Federal and State Tax Liens
If you owe federal taxes and fail to pay, the IRS can file a lien against all of your property. The federal tax lien is a powerful IRS collection tool that gives the IRS a claim against all of your current property and future property. The federal tax lien is a statutory lien that is created automatically when the IRS makes a tax assessment and provides notice and a demand for payment. Once a federal tax lien exists, the IRS will send additional notices requesting payment, threatening levies and filing a notice of federal tax lien.
Notice of Federal Tax Lien
The IRS will review delinquent tax accounts and make a determination whether to record a Notice of Federal Tax Lien. A Notice of Federal Tax Lien is a public lien filing in the taxpayer's state of residence that provides notice to third parties of the IRS's interest in the taxpayer's property. The lien filing provides notice to current and future creditors that the IRS has a claim to all of a taxpayer's property and potential priority over other creditors. Creditors know how powerful the IRS lien is and generally avoid providing credit, loans, loan re-financing, services and other transactions. Potential purchases may avoid taxpayer's with liens on their property because the lien attaches to the property and the IRS could then attempt to collect from the third party. Credit score companies will also report the lien and scores generally are adversely affected.
How Can Taxpayers Prevent Tax Liens?
Taxpayers can respond to an initial notice of tax lien letter from the IRS and request a hearing. The taxpayer can be prepared to resolve the tax debt through an installment agreement or offer in compromise. Other taxpayers may claim hardship and file for currently not collectible account status. If the IRS notifies a taxpayer that it intends to record the lien, doing nothing and ignoring the notice will result in the recording of a notice of federal tax lien with the related future headaches. Once recorded, a notice of federal tax lien can be difficult to remove.
What Can Taxpayers Do About a Recorded Notice of Federal Tax Lien?
Options for dealing with a federal tax lien include release, discharge, subordination and withdrawal. These options are discussed in more detail below.
Paying the Tax Balance Due
The option the IRS always proposes is for taxpayers to pay all back taxes in full, including all penalties and interest. The IRS will release the federal tax lien and issue a certificate of release within 30 days. There are other options for removing a lien, however, even in cases where full pay is not possible for taxpayers.
Abatement or Unenforceable Liability
If the taxpayer is able to abate or adjust the tax owed related to the Notice of Federal Tax Lien, including penalties and interest, a lien release request will be processed.
Where the collections statute has expired, the release of a federal tax lien is generally appropriate. When the IRS files the notice of federal tax lien, there should be a refiling date listed on the form which indicates the last day the IRS may refile the tax lien. If the IRS fails to refile the lien, the lien is released automatically. This date may be impacted by other events during the life of the tax liability, including cases where taxpayers willingly extend the collections statute for various purposes.
Acceptance of Offer in Compromise
Taxpayers hear about the benefits of reducing tax debts by submitting an offer in compromise. An additional benefit is the release of a Notice of Federal Tax Lien when the taxpayer has fully paid the offered amount. Taxpayers must take any collateral agreement into account when requesting a certificate of release.
Trust Fund Recovery Penalty Offsets
If a non-paying officer has an enforceable lien and another responsible officer pays the trust fund taxes in full, a certificate of release may be requested. A partial lien release may also be requested under certain circumstances.
Innocent Spouse Relief
The IRS may pursue an innocent spouse for the tax debt of the other spouse under the joint liability rules. If the innocent spouse prevails for tax relief, the IRS should issue a partial release of any lien for the innocent spouse.
Return Preparer Misconduct
In cases where the lien and related assessment was the result of return preparer misconduct, a lien may be released. This situation may also involve a tax abatement request.
Withdrawal of Lien
Under certain circumstances, the IRS may withdrawal a Notice of Federal Tax Lien and provide notice of the withdrawal to the credit agencies. A withdrawal is different from a release of the lien in a very important way. A release of tax lien releases the IRS's Notice of Federal Tax Lien and terminates the statutory lien, which is the basis for the IRS claim in all of the taxpayer's property. A withdrawal of the Notice of Federal Tax Lien removes the notice and the IRS's priority against certain other creditors of the taxpayer. Essentially the lien is removed from the public record. A withdrawal of the Notice of Federal Tax Lien does not extinguish or terminate the underlying statutory IRS tax lien that allows the IRS to levy or foreclose on a taxpayer's property.
A withdrawal of the Notice of Federal Tax Lien is generally at the discretion of the IRS. One exception is when the IRS files a Notice of Federal Tax Lien after the taxpayer has filed for bankruptcy and the lien is in violation of the bankruptcy automatic stay.
