A federal tax lien is the government’s legal claim against your property when a taxpayer neglects or fails to pay a tax debt. A federal tax lien exists after the IRS assesses liability, i.e. puts a balance due on its books, and sends the taxpayer a Notice and Demand for Payment, a bill that explains how much tax is owed. If the full debt isn’t paid in a timely manner, the IRS files a Notice of Federal Tax Lien, a public notice, to notify creditors and other interested parties that the government has a legal right in a taxpayer’s property. When conditions are in the best interest of both the government and the taxpayer, other options for reducing the impact of a lien exist:
Discharging a Federal Tax Lien
At times, a taxpayer may want to sell property encumbered by an IRS lien. A “discharge” removes the lien from specific property and leaves it in place as to other property. A taxpayer must apply for a “Certificate of Discharge” and provide detailed information regarding the property, sale, current lender and tax lien. Also, two appraisals of the property must be included in the application. If the IRS determines discharge of the property is in its best interest (by facilitating collection) it will agree to the discharge. Note that there are several Internal Revenue Code provisions regarding eligibility and the assistance of an experienced tax attorney is essential to making this determination.
Subordinating a Federal Tax Lien
Unlike a discharge, subordination does not remove the lien but lowers it on the ladder of priority. A taxpayer may want to refinance property which is encumbered by a federal tax lien. The IRS may permit the refinancing under certain circumstances and subordinate the lien to give priority to the lender’s security interest. Thus a taxpayer’s equity in his or her home remains the same but mortgage payments are less due to a lower interest rate. This is made possible by the IRS’ subordination of the lien, allowed by the IRS with the expectation that a taxpayer’s ability to pay the IRS is increased.
Withdrawing a Federal Tax Lien
A “withdrawal” of a federal tax lien removes the public Notice of Federal Tax Lien and has the legal effect as if the Notice was never filed. However, a taxpayer is still liable for the amount of tax due.
Two additional options regarding withdrawal originated in 2011. One option may allow withdrawal of a Notice of Federal Tax Lien after the lien’s release. General eligibility includes the satisfaction and release of the tax lien, as well as compliance in filing all individual returns, business returns, and information returns for the prior three years. A taxpayer must also be current on any estimated tax payments or federal tax deposits, if applicable.
The other option may allow withdrawal of a Notice of Federal Tax Lien if a taxpayer has entered into or converted a regular installment agreement to a Direct Debit installment agreement. This is available only for debts of $25,000 or less, and taxpayers must be in full compliance with other filing and payment requirements.
If you have any questions about discharging, withdrawing, or subordinating a federal tax lien, call THE TAX EXPERTS at the Thorgood Law Firm www.thorgoodlaw.com. For a FREE consultation call 212-490-0704.
