The Federal Tax Lien: A Powerful IRS Tool

People view the IRS as an unrelenting force in collecting tax debt. But compared to the State tax agencies, they are much easier and fair to deal with. They have a process to give taxpayers enough time and opportunities to follow federal tax laws without being heavy handed.

Eventually, after many warnings, the IRS will put the hammer down and increase pressure on the taxpayer to abide. One of the tools they use is to file a Notice of Federal Tax Lien (NFTL). This increases the pressure and stress on taxpayers to act on getting a resolution to the issue.

We will closely examine the NFTL and what we can do.

What does a federal tax lien mean?

Think of this as the Internal Revenue Service owning all your assets and any property you acquire in the future. Filing the lien is the government’s way of protecting their claim to your property. This includes real estate, personal property, and financial assets such as retirement, investments, social security, life insurance.

Having a NFTL filed means that the lien is a public record, and all creditors will check this. This puts handcuffs on the taxpayer financially by making creditors uneasy of their situation. Creditors will not want to increase the chances of borrowers not paying back loans because the IRS is before them.

The federal tax lien is extremely powerful as it attaches to all assets owned by the taxpayer. But, there is a misconception that the IRS tax lien automatically moves in front all other liens. It doesn’t take priority over mortgages, UCC filings, judgments, and other liens filed before the IRS liens. The IRS is powerful, but it is still another creditor like any other creditor.

There are special liens called “super-priority” liens. These liens come before all other liens, including federal tax liens. Even if filed much later, they take first priority such as:

  • Attorney’s Lien
  • Personal Property Purchased at Retail Sale
  • Real Property Tax and Special Assessment Lien
  • Certain Insurance Contracts
  • Purchaser of Securities
  • Personal Property Purchased in Casual Sale
  • Personal Property Subject to Possessory Lien
  • Residential Property Subject to a Mechanics Lien
  • Deposit Secured Loans
  • Purchaser of Motor Vehicle

Where are the NTFL Filed?

Generally, the IRS will file the NFTL in three places.

  • Town hall of the jurisdiction where the taxpayer resides
  • With the Secretary of State of the taxpayer’s residence
  • In the land records at the address of the taxpayer’s residence

These three locations are generally where creditors will conduct UCC search for prospective borrowers. This is what makes it so difficult to navigate financially for individuals and businesses alike. It’s what puts sand in the gears and halts any movement and growth.

The Right to a Hearing

With the filing of the NFTL, the taxpayer will have a right to hearing with a Settlement Officer in appeals. To request a hearing, use Form 12153, Request for Collection Due Process Hearing, within 30 days of the NFTL date. Once the taxpayer receives the request, they can challenge the filing of the NFTL or move to propose a collection alternative. Based on their financial situation, they can suggest a payment plan, a status of not collectible, or an offer-in-compromise.

No negotiation can remove a federal tax lien, but there are ways to work with the lien and lessen the impact. The IRS is flexible regarding the lien if it means they can secure their interest in it.

Let’s consider ways to work with the federal tax lien:

The IRS can remove the lien if the taxpayer owes less than $25,000. Additionally, the taxpayer must set up a direct debit plan and make three monthly payments. If the taxpayer meets these requirements, they can use Form 12277 to request the lien withdrawal of the NFTL.

The IRS recognizes that a lien can have a significant impact on the taxpayer. Therefore, they have made an exception in this case, based on the minimal risk of loss to the government. This would be a withdrawal of the federal tax lien, not just a release.

With the lien withdrawn, it is no longer a public record. A lien release removes the lien from the property. However, it is still on public records. This can still cause continued problems for the taxpayer.

Lien Subordination

There are instances where the taxpayer can make a request for a lien subordination in order get a home refinance approved. By obtaining a refinance approval, the taxpayer can pay down or pay off their tax liability. Use Form 14134, Application for Certificate of Subordination of Federal Tax Lien to make the request.

After the IRS gives approval to the request, the taxpayer can pay the IRS and proceed with their situation. Their situation after the refinance and payment will dictate the next viable options.

Discharge of Lien

Taxpayers may make the decision to sell their home and use the proceeds to make full payment on their liability. You make the request for discharge of lien using Form 14135, Application for Certificate of Discharge of Federal Tax Lien.

This request is to remove the lien for sale of the property. The transfer takes place to the new owner without the attachment of the lien. The taxpayer will send proceeds not less than the United States’ interest to the IRS.

Things to consider

Upon the federal tax lien expiration, it is self-releasing. After 10 years, the lien will automatically be released, and the date of release is shown on the NFTL itself. The date in the “Last Day for Refiling” is the self-release date. The IRS cannot randomly extend the statute but there could be statute extending circumstances that take place.

Filing for bankruptcy, Offer-in-Compromise, requesting a CDP, or requesting an installment agreement will extend the statute. Filing an OIC would increase the statute. The increase equals the number of days from filing to making a decision. Additionally, there would be an additional 30 days for appeals.

After the debt is paid off, any liens will be released within 30 days. Additionally, a Certificate of Release of Federal Tax Lien will be filed. If the lien is not released, the taxpayer can request a copy of the Certificate of Release of Federal Tax Lien from the recording office where the lien was filed.

A federal tax lien does not have any impact on your credit score. This is no longer tracked by the three major credit card bureaus.

For more information regarding the Federal Tax Lien, contact Dan Ohara at (408) 684-8505 or e-mail at dan@oharataxresolution.com