The Internal Revenue Service has an ace up its sleeve when it comes to securing the payment of tax liabilities – the ability to file a federal tax lien in response to your unpaid tax obligations. A federal tax lien is basically a legal claim that's filed in the county where the taxpayer lives or does business. It puts the public on notice that the taxpayer has an unpaid federal tax debt. Invariably, tax liens make their way to the credit reporting agencies and have a significant negative impact on your credit score.
What Is an IRS Tax Lien and What Impact Does It Have?
Whenever you fail to pay your taxes on time, the IRS can file a federal tax lien for the full amount of the taxes you owe plus interest and penalties. The lien attaches to your real and personal property. This does not mean that the tax authorities will seize and sell your property, it just gives them first priority over the sale proceeds. If you sell your home while a lien is in place, for example, the IRS will be paid out of the sales proceeds first before either you or the mortgage company are paid.
Once a tax lien is filed, you'll receive a Notice of Federal Tax Lien and the lien becomes a matter of public record. This information shows up on your credit report and, like other types of public records, will have an immediate negative impact your credit score. With a tax lien present on your credit report, you're going to find it difficult to obtain future credit or loans.
How Long Does a Federal Tax Lien Last?
A tax lien will remain in place until one of the following events occurs:
- The IRS "withdraws" the lien because it was filed in error or because you meet the IRS "Fresh Start Initiative" requirements
- The IRS "releases" the lien because you've paid off the tax liability
- The lien "expires" under the statute of limitations. The IRS generally has 10 years to collect what is owed to it but that period can be extended in all sorts of circumstances.
Let's look at withdrawals and releases in detail.
How to Withdraw an IRS Tax Lien Filed in Error or Under the Fresh Start Initiative
The IRS will always withdraw a tax lien that was filed in error. For example, if the lien was filed against the wrong person or on account of a tax debt that wasn't actually due, then the IRS should withdraw the Notice of Federal Tax Lien right away. If you believe a lien was filed in error, you must immediately telephone the IRS to start the process by which it can withdraw the lien.
In 2011, the IRS announced that it would also allow withdrawals in certain situations where the lien was not filed in error. To qualify for the so-called Fresh Start Initiative, you must either:
- Pay the lien in full, comply with all tax filings for the last three years and be current on estimated tax payments and deposits; or
- Enter into a direct debit installment agreement to repay the entire tax debt in monthly installments within 60 months. This option is available to taxpayers who owe $25,000 or less and who haven't defaulted on their direct debits in the past. The IRS will start the process of withdrawing the lien when you have made three direct debit payments in a row.
What's significant about a lien withdrawal is you return to the same position you were in previously, as if the lien was never filed. This means that notice of the lien will disappear from the county records and the credit agencies will reverse the negative impact of the lien on your credit report. This is a much better outcome than a release which remains on your credit report for up to seven years after the tax debt is paid.
How Do You Request a Tax Lien Withdrawal From the IRS?
If you meet the criteria for the Fresh Start Initiative, you must complete and file Form 12277, Application for Withdrawal of Notice of Federal Tax Lien. Assuming the IRS grants your request, it will file Form 10916(c), Withdrawal of Filed Notice of Federal Tax Lien, with the county records office and send you a copy. You don't have to contact the county records office yourself or provide further proof of the tax lien payment – the IRS will take care of everything for you.
This withdrawal notice will find its way to the credit reporting bureaus automatically, but you can alert them to it if you don't want to wait. Do this by filing a dispute with each of the three credit reporting bureaus – you can do this online – and attaching a copy of Form 10916(c).
How to Get a Certificate of Release of Federal Tax Lien
To release a tax lien, you have to pay the tax debt in full or enter into an Offer of Compromise where the IRS agrees to accept payment of just part of the lien in exchange for a release. Releasing a tax lien means that public records are updated to show that the IRS no longer has any legal claim to your property. This does not mean that the lien will be removed from your credit report; the entry can remain up to seven years even if you pay the debt.
By law, the IRS must arrange for the release of your lien within 30 days after you have paid your tax debt and provide you with a copy. If you have not received a copy of the release after 30 days, call the Centralized Lien Operation on 800-913-6050 to check the status of the IRS lien release.
Occasionally, you'll need to prompt the IRS into releasing the lien after you've paid the tax debt. To request a Certificate of Release where one has not been issued, send a tax lien release letter to the IRS containing the following information:
- Your name, address and telephone number
- The date
- A copy of the Notice of Federal Tax Lien
- An explanation of why the lien should be released
- Evidence that you've paid the tax debt such as an IRS receipt, a canceled check, a record of an electronic money transfer or some other proof of payment.
If there's an unpaid balance on your account, you'll need to settle that in full before the IRS will issue a lien release. IRS Publication 1450 has further details.
What Happens If You Want to Sell Your Home?
Homeowners who have a federal tax lien filed against them often find themselves in a catch-22 situation: they can only raise the funds to pay down the tax debt by selling or refinancing their home, but the debt is higher than the sales price or loan value, effectively blocking the sale. In this situation, the IRS may be willing to release the real estate from the lien if there's enough profit from the sale or refinance to pay the interest on the federal tax debt. To be clear, only the real estate is released from the federal tax lien – you'll still owe the remaining tax debt after the sale has closed.
You can request a certificate of discharge of real estate by filing form 14135, Application for Certificate of Discharge of Property From Federal Tax Lien. The form requires a detailed description of the real estate in question, the fair market value, the anticipated sale price and the name of the lender holding the mortgage. You'll also have to submit copies of the sale agreement, title report, escrow agreement and HUD-1 closing statements.
- You can also contact the IRS at 800-913-6050 to make the request.
- A Certificate of Release of Federal Tax Lien is sufficient proof to show creditors that you paid the federal tax debt.
- An unpaid tax lien will remain on your credit report for 15 years. A paid lien will remain for seven years.
- Because a tax lien affects your credit significantly, it might be difficult to obtain a loan even though you have proof the debt was paid.
- Internal Revenue Service: Withdrawal of Notice of Federal Tax Lien
- Internal Revenue Service: Form 12277
- Nolo: Removing a Federal Tax Lien From Your Credit Report
- Internal Revenue Service: Understanding a Federal Tax Lien
- Internal Revenue Service: Instructions for Requesting a Certificate of Release of Federal Tax Lien
- Top Tax Defenders: How Use the Certificate of Discharge to Remove a Federal Tax Lien
- Internal Revenue Service: Form 14135