Have you experienced problems paying your tax bill? Has the IRS filed a tax lien on your personal and/or business property? Are you worried about your financial future?
These are valid concerns. Managing the IRS tax lien process involves many steps and options.
Continue reading this article to learn more about tax liens. You will also find out what to do in this situation.
What is an IRS Tax Lien?
If you fail to pay a tax debt, the federal government can file a claim against your property. This claim, known as a tax lien, serves to protect the government’s interest. Your property includes real estate, personal property, and financial assets.
The process begins when the IRS “assesses your liability” or documents the amount you owe. A Notice and Demand for Payment is then sent to you explaining how much you need to pay.
If you refuse or fail to pay the debt in full and on time, the IRS files the Notice of Federal Tax Lien. This notifies creditors that the government now has a legal claim on your property.
Consequences of a Tax Lien
Tax liens impact your personal property as well as business interests you own. If you apply for a personal or business loan, lenders look at both financial pictures. Even personal tax liens against a business partner can impact your company’s investment risk.
On April 16, 2018, EquiFax, Experian, and TransUnions removed federal and state tax liens from credit reports. Thus, tax liens no longer impact credit scores.
While your tax lien may not appear as part of your credit score, you must still pay off the lien. It can continue to have a negative impact on your financial profile. If you wish to apply for a mortgage loan, the lender can see the lien and limit your options.
You may, for example, have to pay higher interest rates on loans. Tax debt never disappears and will paint a spotty repayment history. This will impact future loan applications.
What to Do About an IRS Tax Lien?
When the IRS files a tax lien, you must act. Hiring a tax professional can provide guidance through this process.
This IRS will only contact you via the mail. If you don’t respond, you’ll get certified letters. These will describe your tax debt, penalties, and interest.
When these letters go unanswered, the IRS will invoke a bank levy or wage garnishment. You have several options for paying your debt.
Payment Plan
You can set up a payment plan. The plan will involve monthly payments, which may include interest and penalties. You must pay the full monthly amount and on time until you’ve paid the entire debt.
Offer in Compromise
An Offer in Compromise involves asking the IRS to let you pay less than the total amount you owe. For example, if your tax debt is $10,000, you can ask to pay a total of $2,000 over six months. This process may take 6 to 24 months to determine if you qualify.
The IRS only approves about 40% of these offers. If you are pursuing bankruptcy, you can’t qualify for this request. You must have filed all taxes and be current on estimated tax payments to be eligible.
To file an Offer of Compromise you must complete and submit the following documents:
- Form 656, Offer in Compromise
- Form 433-A, Collection Information Statement for Wage Earners and Self-Employed
- Form 433-B (for businesses), Collection Information Statement for Businesses
- Form 656-A, Income Certification for Offer in Compromise Application Fee and Payment
The last form is a request to have the $186 application fee waived. Complete every line of every form. The application may receive a rejection for one blank line.
On the bright side, during this process, tax collection stops.
Withdrawal of Tax Lien
The IRS will withdraw a federal lien if there was an error or the balance is paid. The lien is also rescinded upon acceptance of an Offer in Compromise. Tax liens become unenforceable after a 10-year statute of limitations.
To apply for a withdrawal, complete form 12277. You will need to include the names and addresses of all credit bureaus you want to receive a notification. This withdrawal changes the records so that there’s no evidence of a tax lien ever existing.
Release of the Federal Tax Lien
Once the total debt is completely paid, the IRS releases the lien within 30 days. This means they no longer have a claim to your property. Sometimes, setting up a guaranteed or streamlined agreement for installment payments can generate a release.
Fresh Start Program
The IRS established the Fresh Start Program for taxpayers with a debt of less than $25,000. You might qualify for this program if you transfer some of all your tax debt to another source.
For example, you could pay with a credit card or home equity loan. You can also make regular payments and lower your balance below the $25,000 threshold. If you qualify for this program, the IRS may grant a lien withdrawal.
Are You Looking for Tax and Financial Services?
If you have received a notice concerning a tax lien, it’s time to get professional help. A certified public accountant can ensure that you take the right steps. They can assist with your current problems and prevent future issues.
Gary M. Kaplan, C.P.A., P.A. is licensed to practice in Florida, New York, Maryland, Washington D.C., and Utah. Our office offers all aspects related to filing taxes. This includes tax preparation and planning for individuals, partnerships, and corporate entities.
We have authorizations to represent you in IRS tax audits if they occur. The Kaplan firm also provides accounting and financial reporting services. These include cash projections, budget analysis, compilations, reviews, bookkeeping, and payroll management
Contact us today for help with your taxes and other business financial needs.
