As the Beatles song goes, “If you drive a car / I’ll tax the street / If you try to sit / I’ll tax your seat. If you get too cold / I’ll tax the heat / If you take a walk / I’ll tax your feet. Taxman.”

While George Harrison was not speaking specifically about federal tax liens, he was singing about paying taxes. However, what Mr. Harrison did not discuss are the consequences of failing to pay the “taxman.” This article explores federal tax liens and the process of removing them. 

What is a federal tax lien? 

Liens are not an uncommon occurrence in distressed sales. Liens may range from mortgages, state taxes, local taxes, judgments, construction liens and more. However, this article focuses on one specific lien: the federal tax lien. A property owner, for purpose of this discussion, includes a business or individual(s) referred to as individual within this article; and generally, a federal tax lien occurs when a property owner fails to pay a tax debt. When a federal government lien exists on a property, it is against all of the property owner’s property — from real estate to personal property such as vehicles and financial assets. Section 6325 of the Internal Revenue Code (IRC) addresses the release of federal tax liens. 

According to the IRS, a federal tax lien exists after the IRS:

• Assesses the individual’s liability. 
• Sends the individual a bill explaining how much is owed, which is in a Notice and Demand for Payment.
• The individual neglects or refuses to pay the debt in time. 

Once the IRS has determined a lien is warranted against the property, the IRS files a Notice of Federal Tax Lien, a public document alerting creditors that the government has a lien on the property. Two pieces are important to note about the Notice of Federal Tax Lien: 1) this notice only shows the balance as of the date of the notice and does not show the payoff balance or the charge for filing and releasing the lien; and 2) there is a right to appeal the notice. 

A federal tax lien may greatly affect an individual because the lien attaches to all of the individual’s assets and may affect the individual’s ability to obtain credit. In addition, the lien attaches to all business property and rights to business property, which would include account receivables. Lastly, if the individual files bankruptcy, the lien and debt may continue as well as the Notice of Federal Tax Lien. 

Agents cannot provide legal or tax advice, and they should encourage the parties to consult with an attorney when trying to sell or purchase a property with a federal tax lien. 

What can the owner of the property do?

Clearly, the easiest way to remove the lien is to pay the debt in full. Once paid, the IRS will release its lien within 30 days. In addition, the IRS may be willing to allow the individual to pay on a payment plan, which is discussed at www.irs.gov/Payments/Make-a-Payment. 

However, the IRS does provide other options when said option is in the best interest of the government and individual: 

Discharge of property: This allows the property to be sold free and clear of the lien. This means that the federal government has cleared the individual of the lien for the debt and the Notice of Federal Tax Lien previously filed.

The specific paperwork in this situation is the Form 14135 Application for Certificate of Discharge of Property from Federal Tax Lien. This Certificate of Discharge removes the government’s lien from the property named in the certificate. More information regarding this form is found in the IRS publication 783 at www.irs.gov/pub/irs-pdf/p783.pdf. 

This discharge may be granted in the following six situations.

1. If the value of the individual’s remaining property encumbered by the federal tax lien is equal to at least twice the amount of the federal tax lien liability secured by the lien and any encumbrance entered into before the IRS filed its public notice of lien. (IRC section 6325(b)(1)).
2. When the tax liability is partially satisfied with an amount paid that is not less than the value of the federal government’s interest in the property being discharged. (IRC section 6325(b)(2)(A)). 
3. When the government’s interest in the property has no value. The debts senior to the federal tax lien are greater than the fair market value of the property or greater than the sale value of the property. A copy of the offer to purchase would be included in the application. (IRC section 6325(b)(2)(B)).
4. The IRS reaches an agreement with the individual allowing the property to be sold. This section requires the sale proceeds be held in a fund subject to the claims of the federal government in the same manner and priority that the claims had prior to the property being discharged. A copy of the offer to purchase would be included in the application. (IRC section 6325(b)(3)).
5. A third party that owns the property commits to making a deposit or an acceptable bond equal to the government’s interest in the property. (IRC section 6325(b)(4))
6. Discharge is subject to an Estate Tax lien (IRC section 6325(c)), which is covered under Form 4422 at www.irs.gov/pub/irs-pdf/f4422.pdf. 

Subordination: The process of subordination does not remove the lien, but allows other creditors to move ahead of the IRS, which may help the process of obtaining a loan or mortgage. Essentially, a subordinate, or junior creditor, is moving their position ahead of the federal government. 

This subordination may be granted under two scenarios: 

1. If the individual pays an amount equal to the lien or interest to which the certificate subordinates the lien of the government (IRC section 6325(d)(1))
2. If the IRS determines that the granting of the certificate will increase the amount the government will receive. For example, an individual refinancing for a lower interest rate and thus a lower monthly payment to the creditor would then allow the individual to pay more per month to the government. (IRC section 6325(d)(2)).

This application must be completed by the individual at least 45 days before the transaction date for which the certificate of subordination is needed. More on this is found in IRS publication 784 at www.irs.gov/pub/irs-pdf/p784.pdf. 

Withdrawal: This process removes the public notice to assure that the IRS is not competing with other creditors for the property. The Application for the Withdrawal of the Public Notice is on Form 12277 found at www.irs.gov/pub/irs-pdf/f12277.pdf. If the individual’s application is granted, the IRS will file Form 10916(c), Withdrawal of Filed Notice of Federal Tax Lien, with the recording office where the original notice was filed. In addition, a copy will be provided to the individual for their records as well. (IRC section 623(j)). 

Remember, the withdrawal tells other creditors that the government is deserting its lien priority, not releasing the lien or waiving the individual’s responsibilities relating to the debt. 

What happens if the individual does not pay the federal tax lien? 

If the individual does not repay the debt, the government may take the property to pay the debt, or levy the property — a process that includes the IRS seizing and selling all real and personal property the individual has an interest in. Generally, the IRS does not levy unless 1) a Notice and Demand for Payment was sent, 2) the individual neglected or refused to pay, and 3) a Final Notice of Intent to Levy and Notice of Your Right to a Hearing at least 30 days before the levy. However, it should be noted that there are several exceptions as to when the IRS does not have to provide the 30-day notice. 

There are a number of other considerations regarding the government’s ability to levy; such seizure is not permitted if the individual entered into some sort of payment plan or if the IRS agrees that the individual is unable to pay due to economic hardship. 
For more information on the government’s ability to levy, visit www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Levy as well as pages 5-7 of IRS Publication 594 regarding the collection process at www.irs.gov/pub/irs-pdf/p594.pdf. 

The specific information relating to the IRS was derived from “Understanding a Federal Tax Lien” found at www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Understanding-a-Federal-Tax-Lien. 

Cori Lamont is Director of Regulatory Affairs for the WRA.