How to Remove an IRS Federal Tax Lien
The IRS had recently increased its lien filing threshold from $5,000 to $10,000. What this means is that the IRS will typically not file a lien if your tax liability is less than $10,000. Keep in mind that this is a general rule and circumstances do exist which may warrant lien issuance even if balance is less than $10k.
Nevertheless, if a taxpayer finds himself/herself in the unfortunate position of having an IRS Federal Tax Lien filed against their assets, certain steps can be taken to release or withdraw the lien.
First, a distinction must be made between a tax lien release and lien withdrawal. Essentially, a lien release lifts the lien automatically once the underlying liability is satisfied (i.e paid in full or collection statute expires). The record of the lien will then stay on the taxpayer’s credit history for seven years after such a release. Conversely, a lien withdrawal goes a step further and not only releases the lien but also deletes any reference to the tax lien in the taxpayer’s credit history. It’s as though the lien was never filed or ever existed.
It is worth noting that the delineation between release and withdraw has recently been crossed in one specific instance. On February 24th, 2011, the IRS announced that taxpayers who pay their liability “in full” will have an opportunity to have their IRS Federal tax lien withdrawn. This new policy appears not to apply to those who have settled their liability by way of an Offer In-Compromise. Also, taxpayers must specifically request the withdrawal as it will not be done automatically, unlike the release.
Nevertheless, for taxpayers who have not paid their liability in full, there is still hope. For a lien withdrawal with an outstanding balance, the taxpayer must complete Form 12277 (Application for Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien). Within the form itself, the taxpayer must indicate that he/she falls into at least one of the following categories:
1. The filing of the lien was premature, done in error, or otherwise not in accordance with the IRS administrative procedure;
2. Taxpayer has entered into an installment agreement to satisfy the liability for which the lien was imposed;
3. Withdrawal will facilitate the collection of tax; or
4. The withdrawal of the lien would be in the “best interests” of the taxpayer and the government.
Regarding section 2, taxpayers cannot have a balance exceeding $25,000. If they do, they may make payments on the balance to bring it down to $25k. At that point, the taxpayer must enter into an installment agreement not exceeding 60 months or before the Collection Statue expires. In addition, such an installment agreement must be a Direct Debit Installment Agreement (the IRS withdraws the agreed upon monthly payment each month directly from taxpayer’s bank account) and the taxpayer must be on such an agreement for a minimum of 3 consecutive months. It must be noted that the IRS processing time to enter into a direct debit agreement may take up to 3 months. As a result, from the time that a taxpayer enters into an agreement to the date when he/she is eligible to actually apply for a lien withdrawal could take up to 6 months (3 months of waiting for processing + 3 months of direct debit payments = 6 months).
Lastly, although sections 3 and 4 above appear quite vague, a knowledgeable and seasoned tax attorney will be able to articulate a winning argument.