IRS Tax Relief - Federal Tax Lien Removal


Benjamin Franklin is credited with this famous quote: “In this world, nothing can be said to be certain, except death and taxes.” 

Those of us who have been on the IRS tax relief end of a federal tax lien notice understand Franklin’s pain.

If you are unable to pay a tax debt, you are not alone. An estimated 17 percent of federal taxes go unpaid every year. For at least some of that outstanding debt, the government files a federal tax lien to secure their tax debt. In addition to federal tax liens, tax liens can also be filed at the state and local level.

Receiving notice of a federal tax lien can be an unsettling and confusing affair. This guide from Flat Fee Tax Service, Inc. is designed to help you understand what a federal tax lien is, how it affects your credit, and what steps must be taken to resolve the issue.

IRS Tax Relief - Federal Back Taxes

What Is a Federal Tax lien?

In simple terms, a federal tax lien is a claim by the U.S government against all of your assets based on your failure to pay a tax debt on time. As far as federal tax liens are concerned, your assets include both your personal and real property, as well as your financial assets.

Tax liens are used 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. 

When most people think of tax liens, they associate them with the Internal Revenue Service, but tax liens can also come from a failure to pay state or even local taxes.

What triggers a Federal Tax Lien?

This is what the IRS has to say: “A federal tax lien is the government’s legal claim against your property when you neglect or fail to pay a tax debt. The tax lien protects the government’s interest in all your property, including real estate, personal property, and financial assets.” 

The IRS will file a notice of federal tax lien after other steps fail to result in payment of an outstanding tax debt.

A federal tax lien exists after:

  • The IRS assesses your liability (figures out what you owe).
  • The IRS sends you a bill that explains how much you owe (Notice and Demand for Payment).
  • You neglect or refuse to fully pay the debt in time.

Once these three things happen, the IRS may file a public document called a Notice of Federal Tax Lien to alert creditors that the government has an interest in your property because of taxes that you owe. This IRS notice 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 IRS notice is typically filed in your county of residence or, in the case of a business, in the county in which you do business.

The difference between a Tax Lien and Tax levy?

Think of a federal tax lien as step one in the government’s process to collect the money you owe. The tax lien constitutes a claim against your property.

Just as you cannot sell your home without paying off your mortgage, a tax lien prevents you from selling your assets without first paying off the IRS. 

Tax levies are a completely different collection method.

A tax levy, on the other hand, occurs when the government takes possession of the property to sell it and pay for back taxes. The IRS may seize and sell any type of real or personal property you own or have an interest in.

Can the government really take your property? The simple answer is “yes”. If you have valuable real or personal property – say, a home, a car or a boat – the government may impose a federal tax lien to collect the debt. That means if you are unable to pay the taxes owed, the government – state or federal – sells your real or personal property to satisfy the lien.

The good news is that, if you have received an IRS notice of tax lien, there are things you can do to avoid an actual tax levy. A tax lien does not mean that you will lose your assets if you take the right steps to address it. Those steps will be discussed a little later.

How do IRS Tax Liens affect your credit?

A federal tax lien has a significant impact on your credit, both in the short-term and the long-term. While the U.S. government does not report a federal tax lien to the three major credit bureaus, the credit bureaus themselves search public records to find filed tax liens.

Once a federal tax lien shows up on your credit report, your credit scores can drop dramatically. A tax lien could drop your credit score by as much as 100 points according to a 2010 Congressional testimony by Nina Olson, who leads the Taxpayer Advocate Service, an independent organization within the IRS.”

Credit scoring models take a very dim view of federal tax liens, and they are considered to be one of the most detrimental items on your credit reports. Federal tax liens have a similar effect as bankruptcy or judgments. This means that it can be much more difficult for you to be approved for credit, and may substantially increase the interest rate you have to pay if you are approved for a loan of any sort.

Sadly, your credit score does not recover quickly from that kind of hit. Under federal law, unpaid tax liens can remain on your credit report indefinitely. Unlike other public records, a tax lien can linger around on your credit reports, wreaking havoc on your credit scores for a long time.

A federal tax lien on your credit report can also affect your chances of getting a job. Employers will often check the credit reports of candidates before hiring them or giving them an interview, particularly in industries that provide financial services.

