What is a Federal Tax Lien?
According to the IRS:
"A Federal Tax Lien is the government’s legal claim against your property when you neglect or fail to pay a tax debt. The lien protects the government’s interest in all your property, including real estate, personal property and financial assets. A federal tax lien exists after the IRS:
- Assesses your liability;
- Sends you a bill that explains how much you owe (Notice and Demand for Payment); and
- You neglect or refuse to fully pay the debt in time.
The IRS files a public document, the Notice of Federal Tax Lien, to alert creditors that the government has a legal right to your property."
How does a federal tax lien affect your credit score?
A client of ours, who monitors his credit score regularly shared this information with us:
"Before a Federal Tax lien was filed my credit score was 710. After a Federal Tax Lien in the amount of $36,000 was filed, my credit score dropped to 560. It lowered my credit score by 150 points."
Once a Notice of Federal Tax Lien is filed against you getting a traditional loan becomes difficult, if not impossible. We are not quite sure how ruining your credit make it easier for you to pay back the IRS, but regardless, that is the law.
So how can you remove a Federal Tax Lien from your credit report?
The IRS has initiated something called the Fresh Start program. It allows liens to be withdrawn if a tax debt is paid in full. In addition, if you are in a direct debit installment agreement with the IRS, you may request a lien withdrawal if these conditions are met:
- The current amount you owe must be $50,000 or less.
- If you owe more than $50,000, you may pay down the balance to $50,000 prior to requesting the lien withdrawal to be eligible.
- Your Direct Debit Installment Agreement must full pay the amount you owe within 60 months or before the Collection Statute expires, whichever is earlier.
- You must be in full compliance with other filing and payment requirements.
- You must have made three consecutive direct debit payments.
- You cannot have previously received a lien withdrawal for the same taxes unless the withdrawal was for an improper filing of the lien.
- You cannot have defaulted on your current, or any previous, direct debit installment agreement.
What if you don't qualify for the Fresh Start program? What can you do about a Federal Tax Lien?
If you get into Currently non-collectible status, or a partial-payment installment agreement, the IRS will file a tax lien as a matter of right. We have seen Federal Tax liens removed in a personal Chapter 7 Bankruptcy, but typically they will not be (and then you have the problem of a Bankruptcy on your credit report).
The most common way to request a removal of a tax lien when you don't qualify for the Fresh Start program is to request a lien withdrawal to show that the lien is putting your income-earning ability at risk.
The other way to remove a tax lien is to have an Offer in Compromise accepted and paid. About 2 months after an Offer in Compromise is accepted and paid, the Notice of Federal Tax Lien will automatically be released. A Release is not as favorable as a Withdrawal (A Lien withdrawal erases the existence of a tax lien on your credit report, a release shows there was a debt and it is paid in full).
When going through this process of lien withdrawal, it's important to dot every i and cross every t…and perhaps anticipate that the IRS will kick something back at you on a technicality. If you need assistance with a tax debt or lien issue, contact us for a complimentary consultation.
Source: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Understanding-a-Federal-Tax-Lien
