- 1 How to Release a Federal Tax Lien
- 2 How to sell an asset that is subject to a Federal Tax Lien
- 3 What You Should Know About Federal Tax Liens
How to Release a Federal Tax Lien
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If you owe past due taxes the IRS will file a Notice of Federal Tax Lien with your county clerk. This notice will show on your credit report and hurt your chances of obtaining new credit and put your
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How to sell an asset that is subject to a Federal Tax Lien
If you owe taxes to the IRS, a tax lien automatically arises against you and attaches to just about everything you own. This is sometimes called a secret lien since the government’s claim does not initially appear in any public records. Rather, the lien automatically comes into existence when the tax liability is assessed. Eventually, if you do not pay the amount owed, you will get a letter in the mail demanding you pay the amount owed and stating that the IRS may file a notice of your tax debt in the public records offices where you live. This notice is officially called the Notice of Federal Tax Lien.
Asset Subject to a Notice of Federal Tax Lien
The Notice of Federal Tax Lien is typically filed in your Secretary of State’s office and may also be filed at the appropriate county clerk’s office if real estate is involved. The Notice of Federal Tax Lien puts the public on notice that you owe the IRS money, and that the IRS has rights to your property, just like a recorded mortgage.
A Notice of Federal Tax Lien filed against you can significantly harm your credit, and make it difficult for you to finance any purchases on credit or refinance your house. If you have a chance to be proactive, a good tax attorney or other qualified tax professional may be able to help you avoid a Notice of Federal Tax Lien in the first place. But, if you have not been so proactive, and you are now faced with a Notice of Federal Tax Lien, don’t despair. You still may have options.
You may want to first consider why you want to sell the property in the first place. Perhaps you are selling your motorcycle to help pay off your IRS debt, or maybe you are selling your house boat to get out from underneath large monthly payments to the bank, or maybe you are lucky enough to be selling your asset to make some money for yourself. It is first best to uncover your motive for wanting to sell your property. It also may be a good time to consult with a tax attorney to make sure that your motive will be accomplished by selling your property, and to investigate if possibly there is a better strategy to achieve your end goal.
Once you have confirmed that selling your property is the best option for you to achieve your goal, then the question becomes — how do you get the tax lien removed from the property in question so the buyer can rest assured that the property will be free of any tax liens when the property is transferred to them? It is important to note that if property transfers to the buyer with the tax lien attached to it, the IRS may have the right to seize the property from the buyer. Therefore, most buyers are going to want assurance that the tax lien will be removed from the property. Alternatively, you run the risk that the buyer will sue you in the event that the IRS seizes the property from the buyer after you complete the sale.
Of course, the first and most obvious solution is to pay the tax in full. Once you have paid your debt in full, the IRS must record a Satisfaction of Lien within 30 days of full payment. This will remove the lien from the property.
If you don’t have enough money to pay your back taxes in full, you can still sell the asset free and clear of the tax lien so long as the IRS approves an Application for Certificate of Discharge of Federal Tax Lien. Brave do-it-yourselfers might endeavor to navigate this process without assistance. Many others seek assistance from a tax attorney or other qualified tax professional.
The IRS is likely to discharge the asset from the lien (allow the buyer to take ownership free and clear of the tax lien) if the asset is sold for fair market value (or close to fair market value) and the proceeds of the sale of the asset are used to pay down the IRS taxes owed.
For example, let’s say you own a 2011 Toyota 4Runner that you want to sell to your neighbor for $15,000, but there is a Notice of Federal Tax Lien filed against you in the amount of $25,000 since you owe the IRS $25,000 in taxes. Let’s say that there are no other secured interests, such as a bank loan, against the 4Runner.
You or your tax professional would first submit the Application for Certificate of Discharge to the IRS. In the Application, you would indicate your desire to sell this vehicle for $15,000 which, you agree, would be paid to the IRS in exchange for discharging the vehicle from the tax lien. Assuming the IRS approves the Application, it will issue a written commitment promising to discharge the vehicle from the tax lien upon payment of $15,000. Then, upon payment of $15,000, the asset will be discharged from the lien and the $15,000 payment will be applied to the $25,000 that you owed. In other words, you would now owe the IRS only $10,000.
