What is a Federal Tax Lien / Notice of Federal Tax Lien – Form 668(Y)(c)
How a Federal Tax Lien can affect you
How to avoid a Federal Tax Lien
How to get rid of a Federal Tax Lien
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What is a Federal Tax Lien / Notice of Federal Tax Lien – Form 668(Y)(c)
A Federal Tax Lien is issued when a taxpayer owes money to the IRS and previous attempts by the IRS to collect that money have been unsuccessful. The lien gives the IRS rights to ALL of the taxpayer’s property AND rights to property, including: real estate, personal property, and financial assets. Form 668(Y)(c) - Notice of Federal Tax Lien is filed in the public record to let other creditors know that the IRS is claiming rights to your property.
Lien vs. Levy
A lien is not a levy. A lien secures the government’s interest in your property when you don’t pay your tax debt. A levy actually takes the property to pay the tax debt. If you don’t pay or make arrangements to settle your tax debt, the IRS can levy, seize and sell any type of real or personal property that you own or have an interest in.
How does a Federal Tax Lien affect me?
Once a lien is filed by the IRS, it is very hard to remove. It is always better for a taxpayer to address the issue BEFORE the IRS issues a lien. Avoiding a Federal Tax Lien is usually the best option.
A lien can and will affect you in the various ways:
Your Assets – The lien gives the IRS a right to ALL of your property (your cars, bank accounts, the cash surrender value of your life insurance policies, even your home). As long as the lien remains, the IRS will also get this right to all property you gain in the future.
Your Credit – Because the lien gives the IRS a right to your property, other lenders will know that you will not be able to pay them back UNTIL you pay the IRS first. This can limit your ability to get a mortgage or refinance your existing mortgage, get loans or credit in the future, and it can also lower your credit score.
Filing for Bankruptcy is NOT a guaranteed fix! Your debt to the IRS, the IRS’s lien on your assets, and the Notice of Federal Tax Lien filed in the public record may all continue even after bankruptcy.
How to avoid a Federal Tax Lien
CP501 and CP502 Notices: When a taxpayer owes the IRS, the IRS will attempt to collect that debt by mailing notices to your home address. The first notice is usually a CP501 Notice, which will tell you how much the IRS believes you owe for a given year. Each year is treated separately, and so you if you owe for 5 separate years, you may receive five separate CP501 Notices at once. The IRS will also tell you the total you owe, which generally includes the original balance due and the interest and estimated tax penalties that have accrued since the original due date.
A CP502 Notice is essentially a second warning, stating the same information as the CP501 Notice. However, because more time has passed, the amount owed in the CP502 Notice will often be greater than that in the CP501 Notice, due to the growth of penalties and interest.
Avoiding a tax lien: When a taxpayer receives these notices, it is important that action is taken AS SOON AS POSSIBLE in order to avoid the IRS issuing a tax lien. Taxpayers are usually given three options:
1. Pay the balance in full,
2. Set up a payment installment plan, or
3. Dispute the balance owed.
If you can pay the total amount owed, that will immediately resolve the issue and avoid the lien. However, if you cannot pay the total amount owed or if you dispute that you owe as much as the IRS claims, you should consult a tax law professional immediately.
How to get rid of a Federal Tax Lien
It is easier to avoid a lien than it is to get the IRS to remove their lien. Once a lien is issued, you have few options other than to pay the full amount owed. That is why it is so important to begin to address the issue before the IRS can issue the lien.
However, there are some circumstances under which the IRS may show some leniency towards a taxpayer, and the following is a list of some options you may have available to you after a lien is filed:
Appeal the filing of the lien
Also known as a Collection Due Process (CDP) hearing, this process involves a conference with an impartial IRS employee who has no prior involvement with your case. During this hearing, a taxpayer may argue any of the following:
1. The validity, sufficiency, and timeliness of the CDP Notice and the request of the CDP hearing;
2. Any relevant issue relating to the unpaid tax raised by the taxpayer at the hearing;
3. Any appropriate spousal defenses raised by the taxpayer at the hearing;
4. Any challenges by the taxpayer to the appropriateness of the collection action;
5. Any offers for collection alternatives made by the taxpayer;
6. Whether the proposed collection action balances the need for the efficient collection of taxes with the concern of the taxpayer that the collection be no more intrusive than necessary.
Discharge the lien from specific property
Because a lien applies to ALL property and rights to property, a Discharge of the lien from a specific piece of property may be necessary (for example, if the IRS has already issued a lien against you, but now you want to sell your house).
Each application for a discharge of a tax lien releases the effects of the lien against one piece of property. Note that when certain conditions exist, a third party may also request a Certificate of Discharge.
If you are selling your primary residence, you may also apply for a relocation expense allowance. Certain conditions and limitations apply.
Subordination of lien
Subordination does not remove the lien; it allows other creditors to move ahead of the IRS, which may make it easier for you to get a loan or mortgage despite the IRS lien.
Bonding out of lien
The IRS will release the lien if it accepts a bond that the taxpayer submits, guaranteeing payment of the debt. In addition, the taxpayer must pay all fees that a state or other jurisdiction charges the taxpayer to file and release the lien. These fees will be added to the amount the taxpayer owes.
Expiration of the Statute of Limitations
The IRS has 10 years to collect a debt after it has been assessed. Any lien will usually be released automatically after 10 years has passed. The taxpayer may sue the federal government for damages if the IRS knowingly or negligently does not release a Notice of Federal Tax Lien when it should be released.