Federal Tax Liens

A federal tax lien is the government’s legal claim against a taxpayer’s property when a federal tax debt remains unpaid. It is one of the most important consequences of unresolved IRS collection because the lien can affect property the taxpayer currently owns as well as certain property and rights to property acquired while the lien remains in effect.

A federal tax lien is not the same thing as an IRS levy or seizure. A lien establishes the government’s interest in property and protects its claim against other creditors. A levy is an enforcement action through which the IRS actually takes property or rights to property to satisfy the tax debt. Understanding this distinction is important because receiving notice of a federal tax lien does not mean that the IRS has seized your property, but it does mean that the underlying tax liability has reached a stage where it should not be ignored.

The federal tax lien generally arises after the IRS assesses a tax liability, sends a Notice and Demand for Payment, and the taxpayer fails to pay the balance in full. The lien attaches to the taxpayer’s property and rights to property. The IRS may also file a Notice of Federal Tax Lien (NFTL) in the public record. Filing the NFTL puts other creditors on notice of the government’s legal claim and helps establish the IRS’s priority against certain competing interests.

The distinction between the federal tax lien itself and the Notice of Federal Tax Lien is important. The lien arises by operation of law when the statutory requirements are met. The NFTL is the public document filed by the IRS to notify creditors and other interested parties of that lien. This distinction also becomes important when considering options such as lien release and withdrawal, because they do not mean the same thing.

How a Federal Tax Lien Can Affect Your Property

A federal tax lien can attach broadly to property and rights to property belonging to the taxpayer. Depending on the circumstances, this may include real estate, vehicles, financial assets, business property, accounts receivable, and other property interests. The lien can also attach to certain property acquired after the lien arises while the tax liability remains collectible.

The existence of a lien does not mean that the IRS automatically becomes the owner of these assets. Instead, the lien establishes the government’s legal interest in the property. This becomes particularly important when property is sold, refinanced, transferred, or when another creditor also claims an interest in it.

For example, a taxpayer who wants to sell a home may discover that a filed Notice of Federal Tax Lien must be addressed before the transaction can close. Similarly, a lien may complicate refinancing because a lender may be unwilling to make a new loan while the government’s claim has priority over the lender’s proposed security interest.

Although Notices of Federal Tax Lien no longer appear on reports issued by the major consumer credit bureaus, an NFTL remains a public record and can still affect financial transactions involving property, lenders, and other creditors.

The effect of a federal tax lien can be especially significant for business owners. A lien involving business tax liabilities may affect business property and can complicate financing, the sale of assets, or other transactions. The precise effect depends on the type of tax, ownership of the property, competing liens, and how the underlying liability arose.

What Happens After a Notice of Federal Tax Lien Is Filed?

When the IRS files a Notice of Federal Tax Lien, it generally must notify the taxpayer of the filing and of the right to request a Collection Due Process hearing. The IRS generally sends this notice within five business days after the first NFTL filing for a particular tax debt.

The deadline shown on the notice is important. A timely Collection Due Process request gives the taxpayer an opportunity to have the collection matter reviewed by the IRS Independent Office of Appeals. Depending on the circumstances, the taxpayer may be able to raise issues concerning the lien filing, propose an alternative method of resolving the tax liability, and in certain situations challenge the underlying liability.

Receiving an NFTL therefore does not mean that there are no options remaining. It does mean that the collection case has progressed and that both the underlying tax debt and the consequences of the lien should be evaluated.

Resolving the tax debt is generally the most direct way to eliminate a federal tax lien. When the liability is fully paid, the IRS generally releases the lien within 30 days. A lien may also be released when the IRS is no longer legally permitted to collect the liability or when certain other statutory conditions are satisfied.

However, full payment is not the only situation in which the effect of a filed Notice of Federal Tax Lien can potentially be addressed.

Release, Withdrawal, Discharge, and Subordination

Federal tax lien terminology can be confusing because a release, withdrawal, discharge, and subordination accomplish different things.

A lien release generally eliminates the federal tax lien when the conditions for release have been satisfied. This commonly occurs after the tax liability has been fully paid or when the IRS’s legal period for collection has ended. When appropriate, the IRS files a Certificate of Release of Federal Tax Lien.

A withdrawal is different. Withdrawal removes the public Notice of Federal Tax Lien and generally treats the notice as though it had not been filed. It does not necessarily eliminate the underlying tax liability. The IRS may permit withdrawal in certain circumstances, including situations where the NFTL was filed improperly, where withdrawal will facilitate collection, or where other statutory requirements are satisfied.

A discharge applies to specific property rather than the entire lien. This can become particularly important when a taxpayer needs to sell real estate or another asset that is subject to the federal tax lien. If the requirements are satisfied, the IRS may issue a Certificate of Discharge removing that particular property from the effect of the lien while the federal tax lien continues against other property.

A subordination also does not eliminate the lien. Instead, the IRS agrees to allow another creditor’s interest to move ahead of the government’s lien with respect to particular property. This can sometimes make a transaction such as refinancing possible when the transaction ultimately improves collection of the tax liability or otherwise meets the applicable requirements.

Determining which of these procedures is appropriate requires more than simply knowing that an NFTL exists. The amount owed, equity in the property, other creditors, proposed transaction, collection statute, taxpayer’s compliance, and the IRS’s interest all need to be considered.

Resolving the Tax Debt Behind the Lien

Addressing the lien itself is only part of the problem. Unless the underlying liability is resolved, IRS collection activity may continue even when a particular lien issue has been addressed.

Depending on the taxpayer’s financial circumstances, the underlying debt may potentially be resolved through an Installment Agreement, an Offer in Compromise, Currently Not Collectible status, full payment, or another appropriate collection alternative. In other cases, the taxpayer may need to resolve unfiled returns, correct an inaccurate assessment, or address other compliance problems before a long-term collection solution can be approved.

This distinction is particularly important with lien withdrawal. Removing the public NFTL does not necessarily mean that the tax debt has disappeared. Likewise, obtaining a discharge so that one property can be sold does not automatically resolve the taxpayer’s remaining balances.

The objective should therefore be to understand both questions: what can be done about the lien, and what will resolve the tax liability that caused the lien in the first place?

How PLUS/AUDIT Can Help

When we review a federal tax lien case, we begin by determining the actual status of the taxpayer’s IRS accounts. This may include reviewing account transcripts, identifying the tax periods and balances involved, confirming whether an NFTL has been filed, examining relevant collection deadlines, and determining whether all required tax returns have been filed.

With proper authorization, we can communicate with the IRS on the taxpayer’s behalf and evaluate the available collection and lien-resolution options. When property is being sold or refinanced, this may include determining whether a discharge or subordination should be considered. In other circumstances, we may evaluate whether the requirements for withdrawal or release can be satisfied.

At the same time, we evaluate the underlying tax liability and the taxpayer’s financial circumstances to determine whether a broader collection solution may be appropriate. Depending on the case, this may involve an Installment Agreement, Currently Not Collectible status, an Offer in Compromise, an administrative appeal, or another resolution strategy.

A federal tax lien should not be viewed in isolation. It is usually a consequence of a larger unresolved collection matter, and solving that underlying problem is often the most important part of preventing additional IRS enforcement.

If you have received a Notice of Federal Tax Lien, are attempting to sell or refinance property subject to an IRS lien, or need to determine whether a lien may qualify for release, withdrawal, discharge, or subordination, the situation should be reviewed before important deadlines or transactions are allowed to pass.

PLUS/AUDIT TAX P.C. assists individuals and businesses in Colorado and throughout the United States with federal tax liens, IRS collection matters, and tax resolution.