IRS Form 12277: Application for Withdrawal of Filed Form 668(Y)
Understanding the various IRS forms can confuse taxpayers. One form often misunderstood is IRS Form 12277, which is the Application for Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien. Understanding how and when to use this form, as well as how to fill it out, can help taxpayers improve their financial situation if they’ve faced back taxes in the past.
What is the Purpose of Form 12277?
As the title suggests, IRS Form 12277 exists to allow a taxpayer to request the removal of the public Notice of Federal Tax Lien (NFTL). An NFTL is simply the IRS recording their statutory lien interest in the taxpayer’s property. Under federal law, the IRS has a statutory lien on a taxpayer’s property after a tax liability is ten days past due. It means that the IRS has an automatic tax lien at that time. However, they must record this lien with the taxpayer’s home state to properly enforce their lien interest.
If the IRS files an NFTL, they are claiming an interest in any proceeds that come from selling assets or property to pay off taxes before the owner or other creditors would receive any of the proceeds. An NFTL does not give the IRS superior rights over all creditors. For example, generally, they would be entitled to the taxpayer’s home sale proceeds only after any mortgage holders or other creditors with superior claims are paid, depending on state law.
Does the IRS Have to Contact the Taxpayer Before Filing an NTFL?
Federal law only requires the IRS to make “reasonable efforts to contact the taxpayer” before filing the NFTL. IRS policy states that this means an NFTL can be filed any time after they send Notice CP-14 – Notice of Balance Due. A taxpayer would receive this notice in the mail after filing their taxes and not paying the liability in full. However, the usual method of the IRS is to send Notice CP-504 – Notice of Intent to Levy before they file an NFTL. Additionally, the IRS will generally automatically file an NFTL when the taxpayer enters into a collection alternative. For example, collection alternatives such as an offer-in-compromise, installment agreement, or currently not collectible status. Ultimately, failure to pay a tax liability in full by the due date will likely result in the IRS filing an NFTL against the taxpayer until the taxpayer resolves the outstanding taxes.
Adverse Effects of a Tax Lien
After the IRS files a tax lien against a taxpayer, it can be challenging to get it removed. It is also challenging for taxpayers to get back on financial track after having any collection measure taken against them by the IRS. Unfortunately, a federal lien can impact your credit. It makes it more challenging to qualify for loans or other financial options. Even some jobs require a credit check before offering employment. Therefore, having a federal tax lien on your financial record could make it harder to get a job.
Form 12277 came about from the IRS Fresh Start Initiative, which offers options to taxpayers to allow them to improve their standings with the IRS and get back on track. After resolving a tax lien, a taxpayer can file Form 12277 with the IRS to request to have the lien removed. A taxpayer may also need to take additional action since the IRS often considers other components of your credit history when reviewing your request.
Although federal taxes owed gets resolved within 30 days of payment in full, consumer and business credit reports still may reflect that you had a federal lien in the past. The mark on your credit can impact a taxpayer’s financial abilities and opportunities. It is why the IRS offers an option to have it removed, rather than have it show up on the credit report as released or resolved. Withdrawing the federal tax lien through the filing of Form 12277 can help improve a taxpayer’s credit. It can even put the taxpayer in a better situation when applying for a mortgage or another line of credit.
In What Situations Would I Use Form 12277?
Taxpayers who pay off your taxes owed will release the tax lien. However, it may still show up as something that impacted their finances in the past. Therefore, any taxpayer who has received Form 668(Y) from the IRS would likely want to consider filing Form 12277 to have it removed after resolving the taxes.
Taxpayers have options if they can’t pay the taxes they owe to the IRS. Taxpayers can file an offer in compromise or set up a payment plan if he or she is eligible. An offer in compromise is an offer that is lower than the full amount owed. If the IRS accepts a taxpayer’s offer in compromise, they are accepting the amount as payment in full. A taxpayer may qualify for a payment plan if they meet the IRS criteria for this option. The IRS offers several short-term and long-term installment plan options to taxpayers.
Four Situations the IRS Will Consider to Withdraw a Tax Lien
The IRS won’t always approve the request to remove a federal lien from a taxpayer’s credit. Specifically, Form 12277 outlines the four situations in which it will consider withdrawing the tax lien. The form instructs the taxpayer to put an “X” in the options applicable:
- The Notice of Federal Tax Lien was filed prematurely or not in accordance with IRS procedures.
- The taxpayer entered into an installment agreement to satisfy the liability for which the lien was imposed and the agreement did not provide for a Notice of Federal Tax Lien to be filed.
- The taxpayer is under a direct debit installment agreement.
- Withdrawal will facilitate the collection of the tax.
- The taxpayer (or their advocate) believes withdrawal is in the best interest of the taxpayer and the government.
The fourth situation is the most general. Why? Because it’s hard to quantify what is in the best interest of the government and the taxpayer. It’s also the situation that many taxpayers select when filing Form 12277 when the other conditions do not apply.
When taxpayers complete Form 12277, they must choose a valid reason for requesting the withdrawal. Moreover, the odds of having their request granted increases when they can provide detailed documentation. The documentation needs to outline why the IRS should withdraw the tax lien. If the taxpayer chooses the fourth option as the reason for requesting the withdrawal of a federal tax lien, they need to outline why it is in the taxpayer’s best interest, as well as in the best interest of the government.
Moreover, the IRS may be more likely to accept the request if the taxpayer outlines that removing the federal lien will aid in the process of collecting the taxes owed. For example, if a taxpayer has no assets and no other secured creditors, they may be able to make larger payments through an installment or payment plan than through the seizing of assets or garnishment of wages. Therefore, removing the federal tax lien could be beneficial to the IRS. It may benefit the IRS because the IRS is more likely to receive payment.
If you don't meet the criteria above, a tax lien appeal can also be considered.
Breaking Down the Sections of Form 12277
Sections 1-8
Taxpayers will input their personal information in the first eight sections of Form 12277. All the information you include must match your tax filings and other records exactly. It consists of the taxpayer’s Social Security Number or tax identification number associated with the federal lien.
Section 9
Section nine explains the importance of including a copy of Form 668(Y). Including a copy of this form will speed up the process. It will ensure that the information is matched correctly to the taxpayer’s details.
Section 10
Next is part 10, which requires the taxpayer to select the status of their federal tax lien. The options are:
- Open
- Released
- Unknown
If a taxpayer hasn’t paid off your taxes or the taxpayer paid it off within the last 30 days, the status will likely be open. If the taxpayer paid off the taxes 30 or more days ago, and it has been released from the taxpayer’s credit as outstanding liability, the status is released. Otherwise, a taxpayer can contact the IRS or select unknown if the taxpayer does not know.
Section 11
Section 11 is the reason the taxpayer requests a withdrawal of their federal tax lien. The IRS outlines the reasons or situations in the section above. Therefore, taxpayers will need to select the one that most closely aligns with why they are asking the IRS to remove the tax lien.
Section 12
Taxpayers can go into further detail about the withdrawal request in section 12. In this section, you might include tax filing records, proof of a payment plan the taxpayer has with the IRS, documentation of an accepted offer in compromise, or other details.
Finally, taxpayers must sign and date the affirmation section. It gives the taxpayer’s word that what they have included in the form is true and correct.
Sending and Getting Notified by the IRS
Taxpayers will then submit the form to the IRS via certified mail. Within 30-45 days, the taxpayer should hear back from the IRS. It will come in the form of a confirmation to approve or deny your request to withdraw the federal lien. If the IRS accepts the taxpayer’s request, they will also receive a copy of the request the IRS will submit to the local courthouse. It will effectively withdraw your tax lien.
After receiving approval, you may want to contact the leading three credit reporting agencies to make sure they removed the tax lien. TransUnion, Experian, and Equifax make up the big three credit reporting agencies. However, since 2017, the credit bureaus decided to remove tax liens on credit reports anyway. However, business credit reports and other consumer reports may contain them. For example, LexisNexis’s RiskView Liens and Judgements reports may still report tax liens, and lenders may leverage this tool. If needed, you can dispute the tax lien and provide the approval letter from the IRS as proof.
Form 12277 can help taxpayers get a fresh start on your credit history. It will allow taxpayers to move forward with financial freedom. After taxpayers complete the form, they need to make sure they understand what each section is asking for. They need to fill it out as completely and thoroughly as possible. Doing so can increase a taxpayer’s chances of having the request to withdraw a federal tax lien approved. It is one of the best ways to improve a taxpayer’s credit history if they have faced back taxes in the past.
Disclaimer: The content on this website is for educational purposes only and does not serve as legal or tax advice. For specific help regarding your tax situation, contact a licensed tax professional or tax attorney.