How to Handle a Notice of Federal Tax Lien from the IRS

That certified letter from the IRS just arrived and your heart sinks. A Notice of Federal Tax Lien represents a serious escalation in the tax collection process, but it doesn’t mean all is lost. When the government stakes a legal claim against your property due to unpaid taxes, you have several pathways forward. Taking prompt, informed action can help minimize damage to your credit, protect your assets, and set you on course to resolving your tax situation with the least possible long-term consequences.

It’s important to understand that the tax lien itself arises when you have unpaid taxes after receiving a demand for payment from the IRS. The Notice of Federal Tax Lien is simply the public notification of this existing lien, after the lien has already been filed. The IRS files the notice with local or state authorities, typically in the county where you live or where your business is located.

Understanding the Impact of a Federal Tax Lien

A federal tax lien casts a long shadow over your financial life. Unlike private debts, tax liens represent the government’s legal claim to virtually all your property, including property acquired after the lien is filed.

• While tax liens no longer appear on credit reports as of 2018, they can still indirectly affect your financial situation by limiting access to credit or loans.
• This negative impact can persist even after paying the tax debt, unless you take specific steps to have the notice withdrawn.
• Property sales and refinancing become complicated since the lien attaches to all property rights.
• Buyers and lenders typically require lien resolution before completing transactions.
• Business owners face additional challenges securing loans, contracts (especially government contracts), and maintaining vendor relationships.
• Sole proprietors experience complete blurring of personal and business assets under a tax lien.

Remember, a lien is a claim against your property, while a levy is the actual seizure of the property. Think of a lien as the government placing a “reserved” sign on your assets, while a levy is the government actually taking them. Both are serious, but a lien typically precedes a levy and serves as a warning that more severe collection actions may follow.

Immediate Steps to Take When You Receive a Notice

When that envelope from the IRS arrives containing a Notice of Federal Tax Lien, time is of the essence. Here are the immediate steps you should take:

1. Verify the information carefully. Check that the tax periods, amounts, and your personal information are accurate. Errors do happen, and identifying them early can save considerable trouble.
2. Note all deadlines. The notice will contain important time-sensitive information, including your right to request a Collection Due Process hearing within 30 days of the lien filing.
3. Gather your documentation. Pull together tax returns, previous IRS correspondence, proof of payments made, and financial statements. These will be necessary regardless of which resolution path you choose.
4. Consider your response options. You generally have three initial choices: pay the full amount if possible, challenge the lien if you believe it’s incorrect, or consider resolution alternatives if you can’t pay in full.
5. Don’t ignore the notice. Tax problems worsen with delay—the longer you wait, the more interest and penalties accumulate, and the fewer options you may have available.

If you believe the lien was filed in error—perhaps because you’ve already paid the tax, the IRS calculated the amount incorrectly, or the collection statute of limitations has expired—you should immediately call the IRS number on your notice and be prepared to provide documentation supporting your position.

For further clarification and assistance, you might consider consulting a tax lien lawyer to review your situation.

Options for Resolving Federal Tax Liens

Fortunately, you have several potential pathways for addressing a federal tax lien. The best approach depends on your specific financial situation, the amount owed, and your short- and long-term objectives.

Paying Your Tax Debt in Full

The most straightforward solution is to pay your tax debt completely. Once full payment is received, the IRS will release the lien within 30 days. This clean break offers the fastest route to removing the government’s claim against your property.

To make a full payment, you can use the IRS’s Electronic Federal Tax Payment System (EFTPS), mail a check to the address on your notice, or pay by credit or debit card through an approved payment processor (although additional fees apply for card payments).

After payment, don’t assume the lien release will happen automatically. Request a copy of the release document (called a Certificate of Release of Federal Tax Lien) and verify that it gets filed in the same local records office where the original lien was filed.

Setting Up an Installment Agreement

If you cannot pay the full amount immediately, an installment agreement allows you to make monthly payments toward your tax debt. The IRS offers several types of installment plans:

• Guaranteed installment agreements for debts under $10,000
• Streamlined installment agreements for debts under $50,000
• Partial payment installment agreements
• Non-streamlined agreements for larger debts

To request an installment agreement, you can apply online through the IRS website, submit Form 9465, or call the IRS directly. For debts over $50,000, you may need to provide detailed financial information using Form 433-F, or other forms.

An important note: while an installment agreement will stop most aggressive collection actions, the tax lien will typically remain in place until the debt is fully paid. However, if your debt is under $25,000 and you’re on a direct debit installment agreement, the IRS may be willing to withdraw the public Notice of Federal Tax Lien even while you’re still making payments, which can help your credit situation.

Requesting a Discharge of Property

A discharge removes the lien from specific property, allowing you to sell or refinance that property even while the lien remains on your other assets. This can be especially helpful if you need to sell one property to help pay your tax debt.

To qualify for a discharge, you’ll need to demonstrate that:

• The value of your remaining property subject to the lien is at least twice the amount of the tax debt, or
• The government’s interest in the property has no value, or
• The proceeds from the sale will be applied to your tax debt

To request a discharge, submit Form 14135 (Application for Certificate of Discharge of Property from Federal Tax Lien) along with supporting documentation to the IRS. This process typically takes 30-45 days, so plan accordingly if you’re working with specific transaction deadlines.

