How To Resolve A Tax Lien

If you are facing a Federal tax lien, ignoring the IRS’ correspondence won’t make it go away. Thus our first word of advice is to try and avoid having a tax lien filed against you if possible.  This can be done by responding to the correspondence, setting up a payment plan or a host of other options.  But if one has already been filed against you, this post will tell you how to deal with it.

How to Get Rid of a Federal Tax Lien
The easiest way to get a Federal tax lien lifted is to pay the tax owed, however, this is not always possible. If that is the case, you may qualify for one of the following three options:

Withdrawal
A “withdrawal” removes the public Notice of Federal Tax Lien (NFTL) from your credit report and assures that the IRS is not competing with other creditors for your property; however, the taxpayer is still liable for the amount due.  Generally, the conditions to have a tax lien withdrawn are as follows:

  • Filing of the NFTL was premature or otherwise not in accordance with the IRS’s administrative procedures.
  • The taxpayer has entered into an installment agreement to satisfy the liability for which the lien was imposed.
  • Withdrawal will facilitate the collection of the tax liability.
  • With the consent of the taxpayer or the National Taxpayer Advocate, the withdrawal of the NFTL would be in the best interests of the taxpayer and the United States.

For more information, refer to IRS Form 12277 (Application for the Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien).

Release
A “release” is when the IRS or State tax agency formally acknowledges that a tax lien has been paid off, satisfied or is in some other way no longer enforceable.  The common ways to get a lien released include:

  • Checking that the IRS followed their own rules. If not, the lien must be released.
  • Preparing Form 656, Offer in Compromise. This is the infamous “pennies on the dollar” option taxpayers often hear on late night TV. IF you qualify and IF your offer is accepted, then the IRS has to release the tax lien.  Specifically, the lien will be released within 30 days of when the payment terms have been satisfied and the payment has been verified.
  • Entering into an Installment Agreement.
  • Paying off the tax owed in full.

For more information, refer to IRS Publication 1450 Instructions for Requesting a Certificate of Release of Federal Tax Lien.

Discharge of Property
A “discharge” removes the lien from specific property.  A “discharge” of property from a Federal tax lien may be granted if you qualify under certain Internal Revenue Code (IRC) provisions. For more information, refer to IRS Publication 783 (Certificate of Discharge From Federal Tax Lien).

Subordination
“Subordination” does not remove the lien, but allows other creditors to move ahead of the IRS, which may make it easier to get a loan or mortgage.  The IRS will do this if it is necessary to secure the other creditor’s approval for a sale. For more information, refer to IRS Publication 784 (Certificate of Subordination of Federal Tax Lien).

For example, let’s suppose the IRS holds a lien against your house. Suppose there is also a mortgage on the property, which means that a bank holds a lien as well. If the bank won’t get all of its money from the property sale after the Federal tax lien is satisfied, then it won’t necessarily approve the sale. However, if the IRS ‘subordinates’ its lien, the bank can paid first and the IRS can get the remainder.

Other Key Points To Keep In Mind

  • The distinction between whether a NFTL has been released or has been withdrawn is important because of the manner in which credit reporting agencies treat withdrawals verses releases. When credit reporting agencies receive a notice of the withdrawal of a NFTL, they delete any reference to the tax lien in the taxpayer’s credit history.  In contrast, when the credit reporting agencies receive a release of a lien, while they note the filing of the release in the taxpayer’s credit history, the filing of the release does not operate to remove the references to the tax lien from the taxpayer’s credit history. As such, if a lien has been satisfied, one should always ensure that it is withdrawn.
  • If you want the lien withdrawn, you’ll want to locate a copy of the Form 668(Y) that was filed as it has the serial number of your original case file with the courts.  You can usually obtain a copy of the form by contacting the county recorder where the lien was filed (typically the county you lived in for the tax year associated with the debt).
  • IRS Centralized Lien Operations  — To resolve basic and routine lien issues: verify a lien, request lien payoff amount, or release a lien, call (800) 913-6050 or fax (855) 390-3528.
  • IRS Collection Advisory Group — For all complex lien issues, including discharge, subordination, subrogation or withdrawal; find contact information for your local advisory office in Publication 4235, Collection Advisory Group Addresses .
  • IRS Office of Appeals — Under certain circumstances you may be able to appeal the filing of a Notice of Federal Tax Lien. For more information, see Publication 1660, Collection Appeal Rights

Understanding Your IRS Notice

When you receive an IRS notice, the first reaction is to panic and want to toss the envelope into the trash can!  We recommend that you don’t do that but instead, take a deep breath and keep the following in mind:

  1. An IRS notice typically will be about your federal tax return or tax account. It will be about a specific issue, such as changes to your account. It may ask you for more information. It could also explain that you owe tax and that you need to pay the amount that is due.
  1. Each notice has specific instructions, so read it carefully. It will tell you what you need to do.
  1. If you agree with the notice, you usually don’t need to reply unless it gives you other instructions or you need to make a payment.
  1. If you do not agree with the notice, it’s important for you to respond. You should write a letter to explain why you disagree. Include any information and documents you want the IRS to consider. Mail your reply with the bottom tear-off portion of the notice OR respond via fax if a number is provided.
  1. Always keep copies of any notices you receive with your other tax records.

There are dozens of IRS notices that one can receive; for a comprehensive list check out this link on the IRS’ website.  Listed below is a brief summary of some of the more common notices and a description of what they mean.

CP10:  The IRS made a change(s) to your return because they believe there’s a miscalculation. This change affected the estimated tax payment you wanted applied to your taxes for next year.

CP11:  The IRS made changes to your return because they  believe there’s a miscalculation. You owe money on your taxes as a result of these changes.

CP14:  This IRS sent you this notice because you owe money on unpaid taxes.

CP54G:  Your tax return shows a different name and/or ID number from the information the IRS has for your account.

CP2000:  The income and/or payment information the IRS has on file doesn’t match the information you reported on your tax return.  This could affect your tax return; it may cause an increase or decrease in your tax, or may not change it at all.

CP2005:  The IRS accepted the information you sent them. They’re not going to change your tax return and have closed their review of it.

CP2501:  You need to contact the IRS as they have received information not reported on your tax return.

Form 668Y:  Notice of Federal Tax Lien.

CP501:  You have a balance due (money you owe the IRS) on one of your tax accounts.

CP503:  Reminder notice that the IRS has heard from you and you still have an unpaid balance on one of your tax accounts.  Typically sent 30 days after the filing of a tax lien.

CP504:  Notice of intent to level.  If you do not pay the amount due immediately, the IRS will seize (levy) your property and apply it to pay the amount you owe.  Typically sent 30 days after the above notice.

LT1058:  Final Notice prior to levy.  If no response is received within 30 days, the IRS can levy you.  This is also your opportunity to request a hearing with regards to the matter.