What Are the Effects of A Federal Tax Lien?
When the IRS files a Federal Tax Lien, it makes a claim to a taxpayer’s property as security or payment for a tax debt. As this notice becomes public record, it not only serves to secure the IRS’s interest in collecting the tax debt, but informs other creditors of its priority position in collecting the debt and advises new potential creditors to carefully evaluate lending to the taxpayer in consideration of its preferred position.
Why Is This A Problem?
- The filing of a federal tax lien may prevent the taxpayer from borrowing additional monies from other lenders until such time that the federal tax lien is removed;
- Once recorded, the lien may damage a taxpayer’s credit score which may prevent the taxpayer from borrowing money that would otherwise have been available;
- The recording of a tax lien may result in the taxpayer having to borrow money at a higher interest rate;
- The inability of a business or individual to have available credit may result in missed opportunities that would otherwise have been profitable. Businesses without available credit will often fail in many ways.
Prior IRS Procedures
Prior to the new collection procedures, the IRS would generally not release a filed tax lien until the taxpayer satisfied all tax debt which includes taxes due, penalties and interest. Once the debt was satisfied, in most cases, the IRS would automatically release the lien within 30 days.
New IRS Procedures
Newer line procedures now require the IRS to withdraw the federal tax lien immediately once full payment of taxes are made if requested by the taxpayer. This is particularly important because the prior automatic release 30 days after the taxpayer paid the debt unfortunately does not always happen.
More importantly, the IRS will now allow lien withdrawals for taxpayers entering into a direct debit installment agreement, or where the taxpayer not only agrees to make periodic payments in full satisfaction of its debt.
Third, the IRS will withdraw liens on existing direct debit installment agreements upon the taxpayer’s request, after the taxpayer can show that the direct debit payments will be honored by the bank.
Fourth, the IRS will soon double the dollar thresholds to $10,000 when liens are generally filed (previously $5,000).
The new lien procedures were developed in response to the ineffectiveness of the IRS to collect taxes despite the significantly increased filing of tax liens by the government. The filing of tax liens has not only been ineffective, but further hurts the ability to collect as it damages the taxpayer’s ability to borrow from other sources, causes an increase in interest rates when the taxpayer can borrow, damages a taxpayer’s reputation amongst the business community and other creditors.
Even though the filing of a tax lien may be removed, the notification that a tax lien was filed remains for many years thereafter which ultimately hurts the taxpayer’s credit score resulting in more limited borrowing options and higher interest rates.
Taxpayer’s facing liens now have more options to eliminate the filing of these liens by entering into certain agreements that were not previously available.
Taxpayer’s who already have tax liens can help increase their ability to borrow by having existing liens removed even when the tax debt is not fully paid.