There is a list of conditions that allow for the withdrawal of a Notice of Federal Tax Lien including circumstances when the notice was filed prematurely, where the terms of an agreement with the IRS related to the lien notice is satisfied, when the withdrawal will allow for increased tax collection potential, and when the withdrawal would be in the best interest of the taxpayer and the IRS. A Notice of Federal Tax Lien may also be withdrawn as part of an installment agreement. Because tax lien notices harm credit scores, cause creditors to shy away from lending, and may cause other problems for taxpayers, a lien withdrawal may be an option for removing the impact of the lien.
Discharge of Lien
A discharge of the tax lien removes specific property of the taxpayer from the federal tax lien. There are specific transactions or circumstances that qualify for lien discharge. At a high level, the IRS's interest in the lien is protected as a result of a property transaction or action by the taxpayer. The various circumstances include when the taxpayer has other property to protect the IRS tax lien, where the taxpayer transfers property and receives consideration in excess of the IRS lien value in the exchanged property, where the taxpayer posts a bond on the property, where the property encumbrances result in no lien value to the IRS, and where the taxpayer's property has sufficient value to protect the lien. Other special situations may be considered, including bankruptcy sales, estate sales and real estate foreclosures.
The discharge rules are statutory and the IRS must be convinced that one of the discharge rules apply. Otherwise, the IRS will violate its authority. Taxpayers must be aware that the discharge rules are narrower than a withdrawal in respect to the impact on a Notice of Federal Tax Lien, but broader in the sense that there is no IRS lien on the specific property that is the subject of the discharge request. Another party may take the property free of the lien after receiving the discharge certificate from the taxpayer. As a result, a discharge is one method of facilitating a transaction that the taxpayer would otherwise benefit from but for the impact of the lien on restricting transactions.
Subordination of Lien
Subordination of a lien is the process of a senior creditor allowing a junior creditor to move ahead on the creditor priority list with respect to any property that is subject to a federal tax lien. This may occur under a number of circumstances.
The first is when a junior lien holder pays the IRS an amount equal to the value of the IRS Notice of Federal Tax Lien in the property. Basically this is a buy out of the lien value on the property and is structured to reduce the liability to the IRS. These types of subordination transactions may occur in the context of a taxpayer taking out a home equity loan to pay a tax debt. In such cases, the IRS is likely to grant subordination of its lien rights to facilitate collection. An immediate payoff to the IRS is not always necessary to obtain a subordination agreement if the value of the property is enhanced.
Another request relates to the IRS lien value in the property. If the value of the IRS lien will not be reduced, even if the lien is subordinated, the IRS may permit its interest to be subordinated. This may also occur in the context of another type of request where subordination actually increases the value of the property and protects the IRS lien interest.
Approval of a subordination request by the IRS is not mandatory and will be granted when in the best interests of the IRS. Therefore, careful consideration and negotiation may be required and may be advanced by a skilled attorney. Other challenges may occur when a subordination or discharge request is made to facilitate an installment agreement or to satisfy an offer in compromise.
Subrogation of Lien
Subrogation is the process of one person substituting their interest for another person's interest. In the context of a lien, a junior creditor may "buy out" a senior creditor's lien with the approval of all interested parties. For example, a financial institution may buy out the lien and move up the chain of secured interests in property to protect its interest in that property.
Non-attachment of Lien
While rare, if a taxpayer has been harmed by a lien filing against another person with a similar name or otherwise, the IRS can issue a certificate of non-attachment to allow the harmed taxpayer to prove that its property is not subject to a tax lien. This situation is more likely to occur where business names are similar.
State Tax Liens
State tax authorities also generally have the power to file tax liens against the property of taxpayers with tax debts. Each state has its own rules for when a lien may attach and how to remove the lien. It is not uncommon for a state to require either full payment or subordination when property is sold only if the sale proceeds will be used to pay the state tax debt. State tax rules may be more restrictive than the IRS rules and require careful planning to execute a transaction that is not subject to both federal or state tax liens.
If you have received a notice of deficiency or assessment, you should take action and contact Steiger Tax Law to discuss your available options to address your tax debts and avoid the filing of a Notice of Federal Tax Lien. Michigan tax attorney Andrew Steiger can negotiate with the IRS to avoid the filing of a notice of federal tax lien or remove a tax lien as part of a comprehensive plan to resolve your tax debts. He can advise you regarding the potential for the IRS filing a Notice of Federal Tax Lien and how to release or discharge an existing lien. Failing to act may result in loss of appeal or due process hearing rights. Generally, it is more difficult to remove a notice of federal tax lien after it is filed than it is to prevent it from being filed in the first place.
Contact Michigan Tax Attorney Andrew Steiger for a free consultation to start your tax relief planning. Free consultation does not establish attorney-client relationship. Information is confidential and protected by attorney-client privilege.