Federal Tax Liens... and What You Can Do About Them!

With any tax debt comes an awkward and unwelcome house guest: A?federal tax lien.

This tax lien exists as a matter of federal law, even if you only owe the IRS one dollar. For many people, it has no impact at all on their lives. But for a small percentage of taxpayers, it can have a massive impact.

Let’s explore what this federal tax lien means for you, and briefly discuss some potential solutions to dealing with it.

Before we really get started, there’s one important distinction that needs to be made. Usually, there’s no public record of a federal tax lien. It’s not possible for anybody to find out about it…?usually.

Unfortunately, under certain conditions, especially if you owe more than $10,000, the IRS may file a written notice with the county clerk about the federal tax lien, putting it on public record for the entire world to see (something most anyone wants to avoid). Less than 5% of people with a tax debt have this public record notice filed, but for those that do, the impact on their lives can be far worse.

Good times, right? Let’s delve into what can be done about it.

What does a federal tax lien actually do?

A federal tax lien works just like any other lien. Basically, it’s a claim against your property. A tax lien takes a higher priority over some other kinds of liens but will always stay below other lien types. For example, a federal tax lien will not jump in front of a mortgage or a local property tax lien.

When a federal tax lien exists,?it covers ALL of your property. Where the mortgage on your Chesapeake house is only secured by the house itself, rather than your car, tools, collections, paycheck, etc., a federal tax lien is “secured” by?everything you own. This means the clothes on your back, the money in your checking account, your retirement accounts, even your paycheck.

Yep, that’s correct, a Federal tax lien provides the government with a claim over your paycheck. That doesn’t mean they?will?take it. It just means they?can.

If you’re one of the unlucky 5% that gets that public record filed against you, you may have other impacts in your life. Depending on your profession, it can make it difficult to obtain employment or renew professional licenses. It can also severely impact your ability to buy or sell a home, buy a car, or use other forms of credit.

For 90%+ of people, a federal tax lien is effectively harmless and has zero impact on life or business. Sometimes, however, the lien itself creates a bad situation. In those cases, there are things that can be done with the lien to help put you in a better position.

Lien Withdrawal

In some circumstances, it may be possible to obtain the removal of that public notice mentioned earlier. In order to achieve this, we must demonstrate two things:

1. The lien is creating a financial hardship for you.
2. Removing the lien will help the IRS get paid.

Basically, we aim to prove that the mere existence of that public notice could cause an income loss or other financial issue for you. For a business, a lien may interrupt a factoring agreement or a line of credit, which is required for the business to operate. For a person, the existence of a lien might mean the loss of a security clearance and therefore loss of a job.

Typically, if the hardship case can be made, so can the second part. If your business continues to operate, or you get to keep your job, then you can make payments to the IRS, which makes them happy.

Lien Subordination

Another possible tactic is to keep the IRS tax lien in place, but subordinate the government lien to some other lien. What this means is that we get the IRS to place themselves in second priority position, underneath somebody else.

The most common reason for doing this is to place the IRS lien secondary to a bank financing lien, such as a line of credit or a mortgage refinance. Most banks won’t lend money if they’re not in the first lien position. Thus, subordinating the tax lien keeps the bank happy by keeping their lien as first priority over the IRS.

The IRS is willing to do this because it means you’ll have access to cash to pay them, (such as from a cash-out refi on your house), or it will lower your debt payment, freeing up cash flow to make monthly payments to the IRS.

Lien Discharge

It’s not uncommon for somebody to have one particular asset worth a bit of money. Selling that asset can bring in money to help pay down the tax debt, or selling the asset will eliminate the monthly payment on the asset, thereby allowing you to put that money towards the IRS bill each month.

Do you see how this ultimately keeps coming back to the IRS getting paid somehow?

Here’s an example:?Let’s say you own a vintage 1965 Ford Mustang. It’s worth 60,000, but you still owe 30,000 on it, and you’re making 500 per month payments. You obviously don’t want to sell this car, but it would make life a lot easier if you did, since you owe the IRS 100,000 and they are going to start taking your paycheck via wage garnishment if you don’t do something.

So, sadly, you decide to sell the Mustang. The problem is that?the IRS lien prevents you from selling it. Not only does your loan company have a lien on the car, but the IRS lien also covers it, too. So, you need to remove the IRS lien in order to sell the car. The process of removing the IRS lien from this one piece of property is called a?lien discharge, and you obtain a Certificate of Discharge releasing this one asset only from the lien.

With the Certificate of Discharge in hand, you can sell the car, pay off the car loan, and then have 30k leftover from the sale to pay down your IRS debt. Plus, 500 per month is freed up to pay the government with. It’s not an ideal scenario for most people, giving up a beloved possession, but it’s better than the IRS seizing most of your paycheck every month.

Anchor on this:

Remember, an IRS tax lien itself is usually harmless —?to most people. It’s the things that come several months?after?the lien filing that really cause trouble. However, since the lien is there and if the path to resolving your tax debt involves doing things with assets, or banks, keeping financing open, or preventing loss of your job, there are options available to address the lien.

If you’re behind with IRS filings or tax payments and you’re ready to put your tax problem behind you, let’s talk!

Jim Flauaus, EA

Enrolled to Practice before the Internal Revenue Service