Posted August 24, 2022

What is a Federal Tax Lien?

A federal tax lien does not take or seize anything (a “levy” does the taking). Instead, a federal tax lien provides notice of your personal or business tax liability to third parties (including your lender). It also secures the government’s interest on your business’s assets (real and personal property), and establishes priority. Here’s how it works:

• Before a lien appears, there must be a liability. A liability may arise in conjunction with any kind of federal tax, e.g., withholding, unemployment, or income (business or personal; note: property taxes are local taxes, not federal taxes).

• Generally, the taxpayer must compute the tax due on the return and make the necessary payment by the due date.

• If the taxpayer fails to pay the tax when due, the IRS will “assess” a liability. Shortly thereafter, the IRS will issue a Notice and Demand letter.

• If the liability is not paid within ten days, the IRS can begin actively collecting the taxes. There are two separate groups within Collections – the Automated Collection System (ACS) and Revenue Officers. Generally, ACS handles individual liabilities and Revenue Officers work business liabilities.

• The IRS trains its Revenue Officers to file the federal tax lien and final notice of intent to levy early in the process. Frequently, they do so (even before speaking with the business).

How to Prevent a Tax Lien

It is much easier to prevent the IRS from filing a federal tax lien than removing a lien once filed. The only sure way to prevent a federal tax lien is to avoid owing taxes. If that’s no longer possible, the next best method is to be proactive and negotiate a reasonable repayment arrangement. There’s a discussion on installment agreements below. The IRS may withhold filing a federal tax lien once an agreement is in place. This assumes there is no lien already in place. It also depends on the type of tax and the amount owed.

How to Get a Tax Lien Removed

A federal tax lien remains in effect until the IRS withdraws it, it becomes unenforceable, or the individual or business pays the liability in full. For the IRS to withdraw a lien, a taxpayer must demonstrate the IRS filed the lien by mistake. Alternatively, if a taxpayer can demonstrate the lien creates a hardship, the IRS may withdraw it. Please note it is rare and extremely difficult to demonstrate hardship, and almost entirely limited to individuals. A federal tax lien becomes unenforceable based on the expiration of the statute of limitations. Generally, the statute of limitations is ten years from the date of assessment. To remove a federal tax lien, the taxpayer must repay the liability in full, including penalties and interest.

Alternative: Subordination of a Lien

A federal tax lien can have serious consequences, especially if a business needs funding. If lenders’ concerns are not properly addressed, they will stop funding. Lenders are generally concerned about (1) levies and (2) funding in second position behind a federal tax lien. Typically, the IRS will not withdraw or remove a federal tax lien. Fortunately, there’s still a two-step solution to preserve the funding relationship:

• Step 1. An installment agreement. A formal agreement prevents the IRS from levying a business’s assets, including bank accounts and receivables. Generally, 95% of agreements fail because they were set up to fail. To avoid failure, it’s imperative that the business can afford the monthly payments.

• Step 2. A subordination of federal tax lien. The subordination addresses lenders’ priority concerns by putting the lender’s secured interest back into first position ahead of the IRS. Importantly, there’s a prerequisite. To subordinate a lien, one must secure an installment agreement first.

When federal tax issues arise, don’t wait for the IRS to file a tax lien or issue levies. Be proactive. It’s best not to try to deal with the IRS on your own. Fill out the form below to speak with a specialist about how we can help.