I recommend submitting something such as a blue book value analysis with the Application to substantiate that the sale price is a fair price. If there is no blue book for the type of asset you wish to sell, do your best to prove that the sale price is a fair price. Note that the IRS could potentially require an appraisal—conceivably even two appraisals–if it has reason to doubt that the sale price is fair. If the property to be sold is real estate, an appraisal is often required.
Although it may seem cumbersome and intimidating to get a lien removed from an asset to sell the asset free and clear, the process is actually quite streamlined and can be efficient if you get help in getting it done the correctly. The lien should not be an insurmountable obstacle if you want to transfer real property, personal property or even a business.
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What You Should Know About Federal Tax Liens
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When you don’t pay your federal taxes, the government will eventually file a tax lien against you. A tax lien is the first step the IRS takes to begin the forcible collection of tax debt. It secures the government’s right to your personal property.
Here’s a closer look at how the government files tax liens, what can happen after one is filed and how you can get one removed.
To receive a lien, you first have to be charged a tax. Most people are familiar with this process. When you file your tax return and owe the IRS money, you’ve been assessed taxes. If you don’t pay the amount you’ve been assessed when you file, a lien could eventually come into play.
There is a statute of limitations on tax collection. The IRS has 10 years from the date of assessment to collect unpaid taxes.
If you fail to pay your taxes, the IRS will send you a letter every 30 days, called a Notice and Demand for Payment.
Eventually the IRS will send you one last letter, the Final Intent to Levy notice, indicating the agency’s intent to levy, or legally seize, your property to satisfy your tax debt. You have 30 days from the date of that letter to either pay your taxes or appeal the assessment.
If you haven’t paid or appealed within about nine months after the tax was assessed, the government will file a lien against you in court. A lien is a public document and is also called a Notice of Federal Tax Lien. It lets other creditors know that the government has a legal claim to your property. A lien covers all of your assets, such as your home, investments and vehicles, and it includes any property you acquire while the lien is in place.
Once the IRS files a lien, it can begin collecting on the debt by levying your bank accounts and property, such as homes and automobiles, and garnishing your wages, or seizing your accounts receivable, if you own a business.
A lien becomes a part of your credit history. Having one could cause you to be denied credit, and it could affect your spouse if the lien is attached to property you own together. In addition, it’s public information; your employer, clients or customers (if you’re self-employed) can find it.
To get rid of a lien, you have to satisfy your tax debt in full. You can do this by paying the debt or allowing the IRS to seize your property.
The IRS rarely removes liens unless you’ve paid the debt or the lien is hindering your ability to receive income. But depending on your circumstances and eligibility, the IRS might help you mitigate the lien. Options, as outlined by the IRS, include:
- Discharge of property. This process removes the lien from a specific property named in a Certificate of Discharge.
- Subordination. In this case, the lien remains, but other creditors are allowed to move ahead of the IRS. This could make it easier for you to get a loan or a mortgage.
- Withdrawal. A withdrawal removes the lien and, thus, the IRS isn’t competing with other creditors for your property. You’re still liable, however, for the amount owed.
Once your tax debt is satisfied, you have to ask the IRS to remove your lien by filing a form. The lien should be removed within 30 days. And once it is, you’ll have to alert the various credit reporting agencies.
Fortunately, you can resolve tax debt issues before you ever receive a lien by asking the IRS:
- For permission to pay your debt in installments.
- To settle your debt for less than the amount you owe.
- To be put on non-collectible status, if you’re unemployed or underemployed. That means that the agency will not try to collect taxes from you until your status changes.
Of course, it’s best not to receive a notice of a lien filed in the first place. But if you do, contact a tax professional who can help you understand your next steps.