there’s more than one route to satisfying the irs collection division.
by eric l. green
irs tax liens can have a profound impact on an individual’s situation, affecting their ability to get loans, sell property or engage in business activities. as such, it is crucial for individuals to understand how irs tax liens work and the options available for getting rid of them.
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in this article we discuss approaches and factors to consider when dealing with irs tax liens, offering insights and advice to help taxpayers navigate this process.
understanding irs tax liens
before discussing ways to remove tax liens, it is important to get a basic understanding of what they entail. a tax lien represents a right against a taxpayer’s assets, and is used by the irs to secure its interest in the taxpayer’s assets – both those owned at the time and those later acquired.
the federal tax lien arises automatically by statute when demand for payment is made by the irs and no payment is forthcoming. however, nobody knows about the tax lien except the irs and the taxpayer themselves. often, even the taxpayer does not know about it, hence the irs may decide to file a notice of federal tax lien (nftl) to let other creditors know that the irs has an interest in the taxpayer’s assets.
dealing with liens
here are four key ways to deal with a federal tax lien:
- obtaining a release of lien
- discharging assets from it
- subordinating the lien to a third-party lender
- having the irs withdraw the notice of federal tax lien
release of lien and discharging assets
essentially, when the taxpayer either pays the debt in full or compromises the tax debt with the irs to settle the outstanding debt, the irs will issue a release of tax lien within 30 days after the debt is satisfied.
it is important to know that the tax lien is meant to protect the government’s interest in the taxpayer’s assets, not to prevent a sale. hence, the irs is generally willing to allow the asset to be discharged so long as the irs obtains payment for whatever equity the taxpayer would have received, if anything, regardless of whether the debt is paid in full or not. so, if your client is involved in a short sale where there is no equity in a property, the irs will confirm this and provide a release so the property can be sold.
here’s an example:
a taxpayer owes the irs $400,000 and they own a home worth $500,000 with the following encumbrances, in the following priority order:
- first mortgage to a bank with a balance of $325,000
- a home equity line for $25,000 that is completely used up and outstanding
- a mechanic’s lien from a plumber filed shortly after the home equity line because the owner didn’t pay the plumber $2,500 for the expansion of the home
- the irs notice of federal tax lien for $400,000
then there is a buyer willing to pay the $500,000 fair-market value, and the expected closing costs are $50,000. in this case the taxpayer may seek to have the home discharged from the tax lien so it can be sold to a third-party buyer for agreeing to pay the irs $97,500, the balance of the funds after the closing costs and the priority debts are paid.
once the irs confirms the balances due and priority, and that the contract is a legitimate offer for fair value, it will agree to the discharge and accept the $97,500 payment. the property would then go to the buyer free and clear of any lien and the taxpayer/seller will then owe the irs the balance of $302,500 (which is the $400,000 they originally owed, less the payment from the sale).
subordinating a tax lien
what about a refinance? what do you do if you have another lender (or an existing one) who wishes to lend money, but is concerned about the irs lien that is ahead of it?
if the loan improves irs collection by either helping pay down the tax debt, creating equity to help secure the tax debt or enabling the taxpayer to increase the monthly payments to the irs, then generally, the irs agrees to subordinate its lien to the new creditor.
again, at the heart of all of this is the irs collection division’s wish to collect money, and anything that improves collection is generally good in its book. what you need to do when seeking a subordination is prove to the irs that the subordination is in its best interest because it improves collection, for example:
- the third-party lender is lending money that will be used to pay down the irs tax debt.
- the third-party lender is lending money that will be used to improve the property and, therefore, the value underpinning the irs lien.
- the lender is refinancing the existing loan, reducing the mortgage payments so the taxpayer can, therefore, increase the monthly installment agreement payments to the irs, thus paying off the tax debt faster.
requesting withdrawal of a federal tax lien
taxpayers often want the nftl withdrawn both because of embarrassment and because it can prevent the taxpayer from accessing credit. if the taxpayer meets certain criteria they may request the nftl be withdrawn.
those criteria are:
- the balance owed to the irs is $25,000 or less.
- the taxpayer is in a direct-debit installment agreement.
- the taxpayer has made at least three of the installment agreement payments.
once a taxpayer has met the above criteria, they can request the withdrawal of the nftl.
conclusion
i hope you now see that federal tax liens can be dealt with once one understands that the lien is meant to protect the government’s interest. moreover, that the government is generally willing to work with a taxpayer to facilitate a sale or refinance as long as it does not damage the government’s interest.