There is a huge debate going on in the tax practitioner community right now with regards to liens. The IRS and many other state revenue organizations use tax liens to secure their interest in your unpaid tax debt. Liens are a source of debate in the tax practitioner community because their effectiveness in achieving tangible goals (especially when taxpayers do not own assets) is debatable. In addition, as you noted, they damage your credit score and prevent you from borrowing to meet obligations. Here are two common questions I get in my practice.
How to Remove or Remove a Lien
A federal tax lien waiver is subject to three main conditions: your debt is paid in full, the payment in respect of your debt is secured by bonds, and the collection period has expired (Publication 594, “The Reason We’ll ‘Release’ a Federal Tax Lien,” 6/4/ 2013). A lien waiver means that the IRS has removed the lien on your debt and the Federal Tax Lien Notice. The IRS will file a Federal Tax Lien Release Certificate with state and local authorities.
There are additional options for releasing and/or releasing liens. For example, if you enter into an “Installment Agreement to meet tax obligations, unless the Agreement provides otherwise, the IRS may withdraw the Federal Tax Lien Notice” (Publication 594). The IRS can waive liens to “help you pay your taxes faster” (Publication 594). If the IRS does not follow proper procedures, liens can be released. If a lien is filed during the automatic period of bankruptcy, the lien may be released. Finally, if it is in your best interest and the interests of the government, the IRS may waive the lien.
Finally, a lien can be released when a taxpayer applies for an exemption (from a federal tax lien), which is defined as the removal of a lien from a particular property. There are two main circumstances that contribute to the use of federal tax liens. First, the IRS can issue a Certificate of Discharge if you sell the property. Removing or relinquishing a lien from a property is usually met at the time of sale. For more information on how you may qualify for discharge, review Publication 783, Instructions on How to Apply for a Property Release Certificate from a Federal Tax Lien.
Coordinate Lien
Subordination of federal tax liens is defined as the process of asking creditors to “move ahead of the government’s priority positions” (Publication 594, “How to Create a Secondary IRS Lien for Other Creditors” [‘Subordination’]). For example, IRS liens have priority over new mortgages. When you try to refinance your home, you can’t because of government priorities. In some cases, you can request that the federal government transfer the lien to the new mortgage lender. For more information on subordination liens, see Publication 784, How to Prepare an Application for the IRS Subordination Lien Certificate.