Tax liens are a powerful weapon for the IRS and other tax agencies, including the Franchise Tax Board (FTB), the California Tax and Fee Administration (CDTFA), and the Employment Development Department (EDD). Federal tax lien notices (or state tax lien notices) can cause a lot of trouble and difficulty for many individuals and businesses. What are tax liens and how can taxpayers eliminate them or reduce their impact? This article will focus primarily on IRS liens, but keep in mind that many state tax agencies (such as the Franchise Tax Commission) often have similar rules and procedures.
There are two types of Tax Lien, an “invisible” lien and a federal tax lien notice (or state tax lien notice). What’s called an invisible lien occurs when the IRS issues a notice demanding tax and the taxpayer doesn’t. This invisible lien is not a public records issue (that’s why it is an invisible lien) and has little impact on most taxpayers.
The lien that keeps many people up at night is the federal tax lien notice (or state tax lien notice). This lien is a public record filed by the IRS (or state tax agency) with the county recorder, secretary of state, and other offices that record liens and mortgages. Federal tax lien notices can make it difficult for a person to sell a property or obtain a loan.
A federal tax lien notice is like a second mortgage or registration judgment. This is an obligation attached to the taxpayer’s property and is usually not released until the taxpayer has paid the full amount of the tax. If a taxpayer attempts to sell the property, a lien must usually be paid to get the property out of escrow. Unlike second mortgages, which are usually attached to a single property, a federal tax lien is attached to all of the taxpayer’s property. Liens apply not only to real estate, but to any type of asset, including equipment and intellectual property. The IRS can foreclose on the property that is the subject of the lien, but this is relatively rare.
A tax lien must be distinguished from a lien. A lien involves the IRS simply asserting a property claim, while a lien involves the IRS actively withholding money and other property. Liens typically involve the IRS taking money from people’s bank accounts or paychecks.
Once the IRS (or other tax authority) files a tax lien notice, it can be difficult to remove the lien without paying the full amount of taxes. However, there are several ways to avoid or mitigate the damage caused by a lien.
Avoid lien or not it
The best way to avoid all the negative effects of a tax lien is to avoid the lien entirely. Of course, complying with all tax obligations in a timely manner is the best way to avoid tax liens. But all hope is not lost if you fall behind on your taxes. Involving the IRS (or other tax authorities such as the Franchise Tax Board) can be an effective way to avoid a tax lien notice. Payment plans to avoid federal tax lien notices (or state tax lien notices) can often be negotiated with the IRS (and other agencies). However, you must be ready to open your wallet and pay.
Payment plan or compromise to remove lien
The IRS will revoke federal Tax Shelter lien notices on certain taxpayers subscribed to certain payment plans. These payment plans require (1) the taxpayer to pay the full balance within 60 months, (2) the taxpayer to make at least three direct debit payments, and (3) the taxpayer’s total balance to be less than $25,000. .The IRS will also revoke the Federal Tax Lien Notice after the Compromise Offer is accepted and the terms are completed.
Revocation of tax lien
In some cases, the IRS cancels liens because doing so promotes taxes. For example, if a defense contractor’s security clearance is revoked due to a lien, the IRS can revoke the lien because the IRS would not be able to collect taxes if the defense contractor lost a business or job. Thus, the revocation of the lien facilitates tax collection from the IRS. Professionals such as securities brokers, whose FINRA licenses may be compromised by liens, may also have their liens revoked by the IRS for similar reasons.
lien subordination
A lien affiliation will not eliminate a lien, but it may be the best option for many taxpayers looking to refinance their homes or apply for a home loan. In alien affiliation, the IRS agrees to subordinate (or lower your priority to a second or third) lender. The IRS doesn’t do it out of kindness and only does it if there is some benefit to the IRS. A classic example of lien subordination is a taxpayer refinancing their home for a lower monthly mortgage payment. The IRS will put their liens on the back burner so taxpayers can refinance, but the IRS wants taxpayers to provide the IRS with at least Partial mortgage savings.
