Federal Tax Lien: Definition and How to Remove
Find out the definition of a federal tax lien, what it means if you have one, and how you can remove it.
Did you get a notice of a tax lien? Or maybe you found a tax lien when checking your credit report?
Either way, it’s not fun.
It means you owe the IRS money that you haven’t paid, and they’ve staked a claim against your real property or personal property to settle the debt.
But here’s the thing.
Having a federal tax lien isn’t the end of the world.
Tax liens are unlikely to destroy your credit. Plus, you have options to remove it and get on with your life.
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What is a Federal Tax Lien?
A federal tax lien is one tool the IRS has at its disposal to collect money owed to them.
It gives the IRS a legal right to take your money or property – including your house – if you don’t pay up.
As you can see:
The government doesn’t mess around.
If you have tax debt, give yourself a break. 8% of all U.S. taxpayers are delinquent.
Tax liens are public records, too. If your neighbor or your uncle wants to look for a federal tax lien, they’ll be able to see it.
And there isn’t anything you can do about that.
But you can take steps to remove the federal tax lien.
Will it Affect Your Score?
If you worry about the impact of a federal tax lien on your credit score, you can breathe a sigh of relief.
The credit bureaus – Experian, Equifax, and TransUnion - changed their policy in 2017 to remove civil judgment records and tax lien data.
Want to find out for sure?
Federal law allows you to get a free copy of your credit report once a year at AnnualCreditReport.com.
6 Options to Remove a Tax Lien
The IRS doesn’t give you much advanced notice when they put a tax lien on your property. If you get a Notice of Federal Tax Lien, there’s not much you can do to stop it.
So, what are your options?
Depending on your situation, the IRS can remove a federal tax lien or withdraw it.
Check the Facts
Did you know the IRS makes mistakes?
Shocking, I know.
But it’s true! Not even the IRS is perfect.
Sometimes the IRS will send a Notice of Federal Tax Lien in error. When this happens, the IRS will remove the lien altogether.
“When the IRS withdraws a lien, the lien is erased as though it had never existed,” according to Canopy Tax.
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Fork Over the Cash
The quickest way to remove a tax lien is to pay your balance in full.
That’s not always an option.
Who has that much cash in their bank account?
Not many people… that’s for sure.
Try to Settle for Less
If there’s no way you’ll ever be able to pay off your tax debt, the IRS might agree to settle for less than you owe.
It’s called an offer in compromise (OIC).
The trouble is…
It’s not very common, and the IRS can return or reject your request.
But Canopy Tax has some advice:
“Remember, an offer being returned is not the same thing as it being rejected. An offer is returned when the taxpayer didn’t submit necessary information, filed for bankruptcy, failed to include required application fees, hasn’t filed required returns, or hasn’t paid current tax liabilities. You can’t appeal a returned offer, but once the offer is updated it can be submitted again.”
If the IRS won’t approve your OIC, the next best thing is to set up an installment agreement.
Installment agreements are part of the Fresh Start Program.
Once you start an installment plan, you will have a harder time qualifying for a debt reduction request later. We recommend you speak to an expert to see if you qualify for tax relief first.
“The IRS Fresh Start Program allows the IRS to withdraw a lien if the taxpayer has entered into a Direct Debit Installment Agreement,” said Canopy Tax.
With a direct debit agreement, you authorize the IRS to automatically take the monthly payment from your checking account.
Play the Waiting Game
When it comes to federal tax debt, a statute of limitations applies.
Here’s why that’s important:
It means the IRS can’t try to collect from you forever.
The statute of limitations for federal tax debt is 10 years.
You must be wondering:
Will all of this go away if I ignore it for 10 years?
Get a free second opinion!
It’s unlikely the IRS will sit on the sidelines while you owe them money. Their collection efforts usually get more aggressive the longer you have a balance.
You’re much better off contacting a tax debt relief company and facing this problem head-on.
What if You Really Don't Have the Money?
There’s something called currently not collectible (CNC) status.
How does that work?
If you don’t have enough income to pay your taxes and reasonable living expenses, the IRS might let you off the hook.
But first, you must prove that you’re struggling financially.
Even if they grant you CNC status, your tax debt will grow with penalties and interest charges. You’ll also get a tax bill in the mail every year.
And if you’re expecting a refund on your income taxes while you have a balance, the IRS will likely keep that for themselves. At least until your balance is paid in full.
In this case, if you remain CNC for 10 years, the statute of limitations is up, and the IRS can’t try to collect from you anymore.
IRS Writes Off Millions Yearly
See if you qualify for tax relief. Get a free consultation with a tax relief expert to see if you qualify today.
It's quick, easy, and free.
There’s no reason to let a federal tax lien ruin your life.
If you can’t see the light at the end of the tunnel, reach out for professional help.
Because here’s the deal:
The problem won’t go away on its own.
What you need is a tax expert to help you get your life back. We recommend Optima Tax Relief as our #1 tax relief option.
Whether it’s a company that specializes in tax debt relief, a CPA, or a tax attorney, you don’t have to do this alone.
Get a free second opinion!
By Amy Beardsley
Amy is a personal finance expert and freelance writer and owner of Early Morning Money, She has bachelor degrees in business administration and legal studies, and her work has been featured on The Huffington Post, Money Tips, and many other personal finance publications.