Most people choose to stay out of trouble with the IRS by ensuring they pay their tax bill at the appropriate time. Sometimes, some factors beyond our control can prevent this from occurring. Often, this occurs because the IRS sends the bill to the wrong address or the funds simply not available. This can be as a result of a job loss, a surprise bill, or a number of other incidents in life. The IRS has a right of entry to an array of avenues to collect the income tax you owe. They may do a wage garnishment or levy your bank account. They also have the choice of staking a claim on your property; this is called a tax lien.
Tax Lien Fundamentals
A lien is not usually the first step in the collection process. The IRS must correctly determine how much you owe. They send a bill to advise you of your liability and provide payment instructions. This is a Notice and Demand for Payment. If the bill isn’t fully settled by the deadline, the past-due debt results in the IRS filing a Notice of Federal Tax Lien for many taxpayers. It informs your creditors of the lien on your property.
Therefore, a tax lien has a severe impact on your financial solvency. It applies to real estate property, vehicles, business property – including accounts receivable, and securities. Opposing to popular belief, filing for bankruptcy is not a viable loophole. This is because most income tax doesn’t qualify for inclusion. In addition, the lien remains in place after a bankruptcy is discharged.
Tax Liens and Your Public Record
Tax liens do reflect on your public record. They’re quite straightforward for anyone with internet access to find. You can find them by going to the Website of your state’s Secretary of State, creating an account and conducting a search. If one wants a listing of business tax liens, he or she can do so by filing a written request and paying a fee. You will then receive a CD from the IRS containing the taxpayer’s name, address and more.
Tax liens can be withdrawn, or removed from, your public record as soon as the tax debt is paid in full. For taxpayers who owe less than $25,000, it may be removed if a successful payment history is established. This must be done through direct debit from your bank account. Some taxpayers may have their lien withdrawn for another reason. This can include the IRS approving an Offer in Compromise or the statute of limitations on the debt expiring.
Tax Lien Discharges
Liens and levies are often creates a confusion to consumers. Levies apply to one asset at a time; it applies to things like wages or a checking account. A separate levy must be done on each asset targeted. Liens lay a blanket wager on possessions, such as a home or boat. A lien discharge means excluding one possession from the tax lien blanket.
For instance, if you own a residential home, a vacation home, a car, and a boat, first of all, congratulations! You’re certainly doing well. Second, if you’re late paying your taxes, the IRS may opt for a lien as a collection effort. If so, they then own an interest in these items and can seize them to pay the debt. As a result, this makes it hard to sell or refinance this property. The threat of having the home seized by the IRS is still present after it’s sold. If you refinance it, the new bank must acknowledge that any funds from future transactions are going to the IRS first.
However, if you plan to refinance your home to cash out equity to pay your debt, the IRS may offer assistance. They will consider discharging your home from the lien to simplify the refinance. The IRS always has their eye on the prize, which is the collection of your past-due tax debt. Hire a tax professional to establish the framework and submit the paperwork for a discharge for you.
Tax Lien Subordination
If a discharge doesn’t make sense for your case, another option may be a request for subordination. The Internal Revenue Code lays out certain criteria that must be met for a tax lien subordination to be accepted. As mentioned before, the IRS always has their eyes on the prize. That means they’ll be open to opportunities that will offer them the chance to collect payment before the statute of limitations expires.
Using the instance of a residential home, let’s talk about subordinations. If Company A loans taxpayer money to buy a home, Company A is in first position. Company A will receive repayment first at the time of a sale or refinance of the home. That Implies that Company A will get paid before the taxpayer receives extra money that comes out of the transaction. If Company B extends a second loan against the home, it’s with the common understanding that it will be in second position.
At the point of a sale or refinance, Company A receives repayment first. Company B receives repayment second if there’s enough money in the transaction. A tax lien on the home lands in first position after a sale or refinance. Due to this, most banks won’t loan money to a delinquent taxpayer. That is, unless their loan rests in first position to protect their investment. Subordination changes the position of the tax lien to aid in a sale or refinance.
If the IRS recognizes that subordination will help a refinance, they are more probably to accept a subordination request. This is because it offers them the chance to collect the debt from cashed-out equity. Often, this may happen if there’s no equity, but the refinance will reduce the interest rate on the mortgage. The monthly savings can result in the potential of the taxpayer to make monthly installment payments on their back-tax debt. The IRS is likely to agree to the plan if the savings results in a sufficient monthly installment payment.
Removing a Tax Lien
Once the IRS has filed a tax lien on your property, options for removal become particularly limited. The lien can only be removed once the debt is paid fully. However, planning to make payments on the debt can play a part in removing it. This may be an approved Offer in Compromise or agreement on a satisfactory installment agreement. Other exceptions often apply in certain cases. Consult with a tax relief expert to understand your exact options. You may be able to break free from a tax lien that is burdening your property.