How Will an IRS Lien Affect Me?

If you have an outstanding balance due the IRS that remains unpaid after the IRS gives notice and demands payment, then a federal tax lien automatically arises.  The lien applies to all real and personal property of a taxpayer, including any after-acquired property.

To protect its interest in a taxpayer’s property against other creditors, the IRS may file a Notice of Federal Tax Lien (“NFTL”)—this is generally filed with the Secretary of State and the County where any real property is owned by the taxpayer.  The NFTL is publicly available information, but it will no longer show up on a taxpayer’s credit report (See If You Owe Money To The IRS, Your Credit Score May Be Going Up! posted on this website on August 1, 2017).

Once the NFTL has been filed, there are a limited number of ways a taxpayer can dispose of it.  One way is to pay the balance due in full.  If that occurs, the IRS will automatically release the NFTL within 30 days of full payment of the balances due in relation to the tax periods on the NFTL.  The IRS might also release a NFTL if the tax debt is paid through an Offer in Compromise.

Another way is to request the IRS “discharge” specific property from the NFTL.  This allows a taxpayer to transfer ownership of property to another person without the NFTL being transferred with it.  A discharge often occurs in real estate transactions.  For example, if a taxpayer is selling real property and the IRS will not be paid in full from the proceeds of the sale, then the IRS might agree to discharge (or remove) the NFTL from the real property, provided that all of the taxpayer’s equity in the home is paid to the IRS at closing. This allows the buyer to take the home free and clear of the NFTL.  A taxpayer must apply for a certificate of discharge and obtain approval from the IRS before the real property sale transaction will close.

The IRS might be willing to withdraw the NFTL, which removes it from public record altogether, either after the NFTL has been released (because the balance has been paid in full), or if a taxpayer is paying in an Installment Agreement and meets the following:

  • A Qualifying Taxpayer is an individual or operating business whose liabilities are for income taxes only (an out of business entity may qualify even though it has more than just income tax liabilities);
  • The “unpaid balance of assessments”[1] is below $25,000, which may be paid down to request the lien withdrawal;
  • The taxpayer agrees to enter a Direct Debit Installment Agreement that pays the liabilities in full in 60 months or before the statute of limitations on collection expires, whichever is earlier;
  • Must have made three consecutive monthly payments under the Direct Debit Installment Agreement;
  • Currently in compliance with all filing and payment obligations; and
  • May not have defaulted the current or any previous Installment Agreements (whether paid by Direct Debit or otherwise).

A taxpayer eligible for withdrawal can submit IRS Form 12277, Application for Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien to the IRS for consideration.  If the IRS agrees to withdraw the lien, it will record the withdrawal with the recording offices of where the Notice of Federal Tax Lien was filed and will send a copy to the taxpayer.

If you owe the IRS money, contact Anderson & Jahde for competent, professional tax help.

[1] Once a tax return is filed, the IRS will usually assess the amount of tax, plus any interest and penalties accrued to the date of assessment.  Generally, these amounts, less any payments and withholdings, comprise the “Unpaid Balance of Assessments.”  But after the initial assessment, if the balance goes unpaid, penalties and interest continue to accrue on the unpaid amount owing until it is paid in full, albeit they may not yet be “assessed.”  So, a taxpayer may owe $30,000, but the unpaid balance of assessments may still be under $25,000 for purposes of requesting a lien withdrawal.

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