What Are Federal Tax Liens and How Do You Resolve Them?

A federal tax lien is the government’s legal claim against a taxpayer’s property for unpaid tax debt. This claim serves as security for the debt and can affect a taxpayer’s financial life by making it difficult to obtain credit or sell property. The lien attaches to all of a person’s assets, including real estate, personal property, and financial assets. There are established procedures for taxpayers to resolve the lien and clear their financial standing with the government.

Understanding the Federal Tax Lien

A federal tax lien comes into existence automatically once three conditions are met. First, the Internal Revenue Service (IRS) must assess your tax liability by officially recording how much you owe. Second, the IRS must send you a “Notice and Demand for Payment,” a bill requesting payment. The final condition is your failure to pay the full tax debt after receiving the notice.

Once these steps occur, a statutory lien is created, which exists legally without any public filing. To make the claim known to other creditors, the IRS files a public document called a “Notice of Federal Tax Lien” (NFTL). The NFTL is filed in public records, such as a county recorder’s office, to alert lenders and buyers that the government has a priority claim against your property.

The lien applies to all of a taxpayer’s property and rights to property, including assets acquired while the lien is in effect. It covers real estate, personal property like vehicles, and financial assets such as bank accounts and stocks. For business owners, the lien attaches to business property and accounts receivable.

Resolving a Federal Tax Lien

There are several ways to resolve a federal tax lien. The most direct method is a lien release, which completely removes the lien from all of your property. A release is granted once the tax debt has been paid in full or the IRS has accepted a bond guaranteeing payment. Within 30 days of the debt being satisfied, the IRS is required to issue a Certificate of Release.

Another option is a lien withdrawal, which removes the public Notice of Federal Tax Lien (NFTL) and makes it appear as though it was never filed. This can be helpful for repairing credit. A withdrawal may be granted if the NFTL was filed improperly, if the taxpayer enters into an installment agreement, or if withdrawal is in the best interest of both the taxpayer and the government. The underlying statutory lien and tax debt remain.

Subordination of a federal tax lien allows another creditor to move ahead of the IRS in priority but does not remove the lien. This is often used when a taxpayer needs to refinance a loan to pay their tax debt. The IRS may agree to subordinate its lien if doing so will increase the chances of the tax debt being collected, giving the new creditor’s loan priority.

A discharge of property removes the lien from a specific piece of property. This is common when a taxpayer needs to sell an asset, like a house, but the sale price is less than the total tax debt. The IRS may issue a Certificate of Discharge for that property if the taxpayer pays an amount equal to the government’s interest in it or if that interest is worthless. The lien remains in effect on all other property.

Required Information for Lien Resolution Applications

To apply for a lien withdrawal, you must complete Form 12277, Application for Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien. This form requires your name, taxpayer identification number, and current address. You will also need to provide a copy of the NFTL you wish to have withdrawn and a detailed explanation of the basis for your request, referencing the specific conditions you believe you meet. Supporting documentation is often necessary.

For a discharge of property, the application is made using Form 14135, Application for Discharge of Property from Federal Tax Lien. This form requires detailed information about the property, including its legal description and estimated value. You will need to provide a copy of the NFTL, a copy of the proposed sales agreement, and a recent appraisal. The application also requires a statement explaining the grounds for the discharge, such as the proceeds of the sale being paid to the IRS.

Applications for subordination are submitted using Form 14134, Application for Subordination of Federal Tax Lien. This form requires specific details about the property and the new loan that will take priority. You must include a copy of the NFTL, the proposed new loan documents, and an appraisal of the property. A key part of the application is demonstrating how granting the subordination will ultimately benefit the government by improving the likelihood of tax collection.

The Application Process for Lien Resolution

After completing the appropriate application form, submit the package to the IRS. Applicants should refer to the most current instructions for the specific form they are using to find the correct mailing address, which is typically a centralized processing center. It is important to ensure the submission package is complete, as missing information can delay the processing of your request.

Processing times for lien resolution applications can vary. For applications related to a property sale, the IRS advises submitting the request at least 45 days before the transaction date. During the review, the IRS will determine if you meet the requirements for the requested action. If additional information is needed, the IRS may contact you or your authorized representative.

If your application is approved, the IRS will mail you the appropriate certificate, such as a Certificate of Withdrawal, Certificate of Discharge, or Certificate of Subordination. You may need to file this certificate with the same public records office where the original NFTL was filed. If your application is denied, the IRS will send a letter explaining the reason for the denial and providing information on your appeal rights.