If you owe money to the IRS and don’t pay it within a reasonably short period of time, you will eventually have to face the prospect of a federal tax lien.
Once a tax lien is filed there is little you can do to get it released apart from paying the underlying liability in full or waiting for the 10 year statute of limitations on collections on collections to expire.
The IRS Lien and Your Credit Score
A federal tax lien is worse than a bankruptcy for your credit score.
Bankruptcy is a historic, one time act whereas a federal tax lien is evidence of an ongoing collection action that tells other potential creditors that the IRS is ahead of them in line.
We have seen credit scores plummet as much as 40% because of a federal tax lien.
Avoiding an IRS Lien
You have a better chance of preventing the filing of a Notice of Federal Tax Lien than you do of getting a Certificate of Release once a lien has already been filed. This is why it is important for people with outstanding tax debts to seek professional help as early as possible in the tax collection process.
In appropriate cases, if the proper steps are taken, taxpayers may be able to prevent the issuance of a lien.
Getting an IRS Lien Released
Your options are limited if a lien has already been issued against you.
However, there are still some things that can be done:
- Subordination of lien – The IRS will not release (subordinate in the case of a refinance) it’s lien to allow you to sell or refinance your home unless it is in its best interests. This usually means that you will have to pay the IRS the excess proceeds available at closing. However, there are circumstances in which the IRS will allow you to keep some of the excess proceeds if those proceeds are needed to fund necessary living expenses or health care costs.
- Bonding out of lien – The IRS will release the lien if you replace the collateral with an insurance bond. Tax bonds can be very difficult to get, however.
- Collection due process challenge of lien– Sometimes the IRS doesn’t follow proper procedure in placing a lien on a taxpayer. The law requires that it give the taxpayer written notice of his indebtedness and that the taxpayer refuse to pay the debt before it can issue a federal tax lien. You have the right to challenge any collection action by filing with the IRS appeals office a request for a Collection Due Process hearing.
- Expiration of the Statute of Limitations – The IRS has 10 years to collect assessment. When this period has expired all liens must be released. Generally the IRS will not issue a release of lien unless one is formally requested by the taxpayer.
- Offer in Compromise – If the IRS accepts an offer from you, the federal tax lien will be released.