An Overview of the IRS Tax Collections Process for Non-Tax Lawyers
27. IRS Liens
IRS liens. I want to talk briefly about IRS liens. An IRS lien or lien in general is a security interest on a piece of property. An IRS lien represents the government’s interest in the personal and real property of a taxpayer.
A tax lien has the effect of attaching to all the taxpayer’s real and personal assets. In the event the taxpayer goes to sell one of those assets the government has a claim to that money. In actuality liens really serve two purposes.
Number One, they attach the property and make it really difficult to sell houses. Occasionally it can make it really difficult to sell vehicles or larger items or personal property particularly those that are registered with the DMV.
Secondly, liens have a very negative impact on a taxpayer’s credit and their ability to borrow.
Officially, the policy statement from the IRS is that liens are used to preserve the government’s interest. But there is a big debate between the IRS and the tax practitioner community on what the efficacy of liens are particularly where a taxpayer doesn’t have any assets for the government to secure because the government, like I said liens, are a necessary measure of preserving a security interest. We would argue that the liens are a punitive measure that really only impacts a taxpayer’s credit.
Particularly we have a case where a taxpayer has a renewed installment agreement that will fulfill a liability, and the IRS goes and files a lien anyway. That is a particularly hot topic of debate.
But an IRS taxing can be dealt with in one of three ways. You can ask the government to withdraw the lien, meaning that the lien effectively never happened, and will completely disappear from a taxpayer’s credit.
The government can release the lien usually after the liability has been paid in full, or the government can subordinate the lien which means it drops the lien and priority to perhaps another lender.
If there is refile for a house for example and the lender wants the government to drop its interest you can apply for subordination.
Out of those three options, the best option is to withdraw. To withdraw it takes the lien off the taxpayer’s credit and basically pretends that it never happened and it moves it from there.
The way to apply for a lien withdrawal is through the technical adviser into the RIS. It is usually a pretty detailed process and there are some criteria for lien withdrawal. If the lien serves the best interest to the taxpayer and the government, the IRS can withdraw the lien.
If the taxpayer is on a valid installment agreement that will fulfill the liability the IRS has the discretion to withdraw the lien.
For lien issues we recommend generally getting a tax representative involved because they can be fairly technical and because the pitfalls they have to navigate. But I do want to be aware that there are several options for dealing with tax liens. It’s not an entirely gloom-and-doom situation and that there are numerous options for navigating around them.
In particular you want to be particularly aware when you set up resolution options such as installment agreements that you do so with the intent of avoiding liens. These are never good thing. They can impact a taxpayer far beyond the duration of their liability.
Oftentimes, when speaking with clients, it’s not the resolution that’s causing the taxpayer problems. It’s the threat of liens. Liens prevent people from buying houses and moving on with their life and funding their business, and so, are never really good things to consider.