As Benjamin Franklin once said, “nothing can be said to be certain, except death and taxes.” Taxes are a part of being American. They go toward a variety of programs, such as social programs, national defense and security, safety net programs, and interest on the national debt. Without taxes, many of these programs we take for granted might not exist, such as Social Security, unemployment benefits, and Medicare, which is why the government takes tax collection very seriously.
Being behind on your taxes can land you in troubled waters with Uncle Sam. One consequence of owing back taxes is the IRS’s ability to impose a tax lien, which gives the federal government legal claim against your property. If you received a notice from the IRS of an IRS tax lien, your first concern might be removing the lien right away. Applying for an IRS lien discharge can remove a lien from a specific property. However, there are particular requirements you must meet.
To understand your options when trying to get rid of an IRS lien, keep reading. Below, we’re going to cover an IRS lien discharge and how to apply for a federal tax lien release. Or, use the provided links to jump to a section that may contain the answer you’re looking for.
- What is an IRS Tax Lien?
- What Happens If You Receive Notification of an IRS Tax Lien?
- What is an IRS Tax Lien Discharge?
- How to Apply for an IRS Tax Lien Discharge
- File Form 14135
- What Is Subordination of Federal Tax Lien?
- What Is Withdrawal of Federal Tax Lien?
- What’s the Difference Between a Tax Lien and a Tax Levy?
What is an IRS Tax Lien?
An IRS tax lien gives the federal government legal claim over your property when you fail to pay your tax debt, along with any property you acquire after the lien was put in place. The point of a tax lien is to protect the government’s interest in all of your property, such as your home(s), financial assets, and even personal property, to ensure that your debt will be repaid. If you receive a Notice of Federal Tax Lien, you have the right to appeal.
A tax lien is a public document that alerts creditors that you owe back taxes to the IRS, which gives the government a legal right to your property. Having a federal tax lien on your personal record can harm your credit score, causing further financial trouble down the road.
You will receive a Notice of Federal Tax Lien when the IRS reviews your tax liability and puts the balance on the books, sends you a Notice and Demand for payment, which details how much you owe in back taxes, and you refuse or neglect to pay your tax liability in full and on time.
Having a federal tax lien placed on your property and assets can have a severe impact on your finances.
What Happens If You Receive Notification of an IRS Tax Lien?
After receiving a Notification of an IRS Tax Lien in the mail, you may be wondering what’s going to happen. A federal tax lien can affect you in a variety of ways:
- A legal claim to assets: A tax lien attaches to all of your personal assets and future assets, such as real estate, securities, and vehicles, and lasts for the lien’s entirety.
- Impacts your credit: An IRS tax lien puts a notice on your personal record to warn other creditors that you owe money to the government, which can impact your credit score and ability to get credit.
- Bankruptcy: Filing for bankruptcy and owing tax debt doesn’t mean your tax lien will vanish—a Notice of Federal Tax Lien can remain on your record even after the bankruptcy.
- A legal claim to business property: A federal tax lien can also attach to all business property, including accounts receivable.
Owing back taxes can result in the federal government claiming your personal and/or business assets, which can limit your financial freedom, such as your ability to sell or buy a home or apply for a new line of credit. The best way to prevent scenarios like these is to avoid federal tax liens.
How to Avoid a Federal Tax Lien
Everyone owes taxes and must pay and file taxes by the filing deadline. Failing to do so can result in several consequences, such as failure to file and failure to pay fees, accrued interest on late payments, a federal tax audit, and federal tax liens and levies.
If you’re worried about a federal tax lien, the first step you can take is to avoid having one placed on your assets in the first place. This means paying your taxes on time, every time, and responding to all correspondence that comes from the IRS. However, if you already accrued tax debt, and the IRS has placed a lien on your assets, the best way to get rid of your tax lien is by paying your back taxes in full. Once your back taxes are paid off in full, including interest and fees, the IRS will remove your lien within 30 days.
However, paying back taxes in full to get rid of a tax lien isn’t an option for everyone. If you’re struggling to repay your tax debt, you can apply for a repayment plan. At Community Tax, our tax professionals offer a variety of tax resolution services, such as drafting an Offer in Compromise, setting up IRS Installment Agreements, and applying for Currently Not Collectible Status.
Paying back the IRS can take time, which means having a lien on your property or assets can be holding you back. In this case, you can apply for an IRS tax lien discharge.
What is an IRS Tax Lien Discharge?
