If you don’t deal with the IRS using any of the options discussed in Chapter 6, “When You Owe the IRS,” you are likely to face IRS enforced collection measures. These are the IRS’s awesome lien and levy powers.

The average IRS levy (seizure) brings in about $1,600, mostly from bank accounts or wages. And, just because it happens to you once is no reason to believe it won’t happen again—and again—until the debt is paid in full.

Whenever you owe taxes to the U.S. Treasury and don’t pay, a claim against you by the federal government arises by law. (Internal Revenue Code § 6321.) This claim is called a tax lien. The existence of the government’s claim is not public information—at least initially—and so it is sometimes called a “secret” or “statutory” or “automatic” lien.

The tax lien automatically attaches to just about everything you own or have a right in. If you owe interest and penalties on the tax, which is often the case, the lien covers these amounts as well.

Notice of Federal Tax Lien

If the IRS sends you a valid tax bill and you don’t pay it, you may receive a written demand to pay. This paper is called a CP-501 notice, referring to the IRS number on the right-hand corner. If you don’t pay within 30 days, the IRS has to the right to file a notice in the public records showing your tax debt. This paper is officially called a Notice of Federal Tax Lien. The IRS files over 500,000 notices each year in the county and/or state public records offices where you live, work, or own real estate. In the few states without county recording systems, the IRS sends the Notice of Federal Tax Lien to the secretary of state’s office. The state or county fee for recording the tax lien is paid by the IRS and added to your bill.​​

The IRS does not check first to see if you actually own real estate before recording the lien notice. It has no reason to. Even if you don’t own property now, you might later and the IRS gets first dibs on the proceeds from its sale or financing.​

Example:

Joyce owes the IRS and lives in Fulton County with her Aunt Mildred. The IRS records a Notice of Federal Tax Lien at the county recorder’s office, even though Joyce owns no real estate. Aunt Mildred dies and leaves her home to Joyce. The IRS’s lien now attaches to the house. Joyce won’t be able to sell the house with a clear title without first paying off the IRS. And Joyce won’t get rid of the lien by getting rid of the property. Any buyer takes the property with the IRS lien on it. And the IRS then has two sources of collection—Joyce and the property held by the buyer.​

Effect of a Recorded Notice of Federal Tax Lien

Just as a recorded mortgage tells anyone who searches the public records or pulls your credit report that you owe on your home, a Notice of Federal Tax Lien shows the world that you owe the IRS.

A recorded tax lien damages your borrowing ability by scaring off potential creditors or lenders, making it difficult for you to finance any purchases or get a home loan. Tax lien notices are picked up by credit reporting agencies, such as Experian, Equifax, and TransUnion.

Neutralizing a Recorded Federal Tax Lien

Keep in mind that the automatic, secret, or statutory tax lien and a recorded Notice of Federal Tax Lien are two distinct things. You can’t escape a valid automatic tax lien without (a) paying the tax, interest, and penalties owed, (b) eliminating it in bankruptcy, (c) reducing and paying it through an Offer in Compromise, or (d) having the time limit for collections run. An automatic tax lien will not appear in any public record, such as a county recorder’s office. Hence, it’s sometimes called a silent or secret tax lien. A recorded Notice of Federal Tax Lien tells the world your secret. The best way to get rid of it is to get an IRS Certificate of Release of Federal Tax Lien. The IRS will issue a Certificate of Release if you fully pay the tax owed, discharge it in bankruptcy, or pay it through an Offer in Compromise or if the time limit for IRS collections has run out.

The IRS will not reduce the original amount shown on a tax lien as you make payments. So, if the lien starts out at $100,000 and you pay it down to $1,000, the lien will show as $100,000 until the last penny is paid. Only then will the IRS issue the Certificate of Release.

When the tax is paid in full, eliminated, or reduced and paid through an Offer in Compromise or bankruptcy or the time for collections has lapsed, the IRS must issue the Certificate of Release (Form 668Z) within 30 days. Once you get the Certificate of Release, you should record it (if the IRS doesn’t) and pay the recording fee in the counties where the IRS filed the lien. Also send a copy to the major credit reporting agencies to make sure it gets into your file. Unfortunately, the original recorded IRS lien notice is not erased by the lien release. Credit bureaus can and do report the original lien—and the release—as long as ten years after the recording.

If the IRS Records a Tax Lien

Legally, the IRS must notify you in writing and give you a chance to pay or try to prevent the lien from being recorded before sending the notice to the public records offices. But if you’ve moved or the notice is lost in the mail, you may never get the warning and only learn of it when you apply for credit or a loan—and are turned down.​

Below is a flowchart from the Internal Revenue Manual instructing IRS personnel when to file a Notice of Federal Tax Lien. The IRS does not always file tax lien notices. It’s hit or miss.​

You can appeal an IRS tax lien notice filing to the IRS Appeals Office. First request a telephone conference with the manager of the IRS unit filing the lien. If the manager turns you down, fax or mail a completed Form 9423, Collection Appeal Request, to the collection office. (A copy with instructions is at the IRS website, www.irs.gov.).

