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IRS Tax Liens and Levies: Part 1

By Michael Murray, North Carolina Tax Controversy Attorney

IRS Tax Liens 

In this two-part series, we are going to take a closer look at IRS tax liens and levies. Let’s start by differentiating between an IRS tax lien and a local property tax lien. Property owners must pay property taxes to their local government to generate money for schools and public services. When a property owner fails to pay these taxes the government can place a tax lien on that property for the overdue amount.

In this article, we are focusing on federal tax liens issued by the IRS as a legal claim against your property when you neglect to pay an income tax debt. These are different that the property tax liens referenced above.  IRS tax liens are very broad liens against all of your property – real, personal and financial assets. The purpose of the tax lien is to secure payment of the debt over other creditors. The lien also attaches to rights to property and after acquired property.

These federal tax liens will last until satisfied or the statute of limitations on collections expires. For a tax lien to occur the IRS must assess your liability and send you an official Notice and Demand for Payment. Once you neglect or refuse to fully pay the debt in time the IRS can place a lien against your property. When the IRS files a tax lien, all the creditors are notified about the claim against all property, including property that is acquired after the lien was filed.

The ABC’s of How a Lien Affects You

Assets: A lien will attach to all of your assets such as property, securities and vehicles and future assets acquired during the duration of the lien.

Bankruptcy:  A tax debt lien and notice of federal tax lien may continue after filing for bankruptcy.

Credit: An IRS tax lien will negatively impact your credit rating and may limit your ability to get additional credit. The IRS lien also moves ahead of other creditors in line of priority of payment.

How to Avoid an IRS Tax Lien

You can avoid a federal tax lien by simply filing and paying all of your taxes in full and on time. If you are not able to pay on time, there are options available such as an Offer in Compromise, where the amount is decreased based on proving financial hardship,  and Installment Agreements which set up a payment plan that allows you more time to pay off the debt.  An experienced tax controversy attorney can help you negotiate these which can help you avoid a tax lien.

Ways to Get Out from Under an IRS Tax Lien

  • Pay off the entire amount owed. 

Someone in debt with the IRS can pay the amount owed in full and the IRS will release the tax lien within 30 days after the payment. 

  • Sell Property

The taxpayer can sell off the property and apply for a certificate of discharge. The application for certificate of discharge releases the lien against that property in exchange for the fair market value of the IRS’ interest in that real property. To complete the application you need to attach the deed to the property, an Appraisal, the county valuation,  contract to sell,  the title report and proposed closing statement. When the sale is completed, provide a copy of the new recorded deed to the IRS so that the actual tax lien gets discharged.

  • Subordination

Subordination is an alternative where you make the federal tax lien secondary to another lien.  This usually occurs during the negotiation process of an offer in compromise or installment plan. Subordination does not remove the lien. It only allows other creditors to move ahead of the IRS which may make it easier to get a loan or mortgage.

  • Lien Withdrawal

Withdrawals may occur if there is an agreement on the payment being made in installments to clear off the debt on the lien or if the notice was filed incorrectly or if the withdrawal will speed collection of the tax. The public notice of federal tax lien is withdrawn which assures that the IRS is not competing with other creditors for your property; however you are still liable for the amount due. 

Two other withdrawal options resulted from the Fresh Start initiative:

– if your tax liability has been satisfied and your lien has been released  and you are in compliance for the past three years in filing all returns and your current estimated tax payments and federal tax deposits are up-to-date then the IRS may withdraw the notice of federal tax lien.

– 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. Some restrictions apply so seek advice from an experienced tax attorney. 

Lien v. Levy

 A lien is different from a tax levy. A lien secures the government’s interest in your property when you fail to pay your tax debt. A levy actually allows the government to take the property to satisfy the tax debt. In the second part of this two-part series we will discuss in more detail tax levies.

 If you owe money to the IRS or the North Carolina Department of Revenue and need assistance in helping to negotiate a payment strategy or if a tax lien has been filed against your property please contact the experienced attorneys at Murray Moyer, PLLC for a consultation.