An IRS tax lien discharge removes the federal government’s lien from a particular piece of property and allows taxpayers to transfer property free of the lien. Taxpayers must file IRS Form 14135 to apply for an IRS Certificate of Discharge to be eligible. Applying for an IRS Certificate of Discharge for a federal tax lien is important, especially if you’re trying to sell your property. This is because, even if someone buys your home, the lien still remains. This means buyers are less likely to buy your home because the government has a legal claim to the property.
Getting an IRS Certificate of Discharge for your federal tax lien will open up new financial opportunities. For example, you’ll be able to use the profits you earn from selling your home to pay off your back taxes, or you’ll be able to apply for a cash-out refinance and use that money to make payments on an IRS Installment Agreement.
However, when the IRS issues a tax lien discharge, you will still owe any back taxes, accrued interest, and penalties to the IRS. An IRS tax lien discharge only discharges property and assets listed in the lien discharge. Any property or assets not listed will continue to have a lien.
How to Apply for an IRS Tax Lien Discharge
Applying for an IRS tax lien discharge can be a long and arduous process. First, you have to ensure you qualify for an IRS Certificate of Discharge. There are a few IRS provisions in the Internal Revenue Code (IRC) that determine your eligibility for a tax lien discharge, including:
- Your property subject to the tax lien is worth twice as much as your tax liability: IRC Section 6325(b)(1) states if the value of the taxpayer’s property under the tax lien is equal to at least twice the amount of their federal tax liability and any other debts, such as mortgages, state and local taxes, and mechanics liens, the lien may be discharged. For example, if your tax liability is $20,000 and your other debts equal $15,000, you will add these totals together ($35,000), and multiply it by two to get $70,000. This means your property must be at least $70,000 to qualify, given the aforementioned amount of debt. Use Form 669-A to apply.
- You pay your lien interest in the property up for discharge to the IRS: IRS Section 6325(b)(2)(A) states if the taxpayer pays off the interest owed to the IRS in the property being discharged, the lien may be discharged. For example, if your tax debt is $200,000 and the IRS lien interest equals $60,000, your property must be worth $60,000 to satisfy the lien interest. This will leave you with an outstanding tax debt of $140,000. Use Letter 403 to apply and Form 669-B.
- Your property has no value: IRS Section 6325(b)(2)(B) states if the IRS determines the property has no value, the lien may be issued a discharge. This means if the debts accrued before the tax lien are greater than the fair market value of the property or greater than the sale of the property, the IRS may discharge the lien. For example, if your mortgage is more than your tax liability, the government’s interest in your property will have no value. Use Letter 402 and Form 669-C to apply.
- You sell your property and funds that are subject to your IRS tax lien in escrow: IRS Section 6325(b)(3) states that the IRS may agree to the sale of the property to remove the tax lien. In this case, an escrow agreement must be drafted with the proceeds of the sale being held in a fund for the IRS to claim. For example, if you took out a mortgage before the tax lien for $50,000, the IRS has $30,000 worth of interest in the property, and there are liens after the IRS lien was issued in the amount of $5,000 and $3,000, then the proceeds from the sale will be paid off in the following order:
To qualify, the taxpayer must be able to pay off all interest in the property once the transaction is complete. Use Form 669-H to apply.
- A third party pays the IRS lien interest in the property with cash or a bond: IRS Section 6325(b)(4) states if a third party owns the property, not the taxpayer, they can get the tax lien discharged by depositing the value of the government’s interest in the property in cash or through an acceptable bond. Use Form 669-G to apply.
File Form 14135 Once you’ve determined you’re eligible for an IRS Certificate of Discharge from the IRS, you’ll need to fill out and file IRS Form 14135: Application for Certificate of Discharge of Property From Federal Tax Lien.
To remove a federal tax lien from your property, you will need to apply for a discharge using IRS Form 14135. This form requires a lot of information, including:
- Taxpayer information, such as name and address
- Purchase, transferee, new owner information
- Attorney or representative information
- Lender or finance company information
- Monetary information, such as the proposed sales price and expected proceeds to be paid to the IRS in exchange for the Certificate of Discharge
- Basis for discharge
- A description of the property
- A copy of the deed or title
- A professional appraisal by a third party
- Copies of the federal tax lien, sales contract/purchase agreement, current title report, and proposed closing statement
You must send IRS Form 14135 to the IRS at least 45 days before the sale or loan settlement meeting. At Community Tax, our tax professionals offer tax preparation services to help you complete and file any IRS tax form.
What Is Subordination of Federal Tax Lien?
An IRS Certificate of Discharge isn’t the only way to reduce the impact of a lien. Subordination allows other creditors to move ahead of the IRS, which can help make it easier for taxpayers to get a loan or mortgage. While a
Certificate of Subordination doesn’t remove the tax lien, it gives creditors the opportunity to jump ahead of the IRS’s position for the property named in the certificate. This means lenders can lend to you before you pay down your tax debt. This makes it easier for taxpayers to refinance and use that money to pay off any back taxes.