The appeal request is usually decided within five business days. The appeals officer looks at whether the collectors followed correct procedures and considers the facts and circumstances of your case. The officer should telephone you, so list your work and home telephone numbers in your letter. Most taxpayers lose.​

Avoiding or Eliminating a Tax Lien

A recorded tax lien can be the kiss of death on your credit rating. It may effectively prevent you from selling or refinancing real estate. It won’t, however affect your right to sell personal property, such as a motor vehicle, boat, or furnishings. As discussed in Chapter 6, the best way to deal with a tax lien is to avoid one in the first place.​

For some, a tax lien is just one more black mark on their credit report and won’t make it much worse. But you should respond to an IRS letter threatening a lien filing by contacting the IRS at the telephone number on the letter, or calling 800-829-1040, or calling the Taxpayer Advocate Service. Be ready to convince the IRS that you fall into the category “Will filing notice impair collection of the tax liability?” Point out that a tax lien will kill your chance of getting a bank loan, for example.​

If you tried but failed to convince the IRS to forgo recording a tax lien, here are your options after the lien notice has been filed:

(1). Appeal the lien filing. The IRS has five business days after filing the lien to provide written notice to the taxpayer. This must include notice of the right to request a hearing within 30 days from the sixth day after the lien filing. If you win the appeal, the lien will be withdrawn; unfortunately, the fact of the lien filing will still appear on your credit report. (Internal Revenue Code §6320.)

(2). Pay in full. If you don’t have the funds, can you borrow from friends or relatives? It is better to owe just about anyone other than the IRS. The IRS must record a release within 30 days of full payment, but often the agency doesn’t follow through. Call the IRS Centralized Lien Processing Office at 800-913-6050 to verify the release was filed. Or, obtain a copy of your credit report. If it’s still in the report, call the Taxpayer Advocate Service for fastest service.  

(3). Request a partial discharge. If you own several assets that are encumbered by the tax lien and want to use one to pay off the IRS, ask for a discharge from the tax lien. The IRS will likely do this.

Caution

Bankruptcy doesn’t wipe out a recorded tax lien. If your tax debts qualify for a discharge under any chapter of bankruptcy, the lien will remain, although your personal liability is wiped out. If you owned any real estate going into bankruptcy, it is still subject to the tax lien. The IRS could seize that property after your bankruptcy is over. Or, the more likely scenario is that the IRS would allow you to pay over the value of the property rather than seizing it. And, in some cases, the IRS never tries to enforce the lien after bankruptcy—it is hit or miss. (See a bankruptcy attorney for an analysis of your situation.)​

When the IRS Files a Tax Lien in Error​

The IRS occasionally files a tax lien notice in the public records when you don’t owe anything. For example, you paid the bill but the IRS did not properly credit your account. When this happens, under the Taxpayer Bill of Rights you are entitled to a Certificate of Release stating that the lien was filed in error.

Deliver or mail photocopies of the release to the big three credit bureaus—Experian, TransUnion, and Equifax. Get their phone numbers from the yellow pages and call to find out where to send the copies of the release to minimize the damage to your credit rating caused by the IRS error.​

​Getting a Tax Lien Released

The IRS must issue a Certificate of Release of Lien within 30 days after either:
 

(a) the taxes are fully paid, discharged in bankruptcy, or satisfied through an Offer in Compromise, or

(b) the lien becomes unenforceable because the statute of limitations for collections has run—usually ten years after the tax was first due (Internal Revenue Code §6325(a)). See prior section regarding liens filed in error. The lien eventually will become uncollectible after the ten year statute of limitations on collection runs.

If 30 days pass and no release has yet been issued (not uncommon), then write or call the IRS Centralized Lien Processing, P.O. Box 145595, Stop 8420G, Cincinnati, Ohio 45250-5595; 800-913-6050. Give the date of your request and your name, Social Security number, employer identification number, address, telephone number with the best time to reach you and tell why the lien should be released (such as the taxes were paid, the lien was filed in error, or the statute of limitations has run). Enclose a copy of the tax lien you want released. If you paid the tax, also enclose a copy of an IRS written acknowledgment of payment, an IRS transcript showing payment or a canceled check.​

For emergencies (such as a mortgage loan closing held up by the tax lien), call the Taxpayer Advocate Service. If there is a balance due and you need quick action, be prepared to pay with a certified check, cashier’s check, or money order. Alternatively, the IRS should agree to accept payment out of the proceeds of the real estate escrow.​

Suing the IRS for Collection Actions​

It is possible to sue the IRS in U.S. District Court for damages if it fails to release a tax lien or takes unauthorized collection actions. (Internal Revenue Code § 7430; IRS Regulation 1.7430.) To win in court, you must prove that you suffered direct economic damages from the IRS’s actions. Before suing, you must first try to solve the problem using channels within the IRS. Your litigation costs are recoverable, too, but not any costs of fighting the IRS before you filed the suit.​

Don’t get too excited about suing the IRS. The law makes it tough to prove your case or to recover any big money. And judges are reluctant to award attorneys’ fees and costs even when you win. Very few lawyers are willing to take this kind of case on a contingency basis (in which the fee is a percentage of the amount recovered).​