The Internal Revenue Service (IRS) would like everyone to pay their taxes in full and on-time. That doesn’t always happen, though. When a taxpayer falls behind on payments or has a significant tax debt, the IRS can put a lien on the taxpayer’s property.
Tax liens can interfere with your ability to sell a property or get credit. The best thing to do is prevent a lien in the first place. If the IRS has already issued one, you can take action to have it removed from your property. Since the process can be confusing, it’s best to get help if you’re struggling to pay your taxes or are facing a lien. A tax professional can guide you through the process of removing a lien.
What Is a Federal Tax Lien?
A federal tax lien is a legal claim against any property you own. If you owe the IRS back taxes, it can put a lien on something you own, such as your home. Having a lien on a property doesn’t mean the IRS will sweep in and take it away from you. However, if you decide to sell the property, the lien-holder — in this case, the IRS — gets the first claim to the assets from the sale.
Before a tax lien can exist, the IRS has to send you a first notice requesting payment of your taxes. If you pay the requested amount, the tax lien won’t come into being.
Tax liens are part of the public record, meaning anyone can see them. Having a lien on a property can make it more challenging to sell.
After a lien is in place, the IRS usually only removes it once you pay the total amount of your debt. Once you’ve paid the tax owed, the IRS releases the lien within 30 days.
The IRS isn’t the only tax agency that can issue liens. State and local tax authorities can also put liens on your property if you owe taxes. Some local or state governments will sell liens to investors. The investors pay the taxes owed then attempt to collect the amount from the taxpayer.
How a Tax Lien Affects You
A tax lien might not seem like a big deal, at least on paper. The IRS is simply stating that you owe the debt. Unless you want to sell a property, it seems like it will have little impact on your daily life. The reality is that a tax lien is something to avoid if you can. It can affect your credit and interfere with the sale of your home or other property.
Some of the ways a tax lien can affect you include:
- It can be time-consuming: If the IRS puts a lien on your property, you can end up spending a lot of time working with the agency. You might need to spend hours on hold or spend a lot of time traveling back and forth to a tax office. Similarly, a tax officer might visit you at home or in your office.
- It attaches to all of your assets: A federal tax lien doesn’t attach to just one piece of property. You can’t decide to have a lien on your home or car and nothing else, for example. The lien will be connected to everything you own, including real property, stocks and vehicles. If you purchase new property after the lien is in place, the new property will have a lien on it, too.
- It can hurt your credit: Although federal tax liens don’t appear on credit reports, the lien is public information and is easy for creditors to find when they pull your credit. Your credit score won’t take a dive, but your ability to get a loan or other type of credit might drop.
- It can make it difficult to sell property: If a tax lien shows up during a title search, it can be a red flag to a potential buyer. You might find selling a car or home more challenging while the lien exists. Similarly, it can be challenging to refinance with a lien on your property, as the government has a claim to your equity.
- It doesn’t go away with bankruptcy: Bankruptcy often discharges debts and can help give you a clean slate. It won’t remove a tax lien, though. The tax debt remains after bankruptcy.
- It can lead to a levy: If you can’t pay your tax debt after a lien is put on your property, the IRS can levy your property.
Tax Lien vs. Tax Levy
While a lien is a claim against your property, a levy is the IRS’s actual seizure of your property. The IRS can levy your property and sell it to pay off your debt. The IRS can also levy a bank account and withdraw money from it. If the funds in the account aren’t enough to satisfy the debt, the IRS can withdraw future deposits into the account until the tax debt gets paid off.
A tax levy is usually an extreme situation. The IRS can’t simply seize your property, as there’s a process that needs to be followed first. The IRS needs to send you a final notice and a form called Notice of Your Right to a Hearing at least 30 days before issuing the levy. Those 30 days can give you time to make arrangements with the IRS to remove the tax lien and settle your debt.
How to Prevent Tax Liens
Prevention is often the ideal policy when it comes to tax liens. You can avoid having the IRS put a lien on your property in a few ways.
File and Pay Your Taxes on Time
The most efficient way to avoid a tax lien is to file your taxes and pay any amount owed on time. That usually means filing on or before the April deadline annually.
If you can’t make the April deadline, the IRS does give you the option of requesting an extension. You’ll most likely have to pay interest and penalties on any tax owed unless you pay it in full by the standard deadline.
Tax help is also available if you have difficulty completing your tax returns on your own. Working with a tax planning firm like BC Tax allows you to develop a tax strategy that reduces your tax obligations and can help you avoid a large tax bill. A tax planning firm can also ensure that you file your returns on time and pay what you owe. Furthermore, a tax professional can spot deductions you might have missed, lowering your tax bill and easing any financial stress.
Set up a Payment Plan With the IRS
If you already have a tax debt with the IRS, the next best way to prevent a tax lien is to pay the debt. If possible, pay the debt in one lump sum to eliminate the possibility of a tax lien.
