informational returns) and must also be current on all estimated tax payments and withholdings.

Additionally, taxpayers can get a lien withdrawn after the fact by entering into a direct debit installment agreement with the IRS. A direct debit installment agreement is one where the taxpayer agrees to have monthly payments taken directly out of the taxpayer’s bank account. 

This accomplishes two purposes for the IRS. First, it virtually guarantees automatic payments every month if the taxpayer has sufficient funds in the account to make their monthly payments.

Second, in the case that the taxpayer does default on the agreement, it does provide a readily available levy source. Direct debit installment agreements can be requested via calling the IRS directly or by filling out Form 433-D.[2] 

Finally, liens will be withdrawn if the taxpayer can prove that they were filed in error. However, the IRS will usually not withdraw liens automatically and the taxpayer must complete a lien withdrawal request with the IRS. Lien requests can be submitted to the IRS via Form 12277.[3]

[1] http://www.irs.gov/pub/irs-pdf/f12277.pdf

[2] IRS Form 433-D can be found here: http://www.irs.gov/pub/irs-pdf/f433d.pdf

[3] Form 12277 is available here: http://www.irs.gov/pub/irs-pdf/f12277.pdf

IRS Tax Lien Release – Part Three: Release and Subordination

Tax Lien Release and Partial Release of Lien

Secondary to getting the IRS to withdraw the lien entirely, you want to make sure that you get a tax lien release from the IRS. A tax lien release will still appear on a taxpayer’s credit, but the lien will be shown as paid and not have as adverse an effect. 

In addition, the IRS will no longer have a claim against your real or personal property. As with withdrawals, absent good cause, the IRS generally will not agree to a tax lien release. However, if you are trying to sell an asset to pay your tax liability, the IRS may grant lien release or a partial release of lien. 

A partial tax lien release will only apply to a certain piece of property, but it can be useful to help prevent the encumbrance of an asset. One common example of where a partial release of lien is helpful is when the taxpayer is short-selling their residence in order to free up financial flexibility. 

The IRS considers partial lien release requests on a case-by-case basis and they can be arduous, so be prepared to submit detailed documentation when requesting a partial release of lien.

Alternative to Tax Lien Release: Lien Subordination

Finally, if the IRS will not agree to tax lien withdrawal or tax lien release entirely, a lien subordination is a third option for dealing with an IRS lien. Subordinations are granted usually when a taxpayer is trying to borrow against an asset (while still retaining possession) in order to pay the IRS part of their balance due. 

Subordinations move the IRS’s creditor priority lower than that of another creditor, such as a bank. Usually, this will be a condition for a lender to agree to lend money on an asset that a federal tax lien has already been placed on. This is because should anything happen to that asset, the IRS would retain creditor priority over the bank. 

However, because the IRS retains an interest in the property, they may be more likely to agree to subordination than an all out release of lien in certain circumstances. This is fact dependent, however, and depends on the taxpayer’s circumstances. Applications for lien subordinations are made through IRS Form 14134.[1]

Conclusion

In conclusion, IRS tax liens are problematic for taxpayers and are best dealt with sooner rather than later. That said, if a lien has been placed on your property there are a number of options for resolving the issue. 

Obviously getting the lien withdrawn is the most preferable of these options (only second to avoiding a tax lien in the first place), but if not there are other options including lien release and lien subordination. The IRS has been known to be fairly aggressive when it comes to liens and in granting lien releases, so it is best to speak with a qualified tax professional if you are having trouble accomplishing what you need to. 

As always, I am available for help if you need me via the contact information on this website.

[1] IRS Form 14134 can be found here: http://www.irs.gov/pub/irs-pdf/f14134.pdf

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Sam Brotman, JD, LLM, MBA

Owner and Director of Legal
Brotman Law

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