If you are delinquent in paying back taxes, you are subject to a serious collection action called a tax lien. You need to help of a qualified tax specialist to take action now to prevent having your finances restricted.
The Basics and Dangers of Tax Liens
Tax liens are legal claims filed by the IRS against anything of value which you own. This can be your home, business, income, automobiles, jewelry, property, etc. It is basically a public announcement of your back tax debt and gives the IRS precedent over any other creditors. Our team here at ITS is experienced in tax law and will help you obtain a more affordable solution to pay your tax liability.
Before a tax lien can be filed against you, the following criteria must be met:
- The tax liability has been assessed
- A written “Notice and Demand for Tax Payment” has been sent
- You have refused or are unable to pay off your tax debt within ten days of receiving the notice
Once this criteria is met and a lien is established, it will appear on your credit report. Having record of an IRS attachment in your credit history can ruin your financial future. Your tax lien remains a public record until the amount is paid in full. This is a method used by the IRS to embarrass or intimidate you into accepting an impossible agreement.
Attempting to negotiate settlements for back taxes with the IRS on your own can lead to increased penalties and fines, additional financial stress, and missed opportunities. You need the help that an experienced tax lawyer can provide. Our professionals know your financial rights and what repayment options are available for what you owe. We will represent you in all negotiations to bring your problems to an end. Some of our most skilled areas include:
- Legal representation
- Prevention, Withdrawal and Release of IRS tax liens
- Repayment negotiations (such as debt reduction and installment agreements)
- Tax debt elimination
- Accurate submission of unfiled tax returns
Let Instant Tax Solutions relieve your stress and help you regain financial freedom!
What is a Tax Lien?
Many taxpayers have made costly mistakes leading to unwanted scrutiny by the Internal Revenue Service. Whether individual taxpayers or business owners, the rules are the same—you get behind on your taxes and you face a tax lien. Some are stunned, wondering what they should do next? You need the help of a qualified tax attorney to understand how these penalties operate and what can be done to ease the process of paying those back taxes and getting out of trouble.
Understanding the legalities
A tax lien is an attempt by the IRS to collect a debt, and should not be taken lightly. The first part of answering the question can be summed up as follows: A lien is attached to all your property, including your house and your car, and all your rights to your property. Business owners take note—this includes accounts receivable. Before filing, the government must meet several legal requirements. After first assessing the liability, the IRS should then receive a deposit or acceptable bond in the amount equal to its interest in the property. If you are selling your primary residence, you may be entitled to a relocation expense allowance. You may instead want the IRS to subordinate its lien, which gives it a lower priority over liens filed by other creditors.
Subordination might be needed in cases where a creditor refuses to lend unless their lien is satisfied first. In turn, the government will allow this if it is reasonable, if you give them the dollar value of the lien, and if you prove how subordination would speed up the tax collection process.
But if the IRS chooses to enforce its collection authority, it does so through a levy, which allows the government to attach all monies held by a third party. While a lien is security for a tax debt, a levy goes one step further, seizing property to fully or partially satisfy the tax debt.
Lien versus Levy: What is the difference?
A levy is an execution of power to seize property, while the federal tax lien remains a dormant right of the government. That right can be awakened by events such as the taxpayer’s sale or attempted sale of the property, or the IRS seeking to foreclose on the lien through a judicial procedure.
A lien can lull the taxpayer into a false sense of security by allowing use of the property or the opportunity to derive income from it. Sometimes the taxpayer may even sell the property to a buyer who has no knowledge of the lien, without incurring any legal obligation. But forget it’s there and it may spring up out of the legal shadows when you least expect it.
The lien is authorized by the Internal Revenue Code, which states that if anyone liable to pay any tax neglects or refuses to pay it after demand has been made, the amount—including interest, tax, penalties and any additional fees—shall be a lien in favor of the United States on all property and rights to property, whether real or personal. The IRS is required to give notice and demand payment 60 days after assessment of the tax debt. Three things must exist for tax liens to come into existence:
- the assessment of the tax liability
- the demand for payment and
- the refusal or neglect to pay it
What to Expect When You Receive One
Once the initial shock of receiving such a notice subsides, clients need legal representation from a qualified tax attorney before proceeding further. Navigating this area requires an understanding of the process. The most important things to learn include:
- How it arises
- Types property that can be attached
- Priority over other creditors
- How it lien can be removed
The IRS Will Take Priority
The notice of federal tax lien stems from failure to pay any tax after the IRS demands payment. It is retroactive to the date of assessment, and it remains in force until the debt is paid or becomes unenforceable due to the statute of limitations. The actual filing of the notice is not required. The real significance behind filing it is the establishment of the IRS’s priority over other claimants and creditors to the taxpayer’s property. For example, if the you owe several thousand dollars on auto loans, credit card debt or some other type of unsecured debt, those take a back seat to paying off the federal government.
Confusing Tax Codes and Language
The Internal Revenue Code gets very specific about how and where to file a notice of federal tax lien against both real and personal property. For real property, the notice should be filed in the office in the state where the property is located. In most states this means the notice is filed with the land records in the county where the land lies. The business property of a corporation or partnership is the place where the principal office is located. A notice for a taxpayer living abroad should be filed with the Recorder of Deeds for the District of Columbia.
Sometimes a lien must be refiled to remove any doubt over whether it is still enforceable when the notice shows the assessment is more than 10 years old. In this case, the IRS must file the notice of federal tax lien within a one-year period ending 10 years and 30 days after the date of the assessment. Sometimes taxpayers will look for a way out, pointing out minor errors in the information on the notices in the hopes that such mistakes would invalidate the lien. For example, if something other than the taxpayer’s legal name appears on the notice (such as a nickname), the question is whether it is sufficient to alert another creditor of the existence of the lien. Some courts have ruled that a minor misspelling voids the entire notice.
