Federal Tax Liens
If you owe the IRS more than $10,000 they can legally file a tax lien against you. A Federal Tax Lien is a public record that notifies all other creditors that you owe money to the government. Because it is public record, it also notifies everyone else who may happen to take a look at the public record databases — family, friends, and an army of tax companies that are going to solicit your business.
Beyond a mere annoyance, a Federal Tax Lien can destroy your credit score, prevent you from purchasing or refinancing your house, and even cause you to lose your job or a security clearance.
Luckily, you do have options for dealing with a Federal Tax Lien:
Certificate of Discharge
A Certificate of Discharge is used to “discharge” specific pieces of property from an IRS tax lien. It does not remove the lien itself, it just removes property from the hold of the lien.
A Certificate of Discharge is used when you want to sell a piece of property and you have a tax lien. For example, if you want to sell your house we can negotaite a Certificate of Discharge so that your buyer can purchase the house without worrying that the Tax Lien is going to interfere with the sale.
Certificate of Subordination
A Certificate of Subordination is used to subordinate the IRS’ lien position behind another secured creditor for a specific piece of property only. It does not remove the lien, it simply allows another creditor to move in front of the IRS on that one piece of property.
A Certificate of Subordination is used when you want to refinance a piece of property and you have a tax lien. Subordination means that the IRS is going to give the new lender priority over the tax lien. Let me explain.
All secured creditors have a priority based upon when they became a creditor. For example, if you own your home you might have a first and second mortgage. Your first mortgage has first priority, and your second mortgage has second priority. That means that if you ever sell your home, your first mortgage will generally be paid first.
When the IRS files a tax lien against you, they too become a secured creditor. They basically move into line behind the mortgage companies, so now they are third in line to get paid if you sell that house.
The problem is that if you want to refinance your house, but you are only going to be paying off the first and second mortgage, that would move the IRS from third position into first position because the two mortgage companies that were in front of the line are now paid off.
This is a problem for the new lender who is refinancing you, because the IRS would now be first and the new lender would be second in line behind them. They obviously don’t want to lend you money unless they are in the first position to get paid.
A subordination simply means that the IRS will agree to let the new lender move ahead of them in line.
Withdrawal of Federal Tax Lien
A Withdrawal of Federal Tax Lien is the only way to actually remove the lien altogether. The first two options dealt with specific pieces of property, while a Withdrawal will remove the lien from everything.
A Withdrawal of Federal Tax Lien is a fairly rare occurrence. Once the IRS has established themselves as a secured creditor, they are hesitant to give that up.
In general, in order for the IRS to agree to the Withdrawal of a Lien you must show that withdrawing the lien will increase the IRS’ ability to collect the debt. For example, if you can prove to the IRS that you are going to lose your job because of the Tax Lien they may withdraw it to ensure that you can continue earning money to pay them with.
It must be stressed that you must prove this to the IRS. It cannot be a situation where it “might” happen or “could” happen. Preferably, there needs to be a written policy or letter from your employer saying that it will definitely happen.
The IRS also released new rules in 2011 that say the IRS will Withdraw a lien for anyone who owes $25,000 or less and gets on a payment plan with the IRS. The IRS will require that these payments be automatically debited from your bank account, rather than you mailing in a check, and once you have made three payments via direct debit you are eligible to apply for a Withdrawal.
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