What to Do About an IRS Tax Lien When You Can’t Pay in Full

When the IRS places a lien on your property, it can feel overwhelming. A federal tax lien gives the government a legal claim to your property, including real estate, financial assets, and personal belongings, until your tax debt is paid off. However, there are alternative options that may help you lessen or remove the impact of a lien, allowing you to regain control over your financial situation. Here’s a breakdown of the alternatives available to you.

1. Discharge of Property

A discharge of property removes the federal tax lien from a specific asset, such as your home or vehicle. This option is particularly useful if you need to sell or refinance a property while still carrying a tax debt. While the discharge doesn’t eliminate your tax debt, it frees up the specific asset from the lien.

To determine your eligibility for a discharge, refer to IRS Publication 783, which provides detailed instructions on how to apply for a certificate of discharge. This can be a crucial step in managing your finances and moving forward despite your outstanding tax obligations.

2. Subordination

Subordination allows other creditors to take precedence over the IRS lien, which can facilitate securing loans or mortgages. Although the lien remains in place, this option can improve your chances of obtaining financing, as lenders may be more willing to work with you if they know they will be paid first in the event of a default.

To find out if you qualify for subordination, consult IRS Publication 784, which outlines the application process for a certificate of subordination. This strategy can be particularly beneficial if you’re seeking to access credit despite an existing lien.

3. Withdrawal of the Lien

A withdrawal of the lien removes the public notice of the federal tax lien, indicating that the IRS is no longer competing with other creditors for your property. While this doesn’t eliminate the underlying tax debt, it can significantly improve your credit profile by clearing the lien from public records.

To apply for a withdrawal, you’ll need to complete Form 12277 and meet specific eligibility criteria. The IRS offers additional options for withdrawal under its Fresh Start Initiative:

1. Withdrawal after lien release
   If you’ve fully satisfied your tax liability and the lien has been released, you may request a withdrawal if you meet these conditions:
   • You are in compliance with your tax filings for the past three years, including individual, business, and information returns.
   • You are current on your estimated tax payments and federal tax deposits, if applicable.
2. Withdrawal with a Direct Debit Installment Agreement
   If you are unable to pay off your debt in full, you may qualify for a withdrawal by entering into a Direct Debit Installment Agreement. To be eligible:
   • Your total tax debt must be $25,000 or less (or you can pay it down to this amount).
   • The agreement must ensure that the debt is paid off within 60 months or before the collection statute expires.
   • You must be in compliance with other tax filing and payment requirements.
   • You must have made three consecutive direct debit payments.
   • You cannot have defaulted on your current or any previous Direct Debit Installment Agreement.

Final Thoughts

If you cannot pay your tax debt in full, there are still options available to help you manage or remove the impact of a federal tax lien. Knowing about these options is crucial in navigating your tax issues effectively. If you’re unsure which route is best for you, schedule a free and confidential consultation with us at the law office of Steven N. Klitzner so we can provide personalized advice based on your unique circumstances.