Changes in the Lien Process and the Importance of Lien Withdrawals

Editor: Valrie Chambers, Ph.D., CPA

Procedure & Administration

A Notice of Federal Tax Lien is a legal filing in which the IRS announces its priority rights to the taxpayer’s property over most other nonsecured creditors for the amount of an unpaid tax debt. The lien applies to property owned by the taxpayer at the time of the notice and any property acquired thereafter by the taxpayer.

When a lien is filed, credit reporting agencies update the taxpayer’s credit report, dropping the credit score by about 100 points (IR-2010-83). Employers, landlords, car dealerships, credit card issuers, and insurance companies often use credit scores to decide whether to rent to or employ individuals and to set fees and rates for clients. With rising costs and perhaps declining income from a lower credit score, it is more difficult for taxpayers to meet their current and prior obligations, increasing the risk of taxpayer default.

Once a lien is satisfied, the IRS normally closes the case. However, the notice that a lien was placed remains on the taxpayer’s credit score file for seven years at each of the three credit agencies if the assessment was paid and for longer (but for different amounts of time at different agencies) if the lien was not fully paid. Where there are lien withdrawals, however, the credit agencies remove the lien information from the taxpayer’s file as if it had never existed, allowing the taxpayer to financially regroup faster and at lower cost than if the lien were still in place. Taxpayers may request a lien withdrawal, but until recently the IRS was hesitant to grant that request, even though a financially stronger taxpayer with leaner costs could arguably pay off federal tax assessments faster. The IRS has now reconsidered.

The New Policies

The IRS often filed liens automatically when tax debts exceeded $5,000. This amount now has been doubled to $10,000. Under the new policies announced in IR-2011-20, the IRS will make it easier for taxpayers to obtain lien withdrawals after the tax bill is fully satisfied, but this relief is not automatic: Taxpayers must request the withdrawal. When the tax debt is not yet fully paid, a lien on unpaid assessments of $25,000 or less may be withdrawn if the taxpayer enters into a direct debit installment agreement after a probationary period during which the taxpayer demonstrates that the direct debit payments will be honored. Taxpayers switching from a regular installment agreement to a direct debit installment agreement and those with existing direct debit installment agreements are also eligible for lien withdrawals. However, the IRS will only withdraw a lien at the taxpayer’s request.

Obtaining a Lien Withdrawal

According to Sec. 6323(j)(1), withdrawals of liens can be granted if the taxpayer has entered into an installment agreement or if “the withdrawal of such notice will facilitate the collection of the tax liability” (Sec. 6323(j)(1)(C)). Taxpayer representatives can now ask collections officers for the withdrawal. If the collections officer denies the request, the issue can be elevated to a manager, who has the power to stop an automatic lien. In addition, the national taxpayer advocate can authorize a withdrawal when it is in the best interests of the taxpayer and the government and/or where hardship is involved (Secs. 6323(j)(1)(D) and 7811(a)(1)). Upon the taxpayer’s written request, the IRS will then notify credit reporting agencies and any financial institution or creditor whose name and address is specified in the request.

Conclusion

The IRS’s changes in lien policy will benefit some taxpayers with unpaid assessments. Optimal relief is not automatic, however, and written requests for lien withdrawals should be in every tax representative’s toolbox.

EditorNotes

Valrie Chambers is a professor of accounting at Texas A&M University–Corpus Christi in Corpus Christi, TX, and is a member of the AICPA Tax Division’s IRS Practice and Procedures Committee. For more information about this column, contact Prof. Chambers at valrie.chambers@tamucc.edu.