Tax Debts and Federal Tax Liens

Many individuals are plagued by tax debt, and the accumulation of tax debt can be very stressful. When a return is not filed and taxes are owed, the IRS will begin the collection process. Most of the time, this process starts with passive steps, like sending a letter or receiving a notice from the IRS. As the collection period goes on, however, the steps become more aggressive. The IRS takes tax debt seriously and will do everything it takes to get it paid. One way the IRS makes sure that people will follow all tax rules is by issuing a Federal Tax Lien.

What is a Federal Tax Lien?

Federal Tax Lien is the IRS’s response to collecting unpaid taxes; it is the government’s legal claim on your property if you fail or refuse to pay a tax debt. The notice of Federal Tax Lien is publicly recorded and thus alerts creditors that the government has legal rights against all of your properties, be it personal property (such as vehicles), real estate assets (like homes), or financial assets (like checking or savings accounts).

How a Federal Tax Lien Affects You?

If you owe a tax debt and the IRS socks your assets with a Federal Tax Lien, its impact begins.

Lessen your creditworthiness—Federal Tax Liens are no longer included on credit reports, although they remain publicly recorded. This means that a potential creditor can (and probably will) find out about a tax lien, which can be used against you to reduce your creditworthiness.

Unsellable or refinanceable property—Federal Tax Liens often appear during title searches. If you have equity in a property you’re trying to sell or refinance, having a federal tax lien issued on that asset will effectively halt your efforts.

Reduce your borrowing capacity—Creditors can view publicly recorded federal tax liens and are likely to consider them when evaluating your application for a credit-based account. A lien may mean that you haven’t paid a debt, and it also claims ownership of your item(s), which may make a potential creditor unwilling to let you borrow.

May end up with a Federal Tax Levy—If you don’t pay your tax debt after the IRS issues a federal tax lien, the IRS may then issue a Federal Tax Levy. A levy can take hold of and sell any type of real or personal property that you own.

How to Resolve a Federal Tax Lien?

Your best option for handling a federal tax lien is to avoid getting one in the first place. Once a federal tax lien has been issued, there are a few options for getting it resolved.

 Request for Appeal 

You have the option to file an appeal with the IRS or your state government if you feel that your tax lien was issued by mistake. After the IRS has given you a lien, you must use the Collection Appeals Program (CAP) to file your objection. You have the option to represent yourself in the appeals process or hire a lawyer, CPA, or other competent professional to do it for you. If you qualify and need help with a federal tax lien, you may be able to get help from a low-income taxpayer clinic for free or at a low cost.

Pay your Tax Debt

In most cases, the easiest option to get rid of a federal tax lien is to pay up your tax debt in full. After you have settled your tax debt, the IRS lifts the lien within 30 days. If you couldn’t pay your bill in full, paying it off after a lien may not be feasible. In this situation, you might have to use a payment plan.

Get an IRS Payment Plan

People who can’t pay their back taxes in full can set up a payment plan with the IRS. Your balance will also keep getting fines and interest until the whole debt is paid off. However, if you let the IRS take at least three straight payments directly from your bank account (this is called a direct debit installment agreement), you may be able to get the IRS to remove the federal tax lien from public record. (You’ll still have to settle your tax debt, of course.) You can apply for one of these payment plans online, by mail, over the phone, or in person. Fees range from $0 to $225 based on your plan and income.

You also have the option of working with a tax relief firm. These businesses provide IRS tax lien assistance by contacting the IRS on your behalf to examine the issue, develop a plan, and recommend the best course of action. Even though you can set up a payment plan online (provided you’re eligible), these organizations can assist you if you don’t know where to begin or need direction.

Request for Offer in Compromise 

An Offer in Compromise (OIC) allows taxpayers to negotiate with the IRS to settle their debt for less than what they owe. This offer may be accepted if taxpayers are unable to pay their full tax burden or if doing so would result in extreme financial hardship.

When filing an OIC, expect that the IRS typically takes fewer than half of the applications it gets in a year. To even be considered, you must have filed all of your tax returns and paid any required estimated taxes for the current year. Also, you won’t be considered if you have filed for bankruptcy or are being audited.

File for Bankruptcy

It’s not a pretty choice, but it can help get rid of tax debt in some cases. No matter how much debt you have, bankruptcy is a serious and extreme step that you should only take as a last resort. Filing for bankruptcy can get rid of many debts, but it doesn’t always get rid of an IRS tax debt or lien.

How to avoid a Federal Tax Lien in the future?

Taxes are a part of life that you can’t avoid, so it’s important to plan ahead to avoid penalties, interest, and eventually liens. If you can’t file or pay on time, don’t ignore the letters or notices you get from the IRS. If you can’t pay the full amount you owe, payment options are available to help you settle your tax debt over time