Taxpayers looking to obtain lien release can expect a difficult road ahead if they lack knowledge in a few important areas.
In this article:
- What Is a Tax Lien and a Tax Levy?
- What Can Taxpayers Do to Get a Release of Lien?
- How Can a Taxpayer Get a Tax Lien Withdrawal?
- Who Has Eligibility for a Lien Release?
- When Will the IRS Release a Tax Lien?
- Where Can a Taxpayer Get the Release of Lien Form?
- How Can Taxpayers Avoid Getting a Lien in the First Place?
Lien Release | Questions Taxpayers Should Ask Before Filing
What Is a Tax Lien and a Tax Levy?
When a taxpayer has financial responsibilities left unpaid to the IRS, a tax levy or lien applies.
An IRS tax lien functions as an assurance for the IRS that they will first priority for any unpaid tax debt against other creditors on the assets of the delinquent taxpayers.
The tax lien process formally starts upon receipt of the Notice of Federal Tax Lien (NFTL). Generally, the taxpayer receives five prior correspondence and notices from the IRS before the NFTL arrives.
On the other hand, an IRS tax levy follows after the tax lien. The tax levy proceedings take and distribute the assets that have a lien to satisfy the tax debt.
A tax lien can take 30 days before the IRS takes off the tax claim. The tax levy is the final act, as the IRS takes assets to pay the debt.
A tax lien affects your credit score negatively.
By itself, a tax levy does not impact a credit score. However, almost all tax levies start from a tax lien.
Taxpayers may have a negative score not because of the tax levy, but because of a tax lien that preceded the tax levy. Of course, the IRS may opt to go directly to a tax levy rather than go through the (usually) long tax lien process.
Also, the IRS usually sends a tax lien for unpaid taxes of $10,000 or more. However, there are some instances where a tax lien applies for a lower tax amount.
The tax lien not only considers the unpaid taxes but also all the fees and penalties. Tax liens can impact the taxpayer in other ways, like the cancellation of passports for flight-risk taxpayers and wage garnishment plans.
To clarify, tax liens and levies are federal actions. State levies and liens do exist and have their own state tax forms and procedures to follow.
Once a tax lien starts, the taxpayer moves from negotiating with the IRS to applying for a release of lien.
What Can Taxpayers Do to Get a Release of Lien?
The taxpayers have two options available to them:
One, the IRS can release an existing tax lien through IRS Form 12277. Another option lies in withdrawing the tax lien.
Taxpayers should aim to have a lien withdrawal rather than a tax lien release.
Credit reporting agencies treat a withdrawal differently from a release. With a withdrawal, the IRS cancels the lien from the start as if the lien did not exist at all — which means your credit score remains unaffected.
On the other hand, a tax lien release will stay on your record for seven years. This mark on a credit score affects the trust rating for a taxpayer negatively.
How Can a Taxpayer Get a Tax Lien Withdrawal?
The IRS can withdraw the NFTL when:
- The IRS did not go through the process properly by incorrectly sending notices, or providing inaccurate essential information in the tax file;
- The taxpayer has satisfied the tax debt;
- If paying in full is not tenable, the taxpayer has a different payment plan or agreement with the IRS;
- The IRS deems that withdrawing the NFTL can help hasten the payment of the tax debt; or
- Withdrawal of the NFTL will work out a win-win situation, with the consent of the taxpayer and all parties in the process.
The IRS uses Form 10916(c) for withdrawing the NFTL. They send the form to the court that has jurisdiction over the properties with the lien.
Who Has Eligibility for a Lien Release?
Only taxpayers who have satisfied the tax debt can apply for a tax release. They have to fill out IRS Form 12277 and submit to the IRS.
On their end, the IRS sends the Form 10916(c) to the appropriate registry or court. Once the court or registry receives the form, the taxpayer waits for 30 days on average before the lien drops from the property.
It bears emphasis that while the tax lien may no longer appear on the asset 30 days after receipt of Form 10916(c), the credit score may still record the lien. The tax lien can remain in credit score reports for seven years before dropping out.
Depending on how taxpayers negotiate with the IRS, some can apply for a payment plan or successfully agree on an Offer In Compromise.
Lien release eligibility starts when the taxpayer satisfies the unpaid taxes or gets a different agreement from the IRS. Do note that most tax lien proceedings start after five notices sent and with an unpaid tax amount of $10,000, including penalties and taxes, so a taxpayer may not have to worry about a tax lien at the moment.
When Will the IRS Release a Tax Lien?
The releasing of the tax lien can take around 30 days. However, upon receipt of the NFTL, the government gives the taxpayer 10 days to satisfy the debt first before applying the tax lien.
Upon satisfaction of the unpaid tax or satisfying any requirements for a tax lien withdrawal, the taxpayer can expect the assets to no longer have any liens in 30 days.
Where Can a Taxpayer Get the Release of Lien Form?
The IRS Lien Release form is Form 12277. The taxpayer can download the form from the IRS website.
However, only those who have satisfied or have reached an agreement with the IRS can have a valid form.
Remember, the IRS tax lien release form functions as the start of dropping the tax lien. The IRS still has to inform the courts to release the legal lien from the registry. This means the IRS can simply ignore an invalid form 12277, which is a waste of time and energy for the taxpayer.
How Can Taxpayers Avoid Getting a Lien in the First Place?
Taxpayers can prevent a tax lien, or any kind of levy, by:
- Ensuring that payments for taxes are sent properly and on time;
- Minimizing penalties and fees by paying penalties with higher interests first;
- If paying in full is difficult, negotiating for an offer in compromise or a payment installment plan;
- Opting for quarterly tax payments rather than an annual one to show the IRS good faith and sustainability; and lastly,
- Taking all deductions and benefits that can lower the tax bracket.
The sooner a taxpayer takes care of an IRS lien, the better their finances will be. Armed with the knowledge of tax levies and liens, avoiding and solving a tax lien now becomes clearer and doable.
Do you have any tips about tax liens and levies? Have you gone through a lien release process? Let us discuss in the comments section below.
If you owe back taxes, visit taxreliefcenter.org for more information on tax relief options.