If you owe the IRS more than $10,000, and can’t afford to pay them within 12 months, they are likely to file a Federal tax lien. This lien protects their collection rights and places them behind any existing creditors.
A Federal tax lien is focused on real estate and is filed with your County Recorder. It attaches to your home and, if you attempt to sell, the IRS will get paid before you see a dollar… including interest and penalties.
However, the IRS gets in line behind any other lien holders. If you already have a first and a second on your home, then the Federal tax lien gets third position. If there’s no money left for Uncle Sam when you sell, then he’s out of luck.
It is also possible for the IRS to foreclose on a Federal tax lien. While rare, the Federal tax lien allows them to sell your home at auction, just as if you had defaulted on a loan. This was common in the 1980s, but the government doesn’t like to throw out people from their primary residence.
When the IRS files a Federal tax lien, they must send you a notice (letter) within 5 days. At this point, you can request a Collection Due Process hearing with the Office of Appeals or you can file under the Collection Appeals Program. You must file an appeal within 30 days of receiving the notice of lien. Reasons to appeal include:
- You already paid the tax,
- You were in bankruptcy,
- There was a procedural error in the assessment,
- The collection statute has expired,
- You had no opportunity to dispute the assessment,
- You wish to discuss collection alternatives, and/or
- You wish to make an innocent spouse claim.
If you don’t appeal but still require a release of a Federal tax lien, you can obtain one if:
- You pay or settle the tax bill (including interest and penalties),
- The IRS accepted a bond you submitted to guarantee payment,
- The IRS has not refiled the lien before the collection statute expires (10 years from the date of assessment),
- The notice was filed too soon or not according to IRS procedure,
- Withdrawal of the lien will speed collection of the tax, or
- Withdrawal would be in your best interest (as determined by the Taxpayer Advocate) and the best interest of the government.
The most common Federal tax lien dispute that I came across was around the sale of your primary residence. If you’re selling your home while the IRS has lien, you can apply for a release if any of the following applies:
- The equity the IRS has in other property is twice the amount of the tax owed,
- The IRS receives the equity in the property from the sale,
- The IRS determines the property has no value,
- The IRS receives a lien on the proceeds from the sale, or
- The IRS receives a deposit or bond in lieu of the lien.