How to Handle a Federal Tax Lien

Federal Tax Lien; the words can cause fear and conjure up thoughts of financial ruin for many, but understanding the process can clear up confusion. A federal tax lien gives the Internal Revenue Service a legal claim to the taxpayer’s property for the amount of the tax debt. Usually the government is not the only creditor to whom the taxpayer owes money, so individuals filing a Notice of Federal Tax Lien establish priority rights against any other creditors.

What is a Federal Tax Lien?

Filing this document puts other creditors on public notice that the U.S. government has an official claim against all of the taxpayer’s property, and any property rights acquired after the lien is filed. The courts use this notice to establish priority as far as who gets paid first, such as in situations involving bankruptcy proceedings or real estate sales. The taxpayer must stay on top of this all-important process. When filing, it’s critical for local recording offices to ensure that federal tax liens are filed quickly and properly recorded. Failure to do this could jeopardize the U.S. government’s priority right against other creditors.

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 federal tax 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 of the lien. The IRS may withdraw the lien if notice was filed too soon or not according to IRS procedures, if the taxpayer had entered into an installment agreement to pay the debt, if withdrawing the lien would speed up the collection process, or if withdrawal would be in the taxpayer’s and government’s best interest.

Electronic filing simplified

For the sake of efficiency, the IRS processes notices of a federal tax lien 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.

What does the Lien Processing Unit do?

To further demystify the process, a clear explanation of the invoicing and payment procedures should help. To hold local recording offices accountable, the government’s Lien Processing Unit requests that those offices provide the IRS with