When individuals and businesses fail to pay taxes, the IRS makes legal claims against their property. That’s a frightening circumstance to face. The government issues a Notice of Federal Tax Lien when you neglect or refuse to pay a debt after receiving a Notice and Demand for Payment. That means tax authorities won’t seize your property but they do have first rights to real estate, personal property, and financial assets over other creditors. You may decide to ignore correspondence you receive from the IRS but that’s a mistake. It’s to your advantage to settle your tax debt as quickly as possible and here’s why.
The Impact of a Tax Lien
Imagine not having access to working capital that you depend on to run your business. A pending tax lien limits your ability to obtain future credit or loans since the Notice of Federal Tax Lien appears on your credit report. This can negatively affect a taxpayer’s credit score and sends up red flags to lenders that you’re a bigger risk compared to other borrowers. Lenders know the IRS tax lien attaches to all assets so they may not be able to recoup the funds if borrowers fail to repay loans or declare bankruptcy. Again, it’s imperative that you pay your taxes in full to restore your credit report and have full access to available capital.
How to Release a Tax Lien
Tax liens remain active until:
- You pay the tax liability to the IRS
- The statute of limitations on the debt expires
- You substantiate that the IRS made a mistake
After the IRS issues a Certificate of Release of Federal Tax Lien, the county records that the IRS no longer has a legal claim to taxpayer’s property. An immediate advantage is that it’s easier to obtain credit. However, that doesn’t mean that the tax lien is completely removed from your credit report. In fact, a tax lien can remain up to 10 years on a taxpayer’s credit report. Have in mind that a release is different from an IRS withdrawal, as we’ll see in sections below.
Review the ways below to have a tax lien released:
- Tax debt paid in full – after you pay your debt, the IRS releases the lien within 30 days. You can pay using electronic funds, same-day wire, and check or money order.
- Direct Debit Installment Agreement – the IRS offers long-term payment plans for businesses that owe less than $25,000 which includes tax, penalties, and interest. Direct debits are made from a checking account or a debit/credit card. The IRS charges setup fees and continues to charge penalties or interest. If necessary, it’s possible to revise your payment plan, change the monthly amount, and payment date. There are different requirements for individual payment plans versus business payment plans.
- Debt settlement – you can settle a tax debt by applying for an Offer in Compromise for an amount less than you owe. If you can prove financial hardship, the IRS may be willing to settle the debt. If you are uncertain how to move forward with this option, it’s better to find a financial professional to guide you through the process.
- Collection Delay – Being upfront with the IRS about your financial situation is recommended when you aren’t able to pay your taxes. Even though the debt doesn’t go away, they may be willing to temporarily delay collection. You will need to verify your income and expenses as well as your assets when pursuing this option.
- Tax lien dispute – request a Collection Due Process hearing within 30 days after receiving the Notice of Federal Tax Lien. You will need to provide financial documentation for an IRS case manager to review and correct any errors.
- Expiration of statute of limitations – The IRS has 10 years to collect the tax liability. In some instances, the ten-year collection period can be extended.
As already stated, these types of methods release the tax lien without withdrawing it from a taxpayer’s credit report. Thankfully, it’s possible to completely withdraw the tax lien or avoid it altogether.
How to Withdraw a Tax Lien From Your Credit Report
To help taxpayers pay back taxes and avoid tax liens, the IRS launched the Fresh Start Initiative. By increasing the amount that taxpayers owe before the government issues tax liens, the negative financial impact on taxpayers decreases. Likewise, some taxpayers can have tax liens withdrawn because the Fresh Start program expanded direct debit payments to six years. By giving taxpayers more options to pay, financial crises for those with tax debts of $25,000 or less is avoided. When the IRS withdraws a tax lien, they are required to notify credit agencies regarding the withdrawal resolution. Even though you receive a copy of the withdrawal notice, you should verify that credit bureaus update their reports. Withdrawing a tax lien is good news because it’s like the event never happened!
When meeting the following requirements, you can request a lien withdrawal by filling out Form 12277. You are still liable for any debt, but you remove the lien from your credit report.
- A tax release has been issued signifying you have resolved the tax debt.
- You have filed tax returns for the past three years.
- If applicable, you are current on estimated tax payments and federal tax deposits.
- You have made three direct debit payments on your installment plan and haven’t defaulted on a previous installment agreement.
Once the IRS approves your withdrawal request, they will issue Form 109169(c) with the local county office where the Notice of Federal Tax Lien was filed and send you a copy. If you provide names and addresses of credit reporting agencies, financial institutions, and creditors, the IRS will notify them upon your request. Otherwise, it’s your responsibility to do so.
Staying Ahead of Tax Liens
Business owners are especially vulnerable when facing tax lien consequences. It’s harder to grow your business when a tax debt prevents you from moving forward financially. Thankfully, you can take steps to remediate the situation and get your business back on track. By paying the IRS what you owe and having a lien withdrawn, you can apply for a business loan to purchase equipment, hire additional staff, pay off credit cards, or simply grow your business in multiple ways. Furthermore, to help you manage your business, you can read up on business topics by signing up today for Camino Insights. The free online newsletter arrives weekly in your inbox with timely articles, resources, and tools.