Depending on how much you owe the IRS, paying the balance in full all at once might not be an option. If that’s the case, you can set up a payment plan with the IRS. A payment plan lets you pay back taxes over a designated period. Usually, you get more time to repay than you would otherwise.
The IRS has two payment plan options: a short-term and a long-term plan. With a short-term plan, you’ll pay what you owe within 180 days. A long-term plan lets you make monthly installment payments until the debt is cleared.
If you want to set up a payment plan, you need to be proactive. Working with a tax professional can help you take the steps necessary to apply for the plan and get approved. There are a few things to know when setting up a payment plan with the IRS.
The amount you owe affects the type of plan you’re eligible for. To sign up and pay for a short-term plan, you need to owe less than $100,000 in taxes, interest and penalties combined. For a long-term plan, the total amount you owe needs to be under $50,000.
Starting a payment plan with the IRS isn’t free. There are fees associated with it. Those fees vary based on the type of plan and how you pay.
- Short-term plan: There is no fee for setting up the plan. If you pay by debit or credit card, fees apply.
- Long-term plan with direct debit payments: There is a $31 set-up fee online and a $107 set-up fee if you apply by phone or in-person. No fee to pay using an automatic direct debit from your checking account.
- Long-term plan with another payment method: You’ll pay a $130 set-up fee online and a $225 set-up fee if you apply in-person or by phone. You can pay using a check, money order, non-automatic direct debit, credit or debit card. Fees apply if you pay by card.
The IRS may waive the set-up fees based on your income. For example, the fee is waived for low-income taxpayers who sign up for a long-term payment plan with automatic direct debit payments. The fee is reduced for low-income taxpayers who sign up for a long-term payment plan with another payment method.
Request an Offer in Compromise
Another way to potentially prevent a tax lien is to request an offer in compromise. An offer in compromise allows you to settle your debt with the IRS. Usually, you pay less than you owe to the IRS.
You need to meet specific requirements to qualify for an offer in compromise. Notably, you can be eligible for an offer in compromise if paying your debt in full would create a financial hardship for you. If the value of your assets and income are less than what you owe the IRS, it might allow you an offer in compromise.
It’s worth noting that the IRS can start the process of filing a lien against you while your offer in compromise is being reviewed. Usually, though, the IRS waits to file a lien until after a decision is made. If you’re approved for an offer in compromise, the IRS won’t file a lien. If there’s already a lien, it will be released if your offer in compromise gets accepted.
It’s also worth noting that the IRS tends to refuse offers in compromise, as it believes most taxpayers can repay their debt. To increase the likelihood of your offer getting approved, turn to the tax professionals at BCTax. We’ll negotiate with the IRS on your behalf and help you get the tax relief you need.
How to Remove a Tax Lien
If for whatever reason, you aren’t able to avoid a tax lien, the next step to take is to decide how to remove the IRS tax lien from your property. You have several options for doing so. A tax professional can help you determine which choice is right for you.
Pay the Debt
For some taxpayers, the fastest way to get rid of a tax lien is to pay the debt in full. Once you pay the IRS what you owe, it removes the tax lien within 30 days.
If paying the debt fully isn’t feasible, you have other options for removing a tax lien or limiting its impact on you.
Generally, a tax lien applies to all the property you own, from your home to your bank accounts and your car to your stocks. The IRS might be willing to release or discharge a particular property from the lien in some cases. A discharge lets you sell the property without encumbrance and without the IRS getting to claim the value of the sale.
Not every taxpayer qualifies for a discharge. The tax professionals at BC Tax can review your situation and help you decide if a tax lien discharge is appropriate for you and if your property is eligible for discharge.
You can think of subordination as the IRS letting another creditor cut in line. Subordination doesn’t get rid of the lien, but it does let another creditor move ahead of the IRS. If you’re looking to refinance your home or want to get a car loan, the IRS might agree to let the creditor’s claim take precedence over its own.
Like a property discharge, you need to meet specific requirements to qualify for subordination. BC Tax can review your eligibility and help you through the subordination application process.
The IRS will withdraw the lien notice in some cases, even if you still owe money. The withdrawal doesn’t eliminate your debt but does allow you to apply for credit or sell your property without issue. Usually, there are four situations when you can request a withdrawal:
- If there was an issue with documentation on the IRS’s side when it filed the notice
- If you’re in the process of repaying your debt in installments
- If withdrawing the lien will make it easier for the IRS to collect the debt or you to pay it
- If it’s in the best interests of all involved to remove the lien
Requesting a withdrawal requires you to fill out an application form and submit it to the IRS. BC Tax can help you determine if a withdrawal request is right for you. We can also work with you through the application process.
BC Tax Can Help You Prevent or Remove Federal Tax Liens
Avoiding a tax lien helps you protect your assets. Removing an existing lien can give you more financial freedom and flexibility. At BC Tax, we work with taxpayers and the IRS to develop a solution that’s right for your unique situation. Contact us today to learn more about our tax lien services.