Tax lien notices can cause a lot of confusion, especially if they are unexpected. Consider the following situation: one day, you start receiving calls from different people asking if you’ve received notice of a tax lien filed against you or your business. You haven’t, and you’re unaware of owing back taxes. At first, you assume these calls are coming from scammers, but by the fifth or sixth call, you’re beginning to wonder what’s really going on.
This may not be something you’ve experienced, but others have, and you could in the future.
Why does the IRS file a tax lien?
- Secure the tax debt, protecting the IRS’s ability to collect the unpaid tax debt.
- Make the tax lien a matter of public record, so that other current or potential creditors are put on notice.
- Move the IRS into a priority position for collection of the tax debt. All three credit bureaus have stopped reporting tax liens, so there is the possibility a tax lien filed against you will not completely destroy your credit score. However, having a tax lien filed against you can cause big financial problems, particularly if you are trying to purchase a home, car or get business financing
What Prompts These Calls?
The companies making these types of calls are typically tax resolution companies. The tax resolution industry started in the mid-1980s in Colorado and gained increasing traction in the 1990s. The industry has become increasingly saturated since then. These companies reach out to businesses and individuals whose public record indicates they have had a tax lien filed against them. Notices of public tax liens are filed by the IRS and state tax departments. These liens differ from a property tax lien; they are not focused on collecting delinquent property taxes, rather, they are issued to collect unpaid income taxes as well as penalties and interest for noncompliance, such as failure to file and pay taxes.
When a lien is filed by the IRS, whether by a revenue officer or by the Automated Collections System (ACS), it is filed with the secretary of state or with the county clerk or recorder’s office in the county where the business or individual is located. It is filed to secure the previously unsecured tax debt that the IRS intends to collect.
Tax resolution firms find these records in two ways:
- They have someone within their company search for federal and state tax liens, or
- They hire a third-party vendor to do the research for them. When several companies purchase the information from the same vendors, it results in you getting a lot of phone calls from different companies about the same lien.
Lien Awareness
Business owners and individuals aren’t always aware of IRS collection procedures, but they probably are aware of either not filing a return or a potential tax liability. If a return is not filed, or if another liability is discovered, the IRS typically reaches out to provide that information.
If the taxpayer doesn’t respond to those prior communications, the IRS feels compelled to protect their rights to collect the tax due by filing a tax lien. In cases like these, it’s a good idea to find help. It is important to find someone who can not only negotiate with the IRS, but who also offers experience in tax compliance so that the underlying cause can be corrected.
Sometimes a lien is filed on taxes that were paid and filed on time. It is your responsibility, in this case, to provide the IRS with documentation to prove nothing is owed. The IRS will issue a retraction of tax lien or a lien release once they have satisfactory proof that there was an error on their end and that you are current and compliant.
Unfortunately, an unexpected lien can indicate identity theft or fraud. If you suspect identity theft is the cause of a tax lien, contact the IRS directly. The IRS takes identity theft seriously and works closely with taxpayers to reduce and resolve cases of identity theft. For more information, visit the IRS website.
Steps to Resolution
When it comes to resolving tax liens, first and foremost, verify that this tax lien pertains to you. You can ask the company representatives that are calling you to verify the name and address on the file they are using. You can also contact the secretary of state, the county clerk or recorder’s office to obtain a copy of the lien.
If the lien was filed against a business or individual with a similar name, but the last 4 numbers of the Employer Identification Number (EIN) or the last four of the Social Security Number don’t match yours, the lien does not pertain to you. When the information on a lien matches your current or previous name, address, EIN or social security number, it is important to take steps to resolve the situation promptly.
Whether these taxes are owed or not, the IRS believes they are and intends to collect them. You will want to:
- Request a copy of the lien and look at what time periods the IRS claims are delinquent.
- Call the number provided on the lien and request more specific information.
- Verify that filings from the time periods in question are free from error. A typo, such as an extra zero or an improperly placed decimal point, can lead the IRS to believe your tax debt is substantially more than it actually is.
- Consider submitting amended filings to correct any errors.
- Contact your CPA to find out if their records show all taxes were filed and paid on time. If a return or taxes due were filed or paid late, this can result in penalties for late filing or payment and possibly interest. Since the IRS views compliance as the responsibility of the taxpayer, they will hold you liable for noncompliance.
- Identify whether or not you need to set up a payment arrangement with the IRS if you are unable to pay the penalties and interest in full.
The IRS Froze My Bank Account – What Can I Do? We answer this and other common questions in our IRS Controversy series.
How do I have a tax lien removed?
While the best way to get rid of a tax lien is to do everything possible to not allow it to get filed in the first place, that’s not always possible. So, how are tax liens removed?
Release: The easiest way to get a lien removed is to pay off the full amount of tax, penalties and interest owed. Realistically, that’s not always possible. An installment agreement to pay the tax can put taxpayers on the right track, but the tax lien won’t be released until the tax debt is satisfied, which would most likely be at the end of the installment agreement. If the tax debt, for whatever reason, can’t be or isn’t collected by the IRS, the statute of limitations on the debt may expire. In that case, the lien is considered unenforceable, and the taxpayer can request that it be released. The IRS may also, under the right set of circumstances, decide to release the lien if the outstanding balance is under $25,000, but don’t count on this happening without you taking action.
Discharge: In cases where the taxpayer can sell real property or other assets to satisfy the tax liability, the IRS may consider discharging that property or asset from the lien, as long as the taxpayer agrees to use the proceeds of the sale to pay the tax debt.
Subordination: A taxpayer may choose to refinance their mortgage or apply for a second mortgage or other financing in order to pay off their tax debt. A tax lien can prevent this from happening. But, the IRS may decide that a form of subordination, where the IRS in a sense lifts the tax lien to allow for a particular transaction, such as the refinancing, to take place. Subordination doesn’t remove the tax lien, however; it just allows a specific creditor to move in front of the IRS.
Why would the IRS do the subordination? By allowing the refinancing to be completed, the IRS gets the tax liability paid and the taxpayer can get their property refinanced. But, the IRS will need to see that extra funds for the payment of the tax debt will come as a result of the refinancing, otherwise the subordination will probably not be a possibility since the IRS has nothing to gain from it.
Get help negotiating with the IRS
IRS Collections and dispute resolution is confusing. Find a trusted advisor who has expertise in negotiating with the collections and appeals divisions and securing penalty abatement. This will help give you peace of mind and tax relief help.
Our IRS Dispute Resolution and Collections team is ready to help you.