A client
contacted me this past week. He received a Notice of Federal Tax Lien, and he
wanted to find out if (1) he should worry about it and (2) if I could do
anything about it.
Here is the
pat answer in tax practice: it depends.
A lien is different
from a levy. Odds are you and I would worry more about a levy than a lien.
A levy means
that the IRS comes in and takes your money. The two classics are the wage
garnishment, where they contact your employer and have him/her send them part
of your paycheck, and the bank levy, where they swoop in a drain your bank
account.
The IRS
places a lien on a taxpayer’s property when he/she has unpaid tax debt. It does
not mean that they are going to garnish your paycheck or seize your house, but
it does mean that they have filed something at the courthouse alerting the
world that you have unpaid debt. That lien can cost you over a hundred points
on your credit score. In today’s world, that could affect you being offered a
job or being approved for an apartment.
A lien can
stay on your credit report for years, even after the tax is paid-off.
The IRS has
realized the injurious effect of its previous lien policy. It has taken steps,
albeit small, to alleviate some of the sting:
(1) The IRS has increased the minimum
amount of tax debt that prompts the filing of a tax lien from $5,000 to
$10,000.
(2) If you owe less than $25,000, the IRS
will withdraw the lien if you set up a direct debit installment plan. This
means they automatically draft money from your bank account every month. You
have to pass a probationary period of three months (and three payments). The
IRS will then withdraw the lien.
OBSERVATION: Words are important here. Record of a lien can
remain on your credit report, even after it is removed. You prefer a withdrawal
of the lien, as a withdrawal is as if nothing ever happened.
(3) Even if you owe less than $25,000 and
have made at least three payments under a direct debit plan, you still have to
request that the lien be withdrawn. You should submit Form 12277 Application
for Withdrawal of Filed Notice of Federal Tax Lien, although any written
request that provides the necessary information likely will suffice.
(4) Even after all this, you want to
contact the credit bureaus to be certain that your records have been updated.
What if you owe more than $25,000?
This is my client’s situation, and there are not many good options.
(1) Pay off the tax debt in full.
OBSERVATION: This one ranks a ‘duh.” Nonetheless, the point
to consider is that you might be able to borrow and pay off the IRS. Granted,
you still owe money, but at least you can stop the ongoing ding to your credit.
(2) Post a bond.
OBSERVATION: Again, if you have enough money to post a bond,
you likely can pay-off the debt. I have never seen someone post a bond to
release a lien.
(3) Request a partial release
You own several assets encumbered by the lien. If you need to
sell an asset, you can request partial release from the lien. Expect the IRS to
want the money from the sale, of course.
(4) Offer in Compromise
This is the “pennies on the dollar” commercial on radio or overnight
television. The idea here is that you offer the IRS what you have, plus a
portion of your future earnings, to pay-off a tax debt. If you still have years
to go in the workforce and have reasonable earnings potential, you likely will
not qualify for “pennies on the dollar.” The IRS can also see your earning
power over the next few years, and they will be loathe to let you walk away.
However, if you have modest assets and are disabled, retired or near
retirement, the OIC may pack a punch.
What did I recommend to my client? He
owes more than $25,000, and enough more where I cannot have him pay-down to
$25,000. He is young enough, and has enough earning power, where any offer in
compromise would yield little (if any) more benefit than a payment plan. In
that case, I would prefer to remain in a payment plan, as an offer will toll
the statute of limitations. That takes
away my last ditch option…
(5) Run the 10-year statutory collection
period
The IRS has 3 years to audit your return and 10 years to
collect. Sometimes they overlap, and the two periods run concurrently. Think of running the bulls in Pamplona for 10
years, and you can visualize this tax strategy. Still, sometimes it works,
which is why tax advisors continue to talk about it.
The trap here is “tolling,” which means that the collection
period is suspended. Toll enough and the 10 years can become 15 or 20 years.
What causes a toll? A bankruptcy application causes it. So does an offer in
compromise.
There is no releasing my client’s lien
early. Why? The IRS will generally not release a lien if it knows it will not
be fully paid-off. My client has a
partial pay plan, which means that his full liability will not be paid off
unless the plan payment or period changes.
He owes over $25 thousand and will
not pay-off the IRS in full as the plan now stands. He is hosed.
