What is a Withdrawal of Lien?
Imagine a tax lien as a public “sticky note” the IRS puts on your property when you owe them taxes and haven’t paid. Now, a withdrawal of lien is like the IRS finally taking down that “sticky note.” It’s a formal release, showing the world that the IRS no longer has a claim on your assets because you resolved the tax issue.
Why Does a Tax Lien Happen?
Before we dive deeper into withdrawals, let’s recap why a tax lien shows up in the first place. When you don’t pay your federal taxes, the IRS can assess penalties and interest. If those amounts remain unpaid and if certain procedural requirements are met, the IRS may file a notice of federal tax lien. This notice is a public record and signals to creditors, lenders, and even potential buyers that the IRS has a claim to your property. They often do this when the unpaid balance is quite significant. The tax lien attaches to all of your property and to all your rights to property (e.g., accounts receivables). It can hurt your credit score, make it hard to get loans, and may affect the sale of your home, business, or other assets.
How Does a Withdrawal of Lien Work?
So, how do you get the IRS to withdraw a lien? Usually, it happens in one of a couple of ways:
- Full Payment of the Tax Debt: This is the most common scenario. Once you pay off all the taxes, penalties, and interest you owe, the IRS typically will release the lien. You might think the release is automatic, but it’s not. The IRS will issue a Certificate of Release, which is proof that the lien is no longer active.
- The IRS Made a Mistake: Sometimes, the IRS might file a lien incorrectly. Maybe they had the wrong taxpayer, miscalculated the taxes, or didn’t follow proper procedures. In this case, they can withdraw the lien if it was improperly issued.
- Collection Alternatives: Sometimes, you might enter into an agreement with the IRS for a payment plan, Offer in Compromise, or other collection alternative. Based on those agreements, the IRS may agree to withdraw a lien.
Withdrawal vs. Release of Lien: What’s the Difference?
These terms are often confused. While they both ultimately result in the removal of the lien’s impact, they aren’t the same:
- Release of Lien: The IRS releases a tax lien after the tax debt is satisfied (paid in full, for example). This releases the government’s security interest on the property. A release does not mean that the underlying tax debt goes away.
- Withdrawal of Lien: The IRS removes the public notice of the lien from the public record as if it had never been filed. This usually happens when the lien was filed improperly, or the IRS enters into an agreement with you. This action removes the lien completely.
In short, a release acknowledges the debt is settled, whereas a withdrawal acts like the lien never existed. Withdrawal is generally preferable since it erases the record of a tax lien ever having been filed, which can assist in credit restoration.
Why is a Withdrawal of Lien Important?
A tax lien can affect you in many ways:
- Credit Score: Tax liens appear on your credit report and can significantly lower your credit score. This means higher interest rates on loans and credit cards. Withdrawal removes this negative mark from your public credit record.
- Borrowing: Banks and lenders will often deny loans or credit to people with active tax liens. A withdrawal removes this barrier.
- Real Estate Transactions: If you’re trying to sell or refinance your home, an active tax lien can make the process very difficult, as the lien must be addressed before the transaction can proceed. A withdrawal can make this process go much more smoothly.
- Business: If you own a business, a tax lien can impact your reputation and your ability to get business loans or make contracts. Getting the lien withdrawn can benefit a business owner’s relationships.
Who Can Request a Withdrawal of Lien?
Taxpayers who have had a lien placed on their property can request a withdrawal of the lien in specific situations. This usually means:
- You have resolved the tax debt in some manner, such as through payment or agreement with the IRS.
- The lien was filed in error by the IRS.
- Withdrawal is part of a settlement agreement or resolution of a tax dispute.
You cannot just request a withdrawal because you want it; there must be a legitimate reason.
How to Request a Withdrawal of Lien?
While the IRS sometimes automatically issues a Certificate of Release, this isn’t always the case, and for a withdrawal you need to formally ask. If you believe you qualify, here are the general steps:
- Contact the IRS: You can call the IRS or send a letter to the address indicated on your lien notice.
- Gather Documentation: You will need documentation that supports your request. This might include proof of payment, the official IRS notices, or anything else relevant.
- Submit Form 12277: The IRS has a form for this purpose: Application for Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien. You fill this out completely and truthfully.
- Follow Up: The IRS will review your case, and if they agree to a withdrawal, they will notify you. This process can take time, so patience is key.
- Record the Withdrawal: Once you have received the official notice that the lien has been withdrawn, be sure to verify that the notice is properly filed by the local jurisdiction.
Tips for Handling Tax Liens
Here are some tips to keep in mind:
- Don’t Ignore IRS Notices: Ignoring notices won’t make the problem go away and can lead to liens.
- Communicate with the IRS: If you cannot pay, contact them immediately to discuss options like payment plans.
- Keep Records: Keep copies of all your payments and IRS correspondence.
- Seek Professional Help: If you’re facing a tax lien, consider consulting with a tax professional who can navigate complex procedures.
Common Mistakes and Misconceptions
- Lien Release and Withdrawal are the Same: They are not. You want a withdrawal if possible, as it erases the public record.
- Paying the Debt Automatically Withdraws the Lien: It usually leads to a release of the lien, but a separate process is often needed for a withdrawal.
- Liens Last Forever: Liens do expire after 10 years if not refiled, but not necessarily if you still owe taxes.
- You Can’t Get a Withdrawal if you Paid by Installments: You may be able to, if you met certain conditions.
Related Terms
- Tax Lien: A legal claim by the IRS on your property for unpaid taxes.
- Notice of Federal Tax Lien: The formal document the IRS files to make the lien public record.
- Release of Lien: The IRS’s acknowledgement that they have released the tax lien but that the debt might still exist.
- Offer in Compromise: An agreement with the IRS to pay less than the full amount of taxes owed.
In Conclusion
A “withdrawal of lien” is something you want when you’ve had a tax lien. It signifies that you’ve resolved a tax debt issue, and the IRS removes the public record of the lien as if it never existed. It can significantly improve your financial life. If you find yourself facing tax issues, remember that there are pathways to resolution, and a tax professional can help.