What You Should Know About Tax Liens
A federal tax lien is a legal claim to your property, including property that you acquire after the tax lien arises. The lien protects the government’s interest in all your property, including real estate, personal property and financial assets. The federal tax lien arises automatically when you fail to pay your federal taxes in full within ten days after the IRS makes an assessment of the tax liability and sends you the first Notice or Letter explaining the taxes owed and the demand for payment.
The IRS may also formally file a Notice of Federal Tax lien in the public records, which publicly notifies your creditors that the IRS has a claim against all your property, including property acquired by you after the filing of the Notice of Federal Tax Lien. The filing of a Notice of Federal Tax lien may appear on your credit report and may harm your credit rating. Once a lien arises, the IRS generally cannot release the Tax lien until the income tax, penalty, interest, and recording fees are paid in full or until the IRS may no longer legally collect the tax.
A federal Tax lien exists after:
- Determines your federal tax liability, and
- Sends you a Notice or Letter that explains how much you owe (Notice and Demand for Payment); and
- Neglect or refuse to fully pay the federal tax owed in time.
Ways to Remove a Tax Lien
Pay Your Tax Debt – Pay the full amount of taxes due. The IRS releases your lien within 30 days after you have paid your tax debt.
Discharge of Specific Property – A “discharge” removes the lien from specific property. There are several Internal Revenue Code provisions that determine eligibility. Please contact the Law Office of Robert Thomas for more information, or refer to Publication 783, Instructions on How to Apply for Certificate of Discharge From Federal Tax Lien (PDF) and the video Selling or Refinancing when there is an IRS 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. Please call the Law Office of Robert Thomas to determine eligibility, or refer to Publication 784, Instructions on How to Apply for a Certificate of Subordination of Federal Tax Lien (PDF) and the video Selling or Refinancing when there is an IRS Lien.
Withdrawal – A “withdrawal” removes the public Notice of Federal Tax lien and assures that the IRS is not competing with other creditors for your property; however, you are still liable for the amount due. The IRS will withdraw a Notice of Federal Tax lien if the notice was filed while a bankruptcy automatic stay was in effect. The IRS may also withdraw a Notice of Federal Tax lien if the IRS determines:
- The Notice of Federal Tax lien was filed too soon or not according to IRS procedures;
- You enter into an Installment Agreement to satisfy the tax liability unless the installment agreement provides otherwise;
- Withdrawal will allow you to pay your taxes more quickly; or
- Withdrawal is in your best interest, as determined by the National Taxpayer Advocate, and in the best interest of the government.
Please feel free to call Robert Thomas for eligibility determination, or refer to Form 12277, Application for the Withdrawal of Filed Form 668(Y), Notice of Federal Tax lien (Internal Revenue Code Section 6323(j)) (PDF) and the video Lien Notice Withdrawal.
2011 Fresh Start Initiative – Two additional Withdrawal options are available under the Fresh Start Initiative.
- Withdrawal of your Notice of Federal Tax Lien after the lien’s release. General eligibility includes:
- The tax owed has been paid in full and your tax lien has been released; and also:
- You have been in compliance for the past three years in filing – all individual returns, business returns, and information returns have been timely filed;
- You are current on your estimated tax payments and federal tax deposits, as applicable.
- The other option may allow withdrawal of your Notice of Federal Tax lien if you have entered in or converted your regular Installment Agreement to a Direct Debit Installment Agreement. General eligibility includes:
- You are a qualifying taxpayer (i.e. individuals, businesses with income tax liability only, and out of business entities with any type of tax debt)
- You owe $25,000 or less (If you owe more than $25,000, you may pay down the balance to $25,000 prior to requesting withdrawal of the Notice of Federal Tax Lien)
- Your Direct Debit Installment Agreement must full pay the amount you owe within 60 months or before the Collection Statute expires, whichever is earlier
- You are in full compliance with other filing and payment requirements
- You have made three consecutive direct debit payments
- You can’t have defaulted on your current, or any previous, Direct Debit Installment Agreement.
How Does an IRS Tax lien Affect You
- Assets — A tax lien attaches to all of your assets (such as property, securities, vehicles) and to future assets acquired during the duration of the lien.
- Credit — Once the IRS files a Notice of Federal tax Lien, it may limit your ability to get credit.
- Business — The tax lien attaches to all business property and to all rights to business property, including accounts receivable.
- Bankruptcy — If you file for bankruptcy, your income tax debt, tax lien, and Notice of Federal Tax lien may continue after the bankruptcy.
