Can I Fight a Federal Tax Lien?
How to Remove a Federal Tax Lien
Has a Federal Tax Lien been filed against your personal property? If it has, you may be wondering what a Federal Tax Lien is, and if you can fight it.
What is a Federal Tax Lien?
When the IRS wants to make sure it gets paid on outstanding tax debt, it often files tax liens against the personal property of the taxpayer. The lien gives notice to other lenders, and the public, that you owe money to the IRS. It also encumbers the property, meaning that it cannot be legally sold without first paying off the IRS, or paying off the IRS from the proceeds of the sale.
The IRS can file a Notice of Federal Tax Lien against your real estate property, such as investment properties or the family home, on the land records in your town hall. The IRS can also file a tax lien against your other personal property with the Secretary of State. In Connecticut, we use the CONCORD system, right along with UCC liens. CONCORD can be searched by lenders or members of the public.
Why is a Federal Tax Lien a Big Deal?
A Federal Tax Lien is a big deal because it creates an interest in your property on behalf of the IRS. If the property is ever sold, the proceeds must first go to paying off the IRS before you see a single dollar. This is especially devastating if you are selling a piece of real estate property with the plans of using the money to pay off your mortgage. The IRS lien can strip you of any equity you might have in the property, and sometimes not even leave enough to pay off your mortgage, making the sale of the property unreasonable. Here are some other ways a Federal tax Lien can negatively affect your life:
- Ruin Your Credit: By informing credit agencies and other lenders of your tax debt, a tax lien can make it difficult or impossible to get a business loan, mortgage or even open a new credit card.
- Injure Your Reputation: By searching the land records or CONCORD, your friends and neighbors can gain knowledge of your tax debt and your financial situation.
- Impact Your Profession: Some jobs require you to have healthy credit or even be bonded (insured). Having a tax lien on record can affect your professional reputation and may block you from getting that job you were after (and in turning hurt your ability to pay your tax debts). Further, many employers search for liens when trying to get inside information on the character of a potential employee.
How Can You Fight a Federal Tax Lien?
You can fight a tax lien by having it removed through a release or withdrawal, by having it stripped, or by stopping the IRS from acting on the lien.
An IRS tax lien is released, like any lien, when the underlying debt is paid in full. When a tax debt is satisfied, either by paying the full amount of the debt or less through an Offer in Compromise, a release is filed on the public records. There are now two public records: the Notice of Federal Tax Lien and a Release of Federal Tax Lien. While your obligations to the IRS are gone, anybody searching the records will still be able to see that a lien did exist at one point. The lien will also remain as a mark on your credit report for up to 7 years.
When an IRS tax lien is withdrawn, however, any evidence of the lien is removed. The simplest way to have a tax lien withdrawn is to show that it wasn’t a proper lien: that a the tax debt does not exist, or that it is not your tax debt. The IRS may withdraw a tax lien if the taxpayer enters into an installment agreement under the Fresh Start program. The IRS will also consider withdrawal of a lien if 1) it is in the best interest of the taxpayer AND the United States and/or 2) it will facilitate the collection of the underlying tax debt. A good example is if you need the lien withdrawn so that you can get a loan to pay off your tax debt. Once a lien is withdrawn, it will disappear from your credit history. However, just because a lien has been withdrawn does not mean that the tax debt has been discharged (you might still owe the government money).
A tax lien is stripped through the bankruptcy process, such as Chapter 13 and sometimes Chapter 7 filing. This is complicated and deserves it’s own blog post.
How SHOULD you fight a tax lien?
A release of a tax lien is achieved by either paying the tax debt in full, or through an Offer in Compromise, but a released lien will still leave a mark on your credit history. A withdrawal will take the lien off of your credit report, but it will not discharge the underlying debt and is difficult to convince the IRS to do. Bankruptcy can be expensive and could change your life drastically, leaving a very long-lasting mark on your credit history. In the appropriate circumstances, a Collection Due Process Hearing can temporarily safeguard your property while you propose a resolution to the IRS, but the lien will remain on file while your hearing is pending, and what happens to the lien will depend on the outcome of your hearing. So, which option should you pick? Should you seek a release, fight for a withdrawal, file bankruptcy or request a Collection Due Process Hearing? Should you do more than one?
The answer (or answers) to this question depends on the your specific circumstance. Is the tax debt correct? Do you have the money to pay off the entire debt? Are you looking to repair your credit so that you can get a loan? Are you looking to repair your reputation? All these and many other factors must be considered.
Before you contact the IRS or make any decision about your tax debt situation, you should seek the advice of experienced tax debt resolution professionals. At Glouzgal Ramos Groth LLP, our tax resolution attorneys are ready to discuss your circumstances and help you solve your problems. Call us at 203-740-1400.