Applying for Subordination

Subordination does not remove the lien but instead allows another creditor to move ahead of the IRS in priority. This can be invaluable if you need to refinance your home or obtain a business loan to improve your financial situation.

For example, if you can refinance your home at a lower interest rate but the lender won’t approve the loan because of the tax lien, subordination could allow the refinancing to proceed. The lender gets priority over the IRS, you get your refinancing, and the resulting savings might help you pay off your tax debt more quickly—a potential win for all parties.

To request subordination, submit Form 14134 (Application for Certificate of Subordination of Federal Tax Lien) with supporting documentation. You’ll need to clearly demonstrate how subordination will ultimately facilitate the collection of the tax.

Requesting Withdrawal of the Notice

A withdrawal removes the public Notice of Federal Tax Lien from the records, although you may still owe the tax debt. This differs from a release, which occurs when the debt is paid. Withdrawal can substantially improve your credit score and financial flexibility.

You might qualify for withdrawal if:

• You’ve entered into a direct debit installment agreement for a debt under $25,000
• The lien was filed in error
• Withdrawal would facilitate tax collection
• Withdrawal would be in your best interest and the government’s

To request withdrawal, submit Form 12277 (Application for Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien) to the IRS. If approved, ensure that the withdrawal is properly filed in the same records office where the original notice was filed.

Offer in Compromise

An Offer in Compromise (OIC) allows you to settle your tax debt for less than the full amount you owe. This option is available if paying the full amount would create financial hardship or if there’s doubt about the liability or collectibility.

The IRS evaluates OIC applications based on your ability to pay, income, expenses, and asset equity. They essentially ask: “Is this the most we can reasonably collect?“

To apply, submit Form 656 (Offer in Compromise) along with Form 433-A (for individuals) or 433-B (for businesses) and the application fee, though the specific forms depend on the nature of the Offer in Compromise. The process typically takes 6-12 months, during which collection activities are usually suspended.

If your OIC is accepted and you fulfill the terms of the agreement, the IRS will release the lien after you’ve completed all required payments. Note that filing an Offer in Compromise tolls the collection statute expiration date.

Special Considerations for Small Business Owners

Business owners face unique challenges when dealing with federal tax liens. A tax lien can severely hamper your ability to run and grow your operation.

For businesses, tax liens affect not just credit but also relationships with suppliers, customers, and potential partners. Government contractors may find themselves ineligible for new contracts due to outstanding tax liens. Vendors might require stricter payment terms if they discover a tax lien during a credit check.

Business owners should consider:

• Separating personal and business finances where possible (though this distinction may not protect you from personally being liable for certain business taxes)
• Looking into specialized business installment agreements, which may offer more favorable terms
• Using subordination to maintain necessary business credit lines
• Considering whether reorganization might be beneficial in extreme cases

Remember that employment taxes (like withheld income tax, Social Security, and Medicare) receive particularly aggressive attention from the IRS. Falling behind on these “trust fund taxes” can lead to personal assessment against responsible individuals, even in corporations and LLCs.

Preventing Future Tax Liens

The best way to handle a tax lien is to prevent it from happening in the first place. Proactive tax management can help you avoid the entire lien process. Consider implementing these preventative measures:

• Establish a reliable system for estimating and paying taxes throughout the year, particularly if you’re self-employed or have significant non-wage income.
• Set aside employment taxes in a separate account if you own a business to prevent commingling that often leads to tax problems.
• Communicate proactively with the IRS if you anticipate difficulty paying your taxes—options are typically more favorable when you approach them voluntarily.
• Maintain thorough records of all tax filings, payments, and IRS correspondence to substantiate your case if disputes arise.

Taking these proactive steps can dramatically reduce your risk of experiencing tax liens in the future. Remember that prevention is almost always less costly and stressful than remediation once a lien has been filed.

When to Seek Professional Help

While some tax situations can be handled independently, federal tax liens often warrant professional assistance. Tax attorneys can provide valuable expertise when navigating lien issues.

A tax professional can:

• Evaluate your specific situation and recommend the most appropriate resolution strategy.
• Represent you before the IRS, handling communications and negotiations.
• Help prepare and submit technical applications for lien relief.
• Identify options you might not be aware of based on your specific circumstances.
• Provide protection against potential IRS enforcement actions during the resolution process.

For expert legal guidance, consider engaging a tax lien attorney who focuses in tax controversies and lien resolution.

When selecting a professional, look for someone with specific experience in tax controversy and lien resolution. Ask about their success rate with similar cases and ensure they explain their fee structure clearly upfront.

Remember, tax problems—though serious—have solutions. With prompt attention, appropriate assistance, and a clear understanding of your options, even the burden of a federal tax lien can be successfully addressed.

Facing a Tax Problem? We’re Here to Help.

At Hughes Noff Tax Law, we know how overwhelming it can feel when the IRS or state tax authorities get involved. Whether you’re dealing with an IRS audit or tax dispute, international tax compliance, or tax debt resolution, we’re here to give you relief and bring down that anxiety. Let us deal with the federal government—so you don’t have to.

We approach every client with empathy and provide the advocacy, direction, service, and resolution they deserve. We have over 25 years of experience resolving complex tax controversy and understand the unique and sensitive nature of these matters. As both attorneys and CPAs, we understand the law and the numbers. Our clients appreciate the clarity and peace of mind we help restore—read their stories here.

Contact us today or call 410-694-7758 to schedule your consultation.