Understanding Your Options With a Federal Tax Lien

Andrea Miller
Expert Contributor
Last Updated:
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  • A federal tax lien is a legal claim placed on your property by the IRS if you fail to pay your taxes.
  • Paying your taxes is the only way to remove the lien, but you can take other steps to avoid further action.
  • If you are unable to pay your taxes because it would cause hardship, you can seek relief from the IRS.

When you have federal tax debt that has not been paid, the IRS can place a federal tax lien on your property. This gives the government a claim to your property, which means it can be seized to repay the taxes you owe. A lien can be placed on personal property, including bank accounts and wages, assets, real estate, and vehicles.

What Happens When You Receive a Tax Lien?

The IRS places a tax lien after other attempts to collect your debt have been unsuccessful. When taxes are assessed, you will receive a notice in the mail from the IRS. If you do not respond to this notice, either with payment or by making arrangements for installment payments, you are at risk for a federal tax lien.

Before the lien is placed, you will receive a public document called a Notice of Federal Tax Lien. This notice is also placed on file to let your creditors know that the government has a legal right to your property. If you try to sell your house, for example, you will be unable to do so because the lien gives the IRS first right to the proceeds from the sale.

Some of the detrimental effects of a federal tax lien include the following:

  • The lien is attached to all of your assets, including securities, vehicles, bank accounts, and real estate, as well as to assets you acquire in the future while the lien is still in effect.
  • The lien is a public record that is reported to the three credit bureaus, which may make it difficult or impossible for you to qualify for mortgages and other loans.
  • If you own a business, the lien is attached to all business property, including accounts receivable.
  • You will be responsible for the lien and the associated tax debt even if you file for bankruptcy.

The lien does not necessarily result in a levy if you enter an installment agreement or make other arrangements with the IRS. Once the levy process begins, however, your property can be seized to satisfy your tax debt.

Understanding Your Options With a Federal Tax Lien

How Can a Tax Lien Be Removed?

The only foolproof way to get rid of a tax lien is to pay your federal tax debt in full. Once this step has been taken, the lien will be released within 30 days. However, you may qualify for other options that would remove the lien. These include:

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  • Discharge of property. Under this arrangement, it is in the best interest of the IRS to remove the lien. For example, if selling or refinancing your home would allow you to repay the tax debt, the lien can be removed so that you are able to do so. The IRS would then be entitled to the proceeds up to the amount of your debt. You can apply for discharge of property by following the instructions in IRS Publication 783, Instructions on How to Apply for Certificate of Discharge From Federal Tax Lien.
  • Subordination. This arrangement places the interests of other creditors before the IRS lien and may be done so that you can get a mortgage or other type of loan. Follow the instructions in IRS Publication 784, Instructions on How to Apply for a Certificate of Subordination of Federal Tax Lien, to determine whether you are eligible for subordination of your tax lien.
  • Withdrawal. A tax lien can be withdrawn if you have made payment arrangements, but you are still responsible for the amount due. If you satisfy one of the following requirements, submit Form 12277, Application for the Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien:
    • You have paid the lien in full, have filed all outstanding tax returns for the past three years, and are current on applicable estimated tax payments and deposits.
    • You have entered a direct debit installment agreement, available to individuals who owe less than $25,000 and are able to pay the debt in full within 60 months. You must have already made three consecutive direct debit payments and be current on all other tax filings.

How Can I Avoid a Federal Tax Lien?

Paying your tax balance in full is the best way to avoid a federal tax lien, but it isn’t the only way. As soon as you receive a tax bill, contact the IRS to discuss arrangements if you are unable to pay the past-due balance. Some of the options available to taxpayers include:

  • Applying for a monthly installment agreementA short-term payment plan, in which you will be able to pay your balance in full in 120 days or less, does not carry any fees. Fees are associated with long-term payment plans, in which you have up to 72 months to pay your balance. With either option, you will be assessed monthly penalties which accrue interest along with your balance until the full debt is paid. Requirements vary depending on how much you owe:
    • You can qualify for a monthly payment plan if you have filed all outstanding tax returns and owe less than $50,000.
    • If you owe more than $50,000, you must submit financial information by using Form 433F to qualify for a payment plan.
  • Requesting currently not collectible (CNC) status if making payments toward your tax debt would create an undue financial hardship. Although you will still be responsible for the debt, attempts to collect money from you will be suspended. You will be required to provide proof of your monthly income and expenses as well as assets. If CNC status is granted, it will be reviewed periodically and collection activities may be resumed if your financial status changes. Penalties and interest will continue to accrue. Learn more by calling the IRS at 1-800-829-1040.
  • Making an offer in compromise to settle the tax debt for less than the full amount you owe. Your offer in compromise can consist of either a lump sum in cash or a periodic payment. Keep in mind:
    • When reviewing the amount of the offer, the IRS will consider your ability to pay the debt, the value of any assets you own, and your income and expenses. To be accepted, the offer must represent the most the IRS will realistically be able to collect from you before the statute of limitations on the debt expires.
    • If your offer is rejected, you have the right to file an appeal by submitting Form 13711. Find out if you are a candidate by using the online pre-qualification tool.

