IRS Notice of Federal Tax Lien: What is it and How Does it Affect You?

If you carry a debt owed to the IRS, one of the possible consequences is that a Notice of Federal Tax Lien may be filed. What is a lien and how does it personally impact you?

According to IRS regulations and Internal Revenue Code 6321, a tax lien is a legal claim on an individual's property for payment or satisfaction of a tax debt. The lien attaches to all property or rights to property a taxpayer has or acquires, whether real and personal, tangible or intangible.

By statute, once a tax has been assessed, by way of a taxpayer's original return or a subsequent assessment made by the IRS, and once demand for payment has been made to the taxpayer in writing, if the tax balance remains unpaid after 10 days from the demand notification, a Federal Tax Lien can be created. The Notice of Federal Tax Lien is what makes that balance public.

Don't confuse a tax lien with an IRS levy. A levy is a garnishment by the IRS of a taxpayer's property to satisfy a tax debt. Any such property held by a third party that can be turned over by writing a check can be subject to a levy. For example, a taxpayer's bank account, wages, commissions, retirement benefits, or money received as a contractor can all be subject to a Notice of Levy.

A levy will result in an immediate seizure of all funds in a bank account, or a certain percentage of income will begin to be deducted from your wages, pension and even Social Security benefits. A lien attaches to your real property you currently own or acquire, and comes into play when that property is sold, transferred or foreclosed on.

The best way to avoid a lien, or a levy for that matter, is obviously not to put yourself in a position where you owe the IRS. If you are a wage earning employee, make sure you have the appropriate amounts withheld from your pay for Federal Taxes. If you are self-employed, familiarize yourself with the requirement to make Estimated Tax Payments. Any time you are cashing out on an investment or IRA, ensure you set aside a portion to account for any tax due.

That being said, if you do have a balance owed to the IRS, by all means, make sure you are actively communicating with them to resolve it. Unless your balance is very high, cannot be paid off within a set amount of time that the IRS initially allows, or if you have been put into a non-collectable status by the IRS because of a determined economic hardship, you can likely avoid a lien by responding timely to any balance due notice you receive.

The presence of a tax lien on a credit report or a property title search will noticeably affect one's ability to obtain any future line of credit. A tax lien can only be removed by the IRS, and they do so generally only after the balance has been paid off in full. Even a tax lien that shows as "satisfied" on a credit report may impact a credit score for up to seven to ten years, depending on the reporting agency.

For this reason, be aware of any company that solicits or promises that they can remove tax liens. Once the lien becomes public, individuals who have liens are targeted by many such tax resolution companies. They may be able to negotiate an installment plan or a settlement (called Offer in Compromise), both of which a taxpayer can do themselves, but they do not have any other secret options up their sleeve.

However, unless a lien needs to be withdrawn because of an erroneous filing (such as a taxpayer who has already entered into bankruptcy) or because of a procedural reason (such as a taxpayer who was not provided with written appeal rights in of the IRS intent to file a lien), then the lien cannot be withdrawn by any third party, who will no doubt charge you for their "attempt" to do so.

If a Notice of Federal Tax Lien has been filed, you will be provided with a copy of the lien. The original document will be sent to the County seat, perhaps the local clerk or other local recordkeeping office. If you wish to appeal the lien filing, you need to exercise that right be using Form 12153, Request for a Collection Due Process or Equivalent Hearing, which will accompany the lien filing paperwork.

You have thirty days from the date of the lien filing to request an appeal. If you fail to notify the IRS in writing within 30 days, you may still appeal, but the IRS then categorizes your response as an Equivalency Appeal, which means you forfeit the ability to elevate your appeal to Tax Court.

At times, individuals wonder what they need to do to get their lien "released" or discharged in order to refinance their mortgage. Or perhaps they are selling their property and need the lien released in order to complete the sale. The IRS accounts for these two scenarios and may be willing to Subordinate the lien or Discharge a parcel of property from the effect of the lien.

If one is looking to sell property that has been encumbered by a lien filing, and if the sale price of the property is less than the total amount owed to the IRS and secured by the lien, then most lending institutions will not allow the sale to be completed because of the clouded title.

In this case, if there are proceeds from the sale that will be used to pay down the lien, the IRS may agree to discharge the property from the lien in order to allow the sale to go through. Publication 783, Instructions on How to Apply for a Certificate of Discharge of a Federal Tax Lien, gives information on how to apply for a lien discharge.

In the other scenario, a taxpayer may have potential equity in their real property that they would like to acquire in order to pay off the lien, but the lien prevents them from accessing this equity by way of a cash-out refinance or a home equity line of credit.

Because any lending institution generally wants the first place, so to speak, on the collateral (in this case the home), they may not allow a homeowner to tap into their equity. In this case, the IRS may agree to subordinate the lien. Lien subordination means that the IRS will allow their priority of the lien to become junior, or secondary to another lending interest, so that the equity in the home can be obtained. The IRS would generally only agree to subordinate a lien if there is enough equity to subsequently pay off the lien in full.

For information on lien subordination, please see Publication 784, How to Prepare an Application for a Certificate of Subordination of a Federal Tax Lien.