When personal or financial crises occur, circumstances can spiral out of control. Unpaid federal income taxes, whether due to prolonged illness, job loss, or divorce, can result in a tax lien being placed on a taxpayer’s property. This week’s blog discusses how to get rid of a federal tax lien. Next week, we’ll address how to avoid a federal tax lien altogether.
So, what is a federal tax lien?
A federal tax lien is the government’s legal claim to real estate, personal property and financial assets. The IRS can place a federal tax lien when a taxpayer neglects or refuses to fully pay a tax liability.
The IRS files a public document, the Notice of Federal Tax Lien, to alert creditors that the government has a legal right to the property. Property or assets subject to a tax lien cannot be sold or used for collateral on a loan. That can make a bad financial situation much worse.
Four ways to get rid of a federal tax lien:
- Paying the tax debt in full is the best way to get rid of a lien. The IRS releases the lien within 30 days after the tax debt has been paid.
- Discharge of property removes the lien from specific property, within Internal Revenue Code (IRC) provisions that determine eligibility.
- Subordination does not remove the lien, but allows other creditors to move ahead of the IRS, making it possible to get a loan or mortgage.
- Withdrawal removes the public Notice of Federal Tax Lien and assures that the IRS is not competing with other creditors for taxpayer property; however, the tax is still due.
Of course, the IRS decides whether a taxpayer can get rid of a tax lien, other than paying it in full. Eligibility requirements for taxpayers to get rid of a tax lien by discharge, subordination, or withdrawal include full compliance with other filing and payment requirements and up-to-date payments on any current or previous tax payment agreement.
All of this sounds pretty bad. Read next week’s post to learn more about avoiding federal tax liens altogether.