Tax Liens: A Common Collection Tool

A Federal Tax Lien is one of the most common collection tools utilized by the IRS to collect unpaid taxes. A Federal Tax Lien can have deleterious effects on your credit, limit your ability to access the equity in your assets and can eventually lead to a seizure or foreclosure on the assets secured by the lien.

The IRS may file a lien on tax liabilities exceeding $10,000. This threshold was expanded in 2011 by the Fresh Start Initiative from $5000 to the current $10,000 level. After the assessment of a tax liability and the issuance of a notice of the balance due and demand for payment, typically a CP14 notice, if the taxpayer refuses to pay the tax, a lien is created by operation of law through Internal Revenue Code 6321. In order to put creditors on notice of the lien, as required by Internal Revenue Code 6323, the IRS will issue out a Notice of Federal Tax Lien.

The tax lien attaches to all the assets, including future acquired assets, of the taxpayer. The federal tax lien is a public record. Although the credit bureaus have begun to remove tax liens from individual’s credit reports, the existence of a lien can still have an effect on your credit worthiness. This is especially true when attempting to obtain credit through a collateralized loan. The federal tax lien most dramatically affects secured transactions in real property. In order to pass clean title to a piece of real property that has been attached by a tax lien, the lien would have to either be satisfied at closing or discharged by the IRS.

The IRS does offer programs to withdrawal, discharge or subordinate the tax lien. A taxpayer whose assessed tax debt is below $25,000, can successfully request a withdrawal of the lien after they have established an installment agreement to satisfy the debt within 60 months that is set up on direct debit and made three consecutive payments on that agreement. Additionally, the IRS may withdrawal the lien where it can be demonstrated that its withdrawal will facilitate collection of the debt, such as in situations where a taxpayer’s employment, and ostensibly their ability to repay the debt, would be jeopardized by the lien.

A taxpayer can also apply to have the lien discharged from a particular asset. Typically, this occurs where a taxpayer is in the process of selling a piece of real property, the net proceeds from which will not completely satisfy the debt secured by the lien. So long as the IRS receives payment equal to their interest in the piece of real property secured by the lien, the IRS will grant a request to discharge the lien.

A taxpayer may also apply to have the lien subordinated so as to allow a creditor to take priority over the tax lien. This happens most frequently where a taxpayer is attempting to refinance a mortgage or take an equity loan on real property secured by the lien.

If you have been issued a tax lien by the IRS or state tax agencies, contact the tax attorneys at J David Tax Law. We work with Americans in all 50 States.