When the Internal Revenue Service files a federal tax lien against you, the lien attaches to your assets such as your property, securities and vehicles. It’s a public record that appears on your credit report. The lien alerts creditors to your unpaid tax debt, which may prevent you from obtaining new credit and loans. If you sell a home when you have a federal tax lien, the proceeds of the sale go to the IRS instead of in your pocket. The IRS provides several payment options to help you get rid of a federal lien. State Departments of Revenue each create their own rules, so contact the state directly if you have questions about a state tax lien.
The traditional IRS payment plan requires that you pay your entire balance within 60 months. Your balance consists of the principal amount of tax you owe, plus penalties and interest. Interest can add up quickly, so don’t be surprised if you owe more than the amounts shown on your tax returns. If you owe less than $25,000, you’ll only have to provide limited information about your finances to establish the payment plan. Your federal tax lien is automatically released within 30 days after your balance is paid in full. Once you determine your total balance due, divide the amount by 60 to get an idea of the monthly payment you’ll be asked to pay. You can contact the IRS directly to set up your plan, or request a payment arrangement on the IRS website if you owe less than $50,000. If you owe more than 50,000, you may still be able to set up an installment agreement, but the IRS will require more financial information. You must be current on filing on your tax returns before you request any payment arrangement with the IRS.
Partial Pay Installment Agreement
You can also request a partial pay installment agreement. This plan works well if you can’t afford to pay your taxes in full within 60 months. The IRS will ask you to pay the amount you can afford each month until your taxes are paid in full, or until the period during which the IRS can collect your balance expires, whichever comes first. You'll have to provide detailed financial information to qualify. If you do qualify, you will be subject to a subsequent financial review every two years. As a result of this review, the IRS could increase your payments or terminate the agreement if your financial condition improves. The IRS only has a certain amount of time to collect from you. The statute is usually 10 years from the date your principal tax is first assessed, but you can have this period extended if you appeal any IRS action, or request an Offer in Compromise settlement. During these times, the IRS legally can't attempt to collect, so it tacks on the extra time to your statute. If you enter into a partial pay agreement, your federal tax lien is released when you pay your balance in full or when the collection statute expires. The IRS will strongly encourage you to make your payments via the direct debit option to qualify for a partial pay installment agreement.
Fresh Start Withdrawal
If you qualify, you can request a lien withdrawal through the IRS Fresh Start program. If you enter into a direct debit installment agreement, you can apply for an early withdrawal of your lien. A withdrawal is different from a release. When the IRS withdraws your tax lien, it removes the lien from public records and your credit report, but it does not release your debt. You’ll still owe the IRS, but your creditors won’t know. You'll qualify for withdrawal if you owe less than $25,000, sign up for direct debit of your monthly payments, make three consecutive payments and file all your due tax returns. Your payment plan must not be in default and you must pay your balance in full within 60 months or before the collection statute expires, whichever comes first. If you qualify, download Form 12277 from the IRS website to apply.
Offer in Compromise
An Offer in Compromise (OIC) is an agreement between the taxpayer and the IRS that settles the taxpayer's liabilities for less than the amount owed. If you have minimal disposable income and little equity in your assets, you might be eligible for this type of agreement. The IRS looks at these two main factors to determine if you qualify. If you’re approved for the program, your federal tax lien is released after you pay the agreed upon amount. Depending on the type of settlement payment you select, payments are generally spread out over 5 to 24 months. The application process for this program is the longest of any IRS payment program. Expect to provide a lot of paperwork and wait months while your application is processed. On average, it takes the IRS between 3 and 18 months to process an Offer in Compromise application. Download Form 656-B from the IRS website to apply and see if you qualify.
With a background in taxation and financial consulting, Alia Nikolakopulos has over a decade of experience resolving tax and finance issues. She is an IRS Enrolled Agent and has been a writer for these topics since 2010. Nikolakopulos is pursuing Bachelor of Science in accounting at the Metropolitan State University of Denver.