IRS Tax lien vs. IRS Tax Levy
A federal Tax lien is not a Tax levy. A Tax lien secures the government’s interest in your property when you do not pay your tax debt. A Tax levy actually takes the property to pay the tax debt. If you don’t pay or make arrangements to settle your tax debt, the IRS can levy, seize and sell any type of real or personal property that you own or have an interest in.
Federal Tax Levies
The IRS may levy (seize) your assets such as wages, bank accounts, social security benefits, and retirement income. The IRS also may seize your property (including your car, boat, or real estate) and sell the property to satisfy the tax debt. In addition, any future federal tax refunds or state income tax refunds that you’re due may be seized and applied to your federal Tax Liability.
An IRS Tax levy also permits the IRS to levy property that is yours, but is held by someone else (such as your wages, retirement accounts, dividends, bank accounts, licenses, rental income, accounts receivables, the cash loan value of your life insurance, or commissions).
If you receive an IRS Notice or Letter titled Final Notice of Intent to Levy and Notice of Your Right to A Hearing, contact the Law Office of Robert Thomas right away. Your time to make arrangements or settle you tax debt is running out and so are your options.
When can the Internal Revenue Service Issue a Tax Levy?
The IRS will usually levy only after these three requirements are met:
- The IRS has determined that you owe federal income taxes and has sent you a Notice and Demand for Payment (a tax bill); and
- You neglected or refused to pay the tax; and
- The IRS sent you a Final Notice of Intent to Levy and Notice of Your Right to A Hearing (levy notice) at least 30 days before the levy. The IRS may give you this notice in person, leave it at your home or your usual place of business, or send it to your last known address by certified or registered mail, return receipt requested. Please note: if the IRS levies your state tax refund, you may receive a Notice of Levy on Your State Tax Refund, and a Notice of Your Right to Hearing after the levy is placed.
How Do I Avoid a Federal Tax lien or a Federal Tax Levy?
You can avoid a levy by filing federal tax returns on time and paying your federal taxes when due. If you need more time to file, you can request an extension. If you can’t pay what you owe, you should pay as much as you can and work with the IRS to resolve the remaining balance. The key is to be proactive; so don’t ignore IRS billing notices. Call Robert Thomas for assistance.
You may be able to set up an Installment Payment Plan, settle your tax liability for less than the full amount you owe, or there may be other options. There are several options for making tax payments. Please call Robert Thomas to determine the best option for you.
If a tax levy has already been issued, you will need to get the tax levy released.
How Do I Get a Levy Released?
Contact Robert Thomas immediately to resolve your tax liability matter and request a levy release. The IRS may release a tax levy if it determines that the levy is causing an immediate economic hardship. If the IRS denies your request to release the levy, you may appeal this decision.
Appeal an IRS Collection, Tax Levy, or Tax Lien
You may appeal before or after the IRS places a tax levy on your wages, bank account, or other property. After the tax levy proceeds have been sent to the IRS, you may file a claim to have them returned to you. You may also appeal the denial by the IRS of your request to have levied property returned to you. For a full explanation of your appeal rights, please call the Law Office of Robert Thomas, or refer to Publication 1660, Collection Appeal Rights.
The IRS is required to release a tax levy if it determines that:
- You paid the amount you owe,
- The period for collection ended prior to the tax levy being issued,
- Releasing the tax levy will help you pay your taxes,
- You enter into an Installment Agreement and the terms of the agreement don’t allow for the tax levy to continue,
- The levy creates an economic hardship, meaning the IRS has determined the levy prevents you from meeting basic, reasonable living expenses, or
- The value of the property is more than the amount owed and releasing the tax levy will not hinder our ability to collect the amount owed.
Please note: The release of a tax levy does not mean you do not have to pay the federal income tax debt you owe. You must still make arrangements with the IRS to resolve your income tax debt or a levy may be reissued.
What if a Tax Levy is Causing an Economic Hardship?
An economic hardship occurs when we have determined the tax levy prevents you from meeting basic, reasonable living expenses. In order for the IRS to determine if a tax levy is causing you an economic hardship, the IRS will usually need you to provide financial information. Robert Thomas will assist you in providing the complete financial information, Hardship Letter, and the appropriate schedules.
A tax levy release does not mean you are exempt from paying the balance. The IRS will work with you to establish a payment plan or take other steps to help you pay off the balance. To help ensure quick action, please have the fax number available for the employer, bank or other financial institution that is processing the levy.
Appealing the IRS’s Decision
IRS Payment Options
Low Income Earner Federal Guidelines
Illinois State Tax Appeals
The IRS Collection Process