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FEDERAL TAX LIENS: WHAT DO THEY MEAN AND WHAT CAN YOU DO

When the IRS files a federal tax lien against you, it generally does this in the county where you live or work. That notice of federal tax lien tells the world that you owe them money. It also protects their interest and generally puts them ahead of other creditors. A recorded tax lien will injure your ability to borrow because most banks and lenders will refuse to loan you money while the lien is pending. That’s not always the case, but it does make it more difficult for you to get financing, especially on a home loan. Also, keep in mind tax lien notices are picked up by credit reporting agencies.

HOW DO I GET RID OF A FEDERAL TAX LIEN

You eliminate a federal tax lien by getting an IRS Certificate of Release of Federal Tax Lien. The IRS will issue the Certificate of Release to you if (a) you fully pay the entire amount of tax owed, (b) discharge the tax in bankruptcy (keep in mind this is very technical and you will need professional help), (c) if you reach a settlement with the IRS known as Offer in Compromise and you pay the settlement amount, or (d) if your collection statute expires, meaning the statute of limitations has run out.

The IRS will not eliminate the tax lien or reduce the amount shown on the tax lien when you are making payments on a payment plan. In other words, if the original tax lien was $50,000 and you now paid it down so that you only owe them $1,500, they do not modify the lien. It will still show up as a $50,000 lien until the final amount is paid.

Once you’ve eliminated the tax by paying it in full or by any of the other three methods listed above, the IRS is required to issue you a Certificate of Release within 30 days. Generally, the IRS will do this automatically, and generally they will record it. If they do not, you should record it yourself in the same place where the original lien was filed. I would also recommend that you send a copy of the Certificate of Release to the credit reporting agencies.

People often ask me if the Certificate of Release erases the original lien. Unfortunately, it does not. Often credit bureaus continue to report the original lien, although they will also report that that lien has been released.