Understanding Federal Tax Liens
A federal tax lien is a legal claim the IRS files against your property when you have unpaid tax debt. This lien attaches to all your assets—like real estate, vehicles, bank accounts, and future earnings—alerting creditors and buyers that the government has a secured interest. Tax liens can significantly damage your credit score and impede your ability to buy, sell, or refinance property.
What Is a Tax Lien Withdrawal?
A tax lien withdrawal removes the public Notice of Federal Tax Lien as if the lien was never filed. This action helps improve your credit by erasing the lien from your credit report and public records. To request a withdrawal, taxpayers file IRS Form 12277, “Application for Withdrawal of Filed Notice of Federal Tax Lien.”
The IRS grants withdrawals mainly when:
- The lien was filed prematurely or incorrectly.
- The taxpayer has entered a qualifying direct debit installment agreement and made at least three consecutive payments.
- The payment in full or other resolution (like an Offer in Compromise) has been met.
- Withdrawal will aid in efficient tax collection, such as enabling refinancing.
- Withdrawal serves the best interest of both the taxpayer and the government.
According to IRS guidance (IRS Publication 783), withdrawals typically lead to removal of the lien from credit reports within 30 to 90 days of processing.
What Is a Tax Lien Discharge?
A tax lien discharge releases a specific item of property from the federal tax lien, enabling you to sell or transfer that property free of IRS claim. However, the lien remains on your other assets and is still reported to credit bureaus. To apply, taxpayers submit IRS Form 14135, “Application for Certificate of Discharge of Property From Federal Tax Lien.”
Discharges most commonly occur when:
- The property is sold, and proceeds (fully or partially) pay the IRS.
- The IRS determines their lien interest on the property is worthless.
- The sale proceeds are held in escrow, attaching the lien to that money if unpaid.
- A senior lien on the property takes priority, and the sale price is less than the senior lien balance.
The discharge process facilitates property transactions while preserving the IRS’s secured interest in remaining assets.
Key Differences Between Withdrawal and Discharge
| Feature | Tax Lien Withdrawal | Tax Lien Discharge |
|---|---|---|
| Effect | Removes the entire lien’s public notice completely | Releases only one property from the lien |
| Scope | Applies to all assets tied to the lien | Applies to the specified asset only |
| Credit Impact | Improves credit by removing lien from credit report | No direct credit improvement; lien remains on credit |
| Purpose | Corrects errors, supports tax collection plans | Enables sale or transfer of liened property |
| IRS Form | Form 12277 | Form 14135 |
Who Should Consider These Actions?
- Taxpayers aiming to improve credit: Withdrawal is optimal to remove the lien record and rebuild creditworthiness.
- Property owners needing to sell or refinance: Discharge allows clear title for transactions on lien-encumbered properties.
- Those resolving tax debts: Both options may be considered depending on debt status and goals.
Common Misconceptions
- A discharge doesn’t remove the lien from your credit report—only a withdrawal or release does.
- Withdrawal doesn’t eliminate the tax debt; it just removes the public lien notice.
- Selling a property with a lien requires IRS approval for discharge, not an automatic process.
- A release of lien occurs when debt is fully paid; a withdrawal can occur even if debt remains under specific conditions.
Getting Professional Assistance
Navigating lien withdrawals and discharges involves complex IRS rules and specific forms. Tax professionals, including CPAs, enrolled agents, and tax attorneys, can help assess your situation, guide form submissions, negotiate with the IRS, and advise on credit ramifications.
FAQs
How long does a lien stay on my credit report?
Up to seven years after payment or release unless withdrawn, which results in removal within months.
Can I sell a property with a tax lien?
Yes, but you typically need an IRS discharge to clear that property’s lien.
What’s the difference between a lien release and withdrawal?
A release means the lien is gone because the debt is fully paid; a withdrawal removes the public notice but may occur even if the debt remains.
How do I request a withdrawal?
File IRS Form 12277 fulfilling specific criteria, such as making installment agreement payments.
For more detailed information on related IRS forms and lien removal, see IRS Form 12277 and IRS Form 14135.
Explore additional glossary entries on Tax Lien Release and Lien Withdrawal to deepen your understanding.
Sources:
- Internal Revenue Service. “Understanding a Federal Tax Lien.” IRS.gov. https://www.irs.gov/businesses/small-businesses-self-employed/understanding-a-federal-tax-lien
- Internal Revenue Service. Form 12277, Application for Withdrawal of Filed Notice of Federal Tax Lien. https://www.irs.gov/pub/irs-pdf/f12277.pdf
- Internal Revenue Service. Form 14135, Application for Certificate of Discharge of Property From Federal Tax Lien. https://www.irs.gov/pub/irs-pdf/f14135.pdf
- IRS Publication 783, Internal Revenue Manual Section 5.12.3.4.1. https://www.irs.gov/irm/part5/irm_05-012-003r
