Federal Tax Liens
Federal tax liens are administered by the IRS. IRS tax liens self-release after their statute of limitations expires; this happens automatically after ten years. This provision is contained directly in the language of the lien:
“For each assessment listed below, unless the lien is refiled by the date given in column (e), this notice shall, on the day following such date, operate as a certificate of release as defined in IRC 6325(a).”
So, all you have to do is wait ten years for the federal tax lien statute of limitations to expire and you’re in the clear, right? Well, not exactly; there’s a reason so few taxpayers opt to wait out the statute of limitations.
If you purchase any property or earn any money through income during that 10-year period, the IRS can — and will — seize it to pay off the outstanding tax debt. An active tax lien can destroy your credit, making it an immense challenge to get a mortgage or any other type of loan.
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State Tax Lien
As the name suggests, state tax liens are assessed at the state level. Each state has its own rules and procedures regarding lien removal. Many states will offer fewer resolutions than the IRS. In order to know exactly what options you have when placed under a state tax lien, it is highly recommended that you consult with a tax professional.
How to Remove a Tax Lien
File an Appeal
When it comes to the collections process, the law gives taxpayers many rights and protections. One such protection is the entitlement to notices from the IRS and the right to sufficient time to resolve tax problems. Another such right taxpayers have is the right to appeal collection actions by the IRS.
When you first receive a notice of a lien from the IRS, start by giving them a call. While this won’t always be a success, it has the potential to end your headache quickly and easily — if it is successful.
If your initial phone call with the IRS is not successful, you can request an official appeal by filing Form 9423.
The appeals process doesn’t always work, but it is always worth a shot. And if you have a compelling case — and if removing the lien can demonstrably improve the IRS’ chances of receiving the outstanding amount — then appealing the lien may be the quickest and easiest way to get it removed.
Pay Your Back Taxes
If your initial appeals fail, the best way to remove a lien is to pay your back taxes as soon as possible; the longer you owe unpaid taxes, the bigger your tax headache can get.
The first and most straightforward way to pay you back taxes is to pay in full. If paying in full is within the realm of financial possibility, it is strongly recommended as it accrues neither interest nor penalties.
If you can’t afford to pay in full, you may qualify for a payment plan with the Internal Revenue Service. Simply put, a payment plan is an agreement with the IRS to pay the taxes you owe within an extended but defined timeframe. There are two kinds of payment plans: short-term and long-term.
A short-term payment plan, or Full Payment Agreement, is a 120-day extension to pay in full. There are no additional fees for a full payment Agreement, but interest and applicable penalties still accrue until your liability is paid. However, if you are experiencing financial hardship, full payment agreements can still put a strain on your bank account — and your peace of mind.
If a Full Payment Agreement is not financially attainable, you may be eligible for a Long-Term Payment Plan, which entails an Installment Agreement. An Installment Agreement allows you to pay your taxes over an extended period of time while avoiding collection actions from the IRS such as liens, garnishments, and levies.
When utilizing an Installment Agreement to pay your taxes, you will still owe interest and late penalties. However, Installation Agreements allow you to break up the amount you owe into much more affordable chunks.
Additionally, there are a few options for reducing the impact of a lien that the IRS will agree to if it is in the best interest of both the government and the taxpayer:
Discharge of property
A Discharge of Property removes the lien from specific property, such as a home. This allows the taxpayer to, for example, refinance their mortgage to help pay back their tax debt.
While Subordination does not remove the lien, it allows other creditors to move ahead of the IRS. This allows the taxpayer to have an easier time getting a loan or mortgage.
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.
As part of the IRS’ revamped Fresh Start initiative, are two options that withdraw your Notice of Federal Tax Lien after the lien’s release. In order to be eligible:
Your tax liability has been satisfied and your lien has been released; and also:
You are in compliance for the past three years in filing for all individual returns, business returns, and information returns
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. In order to be eligible:
You are a qualifying taxpayer (individuals, businesses with income tax liability only, and out-of-business entity 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 fully pay the amount you owe within 60 months or before the Collection Statute expires — whichever comes first
You are in full compliance with other filing and payment requirements
You have made three consecutive direct debit payments
You have not defaulted on your current — or any previous — Direct Debit Installment agreement.
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