The scope of a notice is all-inclusive. To avoid confusion, the wording of the lien states it is attached to “ all property and rights to property” of the individual liable for the tax. Some interpret this broad, sweeping language to include real, personal and intangible property of widely varying natures, future interests, and even property the taxpayer acquires after the lien has come into existence. In Aquiline vs. U.S., the Supreme Court maintained that the key point was whether or not, and to what extent, the taxpayer had property or rights to property to which the tax lien could attach. The answer to that lies in state law, which controls the nature of the taxpayer’s legal interest. However, once the taxpayer’s property interest has been established under state law, federal law then determines the consequences of the existence of the notice of the lien.
How to Handle the Situation
You’ve done your best to pay your bills, your mortgage, and fulfill your tax obligations, then you started to struggle financially in today’s faltering economy. Maybe you lost your job or had some unexpected expenses arise. Now you are falling behind and in trouble. Sell your home? It’s not that easy, because now you are in trouble with the Internal Revenue Service and facing a lien against the house.
Why you should understand your rights
In a nutshell, liens are encumbrance against all of the taxpayer’s property and rights to property. It is similar to a bank’s mortgage or ownership of a car, with a few key exceptions. Federal tax liens encompass everything the taxpayer owns, including the cash in his wallet, the clothes on his back and the furniture in his house. It is non-consensual, meaning that while a person may choose to apply for a bank loan to purchase a home, it can arise without the taxpayer’s consent or permission.
All the paperwork and what it means
One thing to remember is that when the taxpayer is transferring property ownership they may apply for a Certificate of Discharge. Each approved application releases the effects of the lien against one piece of property. Sometimes a third party can even request that they themselves file the certificate. But when money and taxes are involved the filing a federal tax lien can get sticky. Despite attempts to prioritize and place the government first, creditors can refuse to extend the taxpayer credit unless their lien is satisfied first, before the federal tax lien. When this happens, subordination is needed. Subordination is the process that makes the federal lien secondary to another lien.
What are my rights to an appeal?
But there is always a way to officially appeal the process. If a taxpayer believes a lien has been filed against them in error, they may request a Certificate of Non-attachment. This can happen when the taxpayer’s name is similar or identical to another person. There is a specific protocol in reversing the filing. The IRS may withdraw the lien if:
- Notice was filed too soon or not according to its procedures
- If the taxpayer had entered into an installment agreement to pay the debt
- If withdrawing the lien would speed up the collection process
- If withdrawal would be in the taxpayer’s and government’s best interest.
Electronic filing simplified
For the sake of efficiency, the IRS processes all notices electronically. Doing this enables the release of the data in a more cost-effective and timely way. With this in mind, the “E-lien” system actually benefits the interests of the taxpayer by streamlining the process. Because of all the paperwork involved, manually filing could significantly slow down the entire process. And remember, because of the sensitive nature of the documentation, any delays are counterproductive. Recording offices sometimes return documents unrecorded or set them aside, causing the IRS to lose priority status. Taxpayers may actually be harmed when certificates of release, revocations and withdrawals are not promptly recorded.
Requesting a Release - How to Finally Get Rid of It!
Time Is of the Essence
The Notice stays in place until you proactively take action to release it. Specifically, it will be released within 30 days if:
- The debt is paid in full.
- The amount owed is adjusted appropriately.
- An accepted bond guaranteeing payment is provided.
It can actually be withdrawn if:
- It is determined that the filing was not done according to procedure
- The taxpayer chooses to participate in a payment plan (this is more easily negotiated with the help of a qualified tax professional acting on your behalf), or
- It would be in the best interest of both parties to withdraw
Taxpayers have the right to appeal the filing and ask for a release.
Working With the IRS
You can work with the federal government to remove a lien by applying to have it discharged. It is imperative to have an experienced professional help you communicate. Four possible resolutions exist:
- Partial payment can be made
- The government could determine its interest in the property has no value
- The government agrees to receive the proceeds from the sale or refinance of the property, or
- The taxpayer can submit another piece of property with a fair market value at least double the amount of the tax owed
The Appeals Process
The IRS must notify the taxpayer within five days after the lien is filed. Some of the circumstances on which an appeal can be based are:
- The debt owed was paid prior to the notice being filed
- The tax was assessed and filed while the taxpayer was in bankruptcy
- A procedural error was made during the assessment
- The statue of limitations on the debt had expired before anything was filed
- The taxpayer was not given a chance to dispute the liability.
Dealing with the State Issued Notices
Despite the noblest of intentions, taxpayers can get hopelessly confused when it comes to understanding the tangled web of tax information at our disposal. This is especially true when a state lien is threatening your household finances. These are particularly unsettling because you are at risk of having the government step in and take everything you own.
Understanding a State Issued Tax Lien
Many taxpayers are not familiar with these types of penalties. Important details to remember are:
- If a person fails to pay a tax debt, plus any additional penalties and interest, this becomes a lien in favor of the state.
- It allows your personal property (cars, boats or business equipment) as well as real property to be sold.
- All current creditors (and future creditors) are notified, affecting your credit rating.
How to Get It Released With the State
There are two ways to have it lien removed.
1) Payment in Full
The first is payment in full, including penalties and interest that have accrued, or full payment based on a settlement agreement. Once the tax debt is paid, the lien is removed although notice that it once existed will remain on public record.
2) Prove it was an Error
The second way is to prove it was issued in error. If this is the case, public records will show that the lien was issued in error and withdrawn.
Effects on Your Credit Rating
One thing that most people don’t know that even on the state level, a penalty like this can really affect an individual’s credit rating. Credit reporting agencies have access to county and state records, and liens are always shown on credit reports.