A federal tax lien may also lead to an IRS levy (wage garnishments). A wage garnishment is a type of tax levy wherein your employer is notified by the IRS to withhold a portion of your wages and forward it to the IRS to be applied to your outstanding tax debt. This can have a significant impact on your take-home pay and your budget.

A federal tax lien attaches not only to your property at the time the notice of tax lien is filed but also to any property you may acquire for the duration of the tax lien. This includes business property you may own and rights to business assets like accounts receivable as well.
How can you remove a Tax Lien from your property?

Some people in hot water with the IRS believe that filing for bankruptcy may be a good way to handle a tax lien. However, it is important to note that a tax lien attaches to all your assets, including your future assets and business property. Even if you file for bankruptcy, your tax debt and federal tax lien may continue afterward.

It is important to remember, however, that paying your debt in full removes the lien from your property, but does not necessarily remove the record of the lien from your credit report. See the section of this guide entitled “How Can You Remove a Tax Lien from Your Credit Report?” for more information.

Request a Discharge of Property: To remove a tax lien from a specific piece of property, you can apply for a discharge of property with the IRS. While a discharge does not eliminate your tax debt, it can free a specific property from being encumbered by that debt. This may be useful when trying to sell or refinance a property.

Request a Subordination: While a subordination will not eliminate your tax debt, it will allow a junior creditor to move ahead of the IRS for the property. This may help you get a loan for the property.

Request a Withdrawal: You can also request a withdrawal of a federal tax lien notice under special circumstances. This removes the public notice of your tax lien. However, you are still liable for the tax amount you owe.

How can you remove a Tax Lien from your credit report?

When your taxes are paid in full, the government entity to whom those taxes were owed, either the federal government or your state government, should file a notice of release of your tax lien in the same jurisdiction in which your original notice of tax lien was filed.

However, while this releases your tax lien, it does not reverse the negative effects of your tax lien on your credit report. To get the tax lien removed from your credit report, you will likely need to take the extra step of having the tax lien withdrawn.

For federal tax liens to be withdrawn, you must meet the following criteria:
  • Your tax liability must be satisfied, and your lien must be released.
  • You must be in compliance with filing your individual and business tax returns and all information returns for at least three years.
  • You must be current on your estimated tax payments and federal tax deposits (if applicable).

The process of withdrawing a state tax lien varies from state to state. If you need a state tax lien removed, you will need to contact your particular state and ask if there is a process in place for withdrawing tax liens that are paid in full, rather than just releasing them.

Once a federal tax lien is withdrawn, the credit bureaus will remove those tax liens from your credit report if the IRS or you contact them and ask them to do so.

How can you avoid Tax Liens with the IRS?

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, often you can still avoid a tax lien by proactively setting up an installment agreement that meets IRS requirements. In general, the more you are able to pay down your tax debt, the more options you will have for repayment with the IRS.

What Should You Do When You Receive a Notice of 
Federal Tax Lien?

The first thing to remember when you receive a notice of federal tax lien is not to panic. Assistance is available from both the IRS and other agencies and companies that offer tax relief services.

Ways the IRS offers assistance fall under the Fresh Start Program and include:

  • Installment agreement – Wherein you agree to have payments automatically deducted from your bank account for up to 72 months.
  • Application for withdrawal – Based on payment in full.
  • Application for withdrawal – based on your enrollment in a direct debit installment agreement wherein your payments to the IRS will be automatically taken from your bank account at agreed upon intervals.
  • Offer in Compromise – Whereby you and the IRS mutually agree to settle your tax debt for less than the full amount, based upon the IRS’s assessment as to your ability to pay the debt.
Can our Tax Relief company help remove Tax Liens?

Yes. In fact, if you have a Tax Lien notification from the IRS, it’s a good idea not to deal with it yourself but get professional IRS Tax Attorneys/tax relief companies on the case. 

The IRS Tax Attorneys at Flat Fee Tax Service, Inc. can help negotiate a federal tax lien on your behalf with the IRS, and gradually get it removed.

But not all tax relief agencies are created equal. It is important to choose your tax relief company wisely since the right company can help you reduce or eliminate tax debt and save you time, stress and money. 

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