To apply for a Certificate of Subordination, a taxpayer must file IRS Form 14134: Application for Certificate of Subordination of Federal Tax Lien, which is similar to the form used for a Certificate of Discharge. Additionally, you must also file your Certificate of Subordination application at least 45 days before the sale or loan settlement meeting.
What Is Withdrawal of Federal Tax Lien?
A when the IRS issues a federal tax lien, it is put on public notice to notify creditors that the IRS has legal claim to your property. This public notice can be detrimental to your credit score, which is important if you’re looking to take out a loan, buy a home, purchase a car, or apply for new lines of credit. To remove this public notice, you can use IRS Form 12277: Application for the Withdrawal of Filed Form 668(y), Notice of Federal Tax Lien.
Withdrawal of a federal tax lien removes the public notice from your records, making it seem as if the lien was never imposed in the first place. Using IRS Form 12277, you can send a request for the IRS to remove the public notice of the tax lien, which can help improve your credit score. With an improved credit score, it can be easier to secure a loan, apply for new lines of credit, or make large purchases like a home or a car.
The IRS Commissioner created the Fresh Start Initiative to help with IRS tax hardships. Under this initiative, there are two ways taxpayers can apply for a withdrawal of their Notice of Federal Tax Lien:
- You can apply for a withdrawal of a federal tax lien if your tax liability has been satisfied and the lien was released. You must also be in compliance for the past three years of tax filing, including individual, business, and information returns, and must be current on your estimated tax payments and federal tax deposits. Or,
- You can apply for a withdrawal of a federal tax lien if you entered in or converted your regular Installment Agreement to a Direct Debit Installment Agreement. To be eligible, you:
- Must be a qualifying taxpayer
- Owe $25,00 or less in back taxes
- Have your Direct Debit Installment Agreement pay your back taxes within 60 months
- Must be in full compliance with other filings and payment requirements
- Have made three consecutive direct debit payments
- Can’t have defaulted on your current, or any previous, Direct Debit Installment Agreement payments
Once you’ve paid off your tax debt or received a Certificate of Discharge, one of your first actions should be applying for a withdrawal of a federal tax lien to remove it from your personal records.
What’s the Difference Between a Tax Lien and a Tax Levy?
A tax lien isn’t the only action the IRS can take against your property and personal assets. While a tax lien secures the IRS’s interest in your property when you fail to pay your tax debt, an IRS tax levy actually takes or seizes your property to pay off your tax debt. This is a much more serious action than a tax lien, as the IRS can take your home, car, or other financial assets and sell them to pay off your tax debt. A tax levy can also garnish wages and take money from your bank or other financial accounts.
Just like a tax lien, the best way to avoid a tax levy is by paying your taxes on time when they’re due, which is typically April 15th for most individual taxpayers. However, if you need more time to file your tax return, you can request an extension. Or, if you’re unable to pay your tax debt, it’s best to pay as much as you can then work with the IRS or a tax representative, such as Community Tax, to resolve your remaining balance through repayment plans.
IRS levies can be released in the following scenarios:
- The IRS determines the levy is causing an immediate economic hardship
- You paid the amount of back taxes you owe
- Releasing the levy will help you pay your current or past taxes
- The collection period ended before the levy was issued
- You entered an Installment Agreement that agrees the levy no longer has to continue
- The value of your property is more than the amount of taxes you owe, and releasing the levy won’t hinder the IRS’s ability to collect the amount owed.
It’s important to note that removing both a tax lien and a tax levy doesn’t mean you don’t have to pay the balance due. You must work with the IRS to resolve your tax debts, or the lien or levy may be reissued.
Wrapping Up on IRS Lien Discharge
An IRS tax lien can have serious financial implications. With a tax lien placed on your property or assets, creditors will see the IRS has interest in your property or assets and might be unwilling to approve you for a mortgage or refinance until the lien is removed. To remove a tax lien, you must apply for a Certificate of Discharge. An IRS lien discharge will remove the lien from any particular property.
However, there are other ways to reduce the impact of a lien, such as applying for a Certificate of Subordination that gives creditors the ability to have interest in your property or requesting a tax lien withdrawal to remove the lien from your personal records.
At Community Tax, our tax representatives are here to help you apply for an IRS lien discharge and resolve any tax issues. Our team can help draft an Offer in Compromise to reduce the amount of taxes owed, or set up an IRS Installment Agreement to pay off your tax debt.