Even if you can’t afford to pay your taxes, you should always file all tax returns. That’s because the failure to file penalty, which is assessed monthly, is 5 percent of your total tax balance. If you file your return but do not pay the taxes owed, the penalty drops to 0.5 percent of your balance.

What Is the Difference Between a Levy and a Lien?

The terms “lien” and “levy” are often confused with one another. A lien is the actual legal claim the IRS has on your property, while a levy is an action taken to seize the property as a last resort to collect past-due taxes. Through the levy process, the IRS can seize your real estate, vehicles, wages, bank accounts, retirement accounts, and other assets.

If you have a federal tax lien on your property and fail to make arrangements to pay your taxes, you may receive an official IRS notice titled “Final Notice of Intent to Levy and Notice of Your Right to a Hearing.” This signifies that if you do not take action, your property will be seized by the IRS.

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Three requirements must be met for a levy to be carried out:

  • You received a tax bill from the IRS, titled Notice and Demand for Payment, which indicated the assessed amount of taxes that you owe.
  • You did not pay the amount indicated on this notice or make other arrangements to satisfy the debt, such as a payment plan.
  • You received a Final Notice of Intent to Levy and Notice of Your Right to A Hearing at least 30 days before the levy is enacted. It will either be delivered in person to your home or place of business or sent to your last known address by certified or registered mail with a return receipt.

Property that is seized by the IRS because of federal tax debt is sold, and the proceeds are applied to your account. You have the right to appeal throughout the levy and lien process, so it’s important to be aware of your rights as a taxpayer and closely follow the instructions on notices you receive from the IRS. These notices will detail your right to appeal and outline the process for doing so.

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If you recently received a levy notice, it’s not too late to act. Call the IRS right away at the number on your billing notice or 1-800-829-1040 to discuss your options with a qualified agent.

How Can I Establish Undue Financial Hardship?

If you are able to prove that repaying your IRS debt would make it impossible to meet your basic living expenses, the IRS will cease collections activity for a limited time period, after which your account will be reevaluated.

You can apply by completing IRS Form 433, which asks for proof of your financial status, including details about your monthly income and expenses. Keep in mind that your balance will continue to accrue monthly penalties and interest.

If you are granted CNC status, the lien will remain on your property, which prevents you from selling it without using the proceeds to pay your tax debt. However, the IRS will not proceed to a levy as long as your account remains CNC.

How Can I Appeal IRS Collections?

If you disagree with a decision the IRS has made about your tax account, you have the right to an appeal. These procedures are outlined in Publication 1660. You’ll also receive appeal instructions that apply to your specific situation on your official IRS notice about collections.

Collection due process is the first step to contest the IRS decision and can be undertaken if you have received one of the following notices:

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  • Notice of Federal Tax Lien Filing and Your Right to a Hearing under IRC 6320.
  • Final Notice – Notice of Intent to Levy and Notice of Your Right to a Hearing.
  • Notice of Jeopardy Levy and Right of Appeal.
  • Notice of Levy on Your State Tax Refund – Notice of Your Right to a Hearing.
  • Post Levy Collection Due Process (CDP) Notice.

During due process, you can represent yourself or be represented by a tax attorney, certified public accountant (CPA), or enrolled agent qualified to practice before the IRS. If your income is at or below 250% of the federal poverty threshold for your state and household size, you may qualify for free representation through a Low-Income Tax Clinic.

When you receive one of the notices listed above, follow the instructions included to request a hearing under collection due process. For a lien, you must be notified by the IRS within five days after the lien is filed and have 30 days after notification to request a hearing.

Complete Form 12153, Request for a Collection Due Process or Equivalent Hearing. You will be asked to list the reason for disagreeing with the lien. Possible reasons include:

  • Availability of alternative collection options such as an offer in compromise or installment agreement.
  • Withdrawal of Notice of Federal Tax Lien.
  • Spousal defense.
  • Subordination or discharge of lien.

If you need assistance with your tax debt, Solvable can help. Answer a few brief questions today to get matched with vetted debt relief companies who specialize in helping individuals who owe money to the IRS. Get on the path to a brighter financial future.

 

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Andrea Miller
Expert Contributor
Last Updated: