How to Release or Withdraw a Federal Tax Lien
A federal tax lien is the IRS’s legal claim to your current and future assets. If a company or an individual does not pay their first tax bill, the IRS may file a Notice of Federal Tax Lien (NTFL), which provides public notice to creditors. The IRS establishes priority rights. Usually, the IRS only places liens on tax liabilities over $10,000, but they do file them for lower balances. Fortunately, there are ways to get liens released and withdrawn.
Difference Between a Tax Lien Release and a Withdrawal?
Before understanding how to release or withdraw an IRS tax lien, you should understand the difference between the two.
When the IRS releases a tax lien, it clears the statutory tax lien for your taxes as well as the public NTFL. The IRS does this by filing a Certificate of Release of Federal Tax Lien. However, other tools used by lenders will have references to your tax lien for up to seven years unless the IRS withdraws it.
When the IRS withdraws a tax lien, it removes the Notice of Federal Tax Lien from the public record. The IRS informs creditors they are abandoning their lien priority with regards to your assets or your business’s assets.
Update: Since the major credit bureaus started removing tax liens from credit reports in 2017/18, other solutions emerged for reporting on tax liens.
How to Withdraw a Federal Tax Lien
There are a few ways to get the IRS to withdraw a tax lien. Operationally, the IRS will file a document called the Withdrawal of Filed Notice of Federal Tax Lien. It is also known as Form 10916(c) which the IRS utilizes to withdraw an active NTFL. In order for the IRS to file Form 10916(c), an Application for Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien must be filed, which is form 12277
Set Up a Direct Debit Installment Agreement (DDIA)
If you set up a direct debit installment agreement, in some cases the IRS will withdraw the lien from public record under the following conditions:
- You are an individual, a business with income tax liabilities only, or you are out of business (for which any type of tax qualifies).
- The unpaid balance originally assessed, which includes tax, penalties, and interest is less than $25,000. Remember, interest and penalties that have accrued since you filed (unassessed), do not count toward the tax amount limitation. Moreover, if you are above $25,000 you can pay it down to qualify.
- You agree to a direct debit installment agreement with a 60-month term or less. What this means is that the payment is directly taken each month from your bank account. If the IRS can only legally collect for say 30 months, then you must pay off the balance in 30 months or less.
- You are in filing and deposit compliance
Convert a Regular Installment Agreement to a DDIA
If you have an installment agreement already with the IRS, and you are under the $25,000 threshold, you can convert it to a DDIA. You will now qualify to have the lien withdrawn. Again, if you the original assessed balance was over $25,000, you can pay it down once you convert to a DDIA.
The IRS Didn’t Follow Their Procedures
If the IRS doesn’t follow their procedures or files the tax lien prematurely, you can request a lien withdrawal.
Here are some examples:
- An IRS employee knows you have a carryback, overpayment or adjustment that will satisfy the tax lien and files the tax lien anyway.
- You filed for bankruptcy, and the IRS filed an NTFL while an automatic stay was in place.
- You were in a Combat Zone, away from active military outside the U.S. on a contingency mission, or hospitalized while serving in a Combat Zone
- The IRS filed an NTFL for an Obamacare shared responsibility payment (penalty for not carrying health insurance).
- The IRS filed a duplicate NTFL
If Withdrawing the Tax Lien Will Help Facilitate IRS Collection
If withdrawing the tax lien will facilitate the collection of tax, you can request a withdrawal using Form 12277.
For example, say you have no assets, you don’t think you will acquire them in the future, and you have no other secured creditors. In this situation, you may agree to make more significant payments to the IRS through payroll deduction than they otherwise would receive through wage garnishment. Therefore, withdrawing the NTFL will facilitate IRS collection.
If Withdrawing the Tax Lien Is In Your Interest and the Government’s
If you, or the Taxpayer Advocate Service acting on your behalf, believe withdrawing the tax lien benefits the taxpayer and the U.S government, the IRS may remove it. For example, in many states, professionals can lose their license or job if they have a tax lien. In many cases, if the IRS has released the tax lien, it may approve a withdrawal request if it helps the taxpayer’s credit profile. Moreover, it indirectly will increase the probability of future tax compliance.
Paying Your Taxes In Full Along With Other Conditions
If you pay your taxes in full, the IRS will release your tax lien within 30 days of payment. However, withdrawing your tax lien after a release also requires:
- Filing compliance for the last three years of tax returns. The rule applies to business, individual and information returns.
- You are current with estimated tax payments and federal tax deposits (business)
- You request the withdrawal in writing (Form 12277)
How to Release an IRS Tax Lien
The IRS files a “Certificate of Release of Federal Tax Lien” with the same local or state authorities that received the NFTL when you obtain a “release.” Usually, that means the local county recorder or secretary of state receives the Certificate of Release. When you meet any of the following conditions below, the IRS usually releases the tax lien.
Pay Taxes Owed in Full
If you pay the IRS all of your taxes owed plus any interest and penalties, the agency will release the tax lien. Therefore, the IRS will file a Certificate of Release. However, unless the IRS withdraws the tax lien, traces of it will show up on your credit report.
Settle Taxes Through an Offer in Compromise
An offer in compromise (OIC) is when you settle your taxes owed for less than you owe. You have up to two years to pay off an OIC that’s accepted. Consequently, you make payments on the settlement amount.
To qualify, you must meet strict requirements and disclose a lot of financial information. The IRS only accepts offers if the agency believes that amount is the most it can get. Recently, the IRS relaxed the requirements for the offer in compromise program.
If you meet the payment requirements on an Offer in Compromise, the IRS will release the tax lien.
Let the Statute of Limitations Expire
Like most liabilities, IRS taxes have a statute of limitations on collection, and if the Collection Statute Expiration Date arrives, the IRS can no longer enforce the tax lien. Typically, taxes owed expires ten years after you file your return or after the IRS assesses the taxes owed. The IRS usually extends the statute of limitations on collection if you file bankruptcy, you file an offer in compromise, or if you sign Form 900 (Tax Collection Waiver).
When the statute of limitation on collection arrives on a specific tax year, the IRS lien does not become enforceable anymore so as long as the IRS did not refile the tax lien and the deadline for refiling has passed. As long as all liabilities shown on the NTFL have reached their self-release point, creditors and the IRS will consider the tax lien fully released.
Give the IRS a Bond Guaranteeing Payment
You can also post a bond guaranteeing payment. It has the same effect in many cases as paying your taxes in full. Taxpayers rarely leverage surety bonds because it is usually challenging to qualify for one because of the adverse effects on one’s credit. Moreover, in most cases, the cost of the bond would be the same as paying off the taxes.
Once you have met one of the above requirements, the IRS should release your tax lien. In many cases, the IRS doesn’t automatically release the lien. If that happens, contact the Centralized Lien Unit at (800) 913-6050.
Partial Releases of a Tax Lien
In many cases, the IRS will file a Notice of Federal Tax Lien with more than one taxpayer’s name on it. In such situations, if one taxpayer on the NTFL satisfies part or all of their liability while the other does not, the IRS may issue a Certificate of Release with the word “partial” annotated on it. For example, you could accomplish a release with many of the same reasons as above.
Alternatives to a Lien Release or Withdrawal
Sometimes a lien release or lien withdrawal will not be an option. Below are a couple of other options that are available.
Appealing an IRS Tax Lien
When the IRS files a lien, they will send you a Notice of Federal Tax Lien and your right to a collection due process hearing. It is possible to appeal the lien and get the lien released using the methods mentioned above as well as some other reasons, the full list of reasons to appeal a lien can be found in this guide to appealing an IRS tax lien.
Subordinate an IRS Tax Lien
Subordination of a tax lien is when the IRS allows a new creditor to move ahead of the IRS in priority. This can help get financing in certain situations and will be allowed by the IRS if it is in their best interest. For example, this can help you or your business refinance a mortgage when this type of refinancing will increase your ability to repay the IRS in the future.
When In Doubt, Work with a Licensed Tax Professional
In any event, we highly recommend you work with a licensed tax professional to ensure you navigate the IRS collection process, avoid levies, and obtain the most beneficial resolution for you or your business. At TaxCure, our goal is to simplify the process for taxpayers to find tax professionals. We have a unique ranking algorithm that takes into account tax professional experience to ensure you see the pros with experience that match your unique problem. You can view the list of top-rated professionals that help with tax liens, this list is for IRS tax liens, if you have a specific state agency that has filed a tax lien, please be sure to select that agency in the filter to see the professionals that have experience helping that that particular agency. You can also use the form below to start your search today.