How to Get Rid of a Federal Tax Lien

A federal tax lien is a legal claim the U.S. government places on your property when you fail to pay a tax debt. This lien secures the government’s interest in your assets, including real estate, personal property, and financial accounts, until the debt is satisfied. The presence of a tax lien can significantly affect your financial standing, making it difficult to sell property, obtain credit, or secure loans.

Understanding Your Tax Lien

Becoming aware of a federal tax lien often occurs when the Internal Revenue Service (IRS) files a public document called a Notice of Federal Tax Lien. This notice alerts creditors to the government’s legal right to your property. While this public filing can significantly impact your credit score and ability to conduct financial transactions, the lien itself exists from the moment the tax is assessed, not when the notice is filed.

Before exploring resolution options, gather specific information about your tax lien. This includes the exact amount of the tax debt, the tax period or periods covered by the lien, and the date the Notice of Federal Tax Lien was filed. Identifying the type of tax (e.g., income or payroll) is also important as it can influence resolution strategies.

You can obtain this information by contacting the IRS directly. Another method involves requesting an IRS tax transcript, which provides a summary of your tax account for specific years. Reviewing your credit report can also reveal the filed Notice of Federal Tax Lien, showing the filing date and amount claimed.

Paying Off or Paying Down the Lien

The most direct approach to resolving a federal tax lien is satisfying the underlying tax debt. When the full amount of tax owed, along with any accrued penalties and interest, is paid, the IRS will release the lien. The IRS issues a Certificate of Release of Federal Tax Lien within 30 days after the tax liability is fully satisfied.

To ensure proper release, verify the exact payoff amount with the IRS, as interest and penalties can continue to accrue until payment is received. Accepted payment methods include direct debit from a bank account, credit or debit card payments, or mailing a check or money order to the IRS. Once processed and released, this action should be reflected on your credit report, potentially improving your credit standing.

If immediate full payment is not feasible, an installment agreement with the IRS can resolve the lien. An installment agreement allows you to make monthly payments over a period, up to 72 months, until your tax debt is paid in full. To qualify, you must be current with all filing requirements and owe a combined total of under $50,000 in tax, penalties, and interest for individuals, or $25,000 for businesses.

Apply for an installment agreement by submitting Form 9465, Installment Agreement Request, to the IRS. While an approved installment agreement does not immediately remove the tax lien, it can prevent further collection actions and lead to the lien’s release or withdrawal under specific conditions. Once the installment agreement is successfully completed and the debt is paid, the lien will be released. The IRS may also withdraw the lien once an installment agreement is established and maintained.

Resolving the Lien Through Compromise or Adjustment

An Offer in Compromise (OIC) resolves a tax liability for a lower amount than originally owed. This agreement is considered when there is doubt as to the taxpayer’s ability to pay the full amount, or when paying the full amount would create economic hardship. The IRS assesses OIC requests based on factors such as:
Your ability to pay
Your income
Expenses
Asset equity

Prepare an OIC application by compiling extensive financial documentation. This includes details about your monthly income and expenses, asset values (e.g., real estate, vehicles, financial accounts), and liabilities. This documentation helps the IRS determine your reasonable collection potential.

Submit an OIC by completing Form 656, Offer in Compromise, and including a non-refundable application fee. Include an initial payment with your application, which varies based on the type of offer and your payment proposal. After submission, the IRS will review your application, which can take several months and may involve further negotiation or requests for additional information.

Lien withdrawal is distinct from lien release; it removes the public notice of the lien, treating it as if it was never filed. The IRS may withdraw a tax lien under specific conditions, such as when it was filed prematurely or erroneously, or when withdrawal would facilitate tax collection. Another common scenario for withdrawal is when an Offer in Compromise has been accepted and its terms are met, or when a direct debit installment agreement has been approved and maintained.

To request a lien withdrawal, file Form 12277, Application for Withdrawal of Filed Notice of Federal Tax Lien. This form requires you to state the reason and provide supporting documentation. The IRS will review your application to determine if it meets the criteria for withdrawal, which can be beneficial for your credit standing and ability to secure financing.

Discharging the Lien Through Bankruptcy

While bankruptcy can provide relief from various debts, its impact on a federal tax lien is complex and limited. Filing for bankruptcy does not automatically discharge an existing federal tax lien. The lien remains attached to assets owned by the taxpayer before the bankruptcy filing, even if the underlying tax debt is discharged.

For a tax lien to be potentially eliminated or discharged in bankruptcy, specific conditions must be met regarding the age and nature of the tax debt. The tax debt must be at least three years old from the tax return’s due date, including extensions. The tax return must have been filed at least two years before the bankruptcy petition, and the tax must not have been assessed within 240 days prior to the bankruptcy filing or during the bankruptcy case itself.

Even when the underlying tax debt is discharged in bankruptcy, the federal tax lien continues to attach to assets existing at the time the bankruptcy case was filed. This means if you owned property before bankruptcy, the IRS lien can still be enforced against it, even if you are no longer personally liable for the tax debt. However, a federal tax lien does not attach to assets acquired after the bankruptcy filing, provided the underlying tax debt is discharged.

Navigating the interplay between federal tax liens and bankruptcy is a complex process. The specific rules and outcomes can vary significantly depending on the type of bankruptcy filed and the circumstances of the tax debt and assets involved. Given the complexities, seeking assistance from a qualified bankruptcy attorney or tax professional is advised to understand the potential impact on your specific situation.