Federal tax liens filed by the IRS for unpaid back taxes can cause serious damage to many areas of your life. IRS tax liens can not only ruin your credit rating but also cause problems with employers. Companies often pass up on hiring an otherwise qualified candidate because of IRS tax liens on the candidate’s credit report. Employers in some industries, (banking, finance, legal, accounting, law enforcement, or government agencies requiring security clearances) often have to terminate employees due to IRS tax problems when they discover an IRS tax lien has been filed against their employee.

For well known public figures (politicians, celebrities, etc.), IRS federal tax liens can do great damage to your reputation once the local press gets a hold of the news that the IRS has filed a federal tax lien on you for unpaid back taxes. Often they will publish news of your IRS tax problems for the world to see causing not only embarrassment and humiliation but damage to personal and business relationships.

So what can you do to avoid the IRS filing a federal tax lien?

Once a federal tax is assessed, the IRS collection cycle begins. Besides the usual IRS collection letters threatening to levy and seize your assets, the IRS will eventually issue a federal tax lien and file it in the public record as notice to the public that you owe back taxes to the IRS. The trick to avoiding the filing of a federal tax lien is to be proactive before the federal tax lien is filed by the IRS.

In lieu of a federal tax lien, the IRS can in many cases accept a Collateral Agreement which protects the government’s interest so they do not have to file a federal tax lien. The three most common assets used as collateral are: (1) letters of credit from a lender, (2) securities, or (3) surety bonds. There are other assets that can be used but these three are the most common and can go a long way towards getting a Collateral Agreement accepted quickly to avoid the filing of a federal tax lien.

So, avoiding the filing of an IRS tax lien is possible. It just takes knowledge of the Collateral Agreement process and approaching the IRS early in the collection cycle before they issue a federal tax lien. An experienced tax CPA or tax attorney is best suited to help you with this process as they know how to properly draft a Collateral Agreement, negotiate with the IRS, and get the Collateral Agreement accepted.

Nothing can kill your credit rating like an IRS tax lien. Your credit report can drop about 100 points after an IRS tax lien is filed in the public record. Having a federal tax lien on your credit record can eliminate many lenders from loaning you funds to buy a house, a car, or to refinance your existing loan to get a more favorable rate. So just how do you deal with an IRS tax lien and fix the mess it has left in its wake? Well, to explain how, we need to start with what is an IRS tax lien, when does it come into existence, and how does one get it off your credit report.

IRS tax liens are filed in the public record to protect the federal government’s interest in IRS tax debts owed to it by you, the taxpayer. It is kind of like the IRS’s insurance policy. If you have any real estate or personal assets, the IRS tax lien attaches to it and allows the IRS to pursue enforced collection action (liens, levies, seizures) against your assets in order to collect what you owe them.

All IRS tax liens come into existence upon the assessment of a federal tax against a taxpayer. This usually happens when you file a tax return and it is processed by the IRS. However, federal tax assessments may also come into existence when the IRS audits your tax return, adjusts your tax return due to a mistake or missing W-2 or 1099, or they file a substitute tax return against you because you didn’t file a tax return. However the federal tax assessment came into existence, the IRS tax lien exists but is not effective against certain assets (like real estate) until it is perfected under state law by the filing of a federal tax lien in the public record.

The federal tax lien is filed in one of several places to insure it becomes public notice that you have an IRS tax problem and that the IRS has a federal tax lien securing the back taxes owed by you, the taxpayer, against your assets. Where an IRS tax lien is filed depends on state law. Some of the most common places the IRS files a federal tax lien is with one of the following: the Registry of Deeds or County Recorder, the office of county clerk, the office of town clerk, the office of probate judge, or the clerk of the circuit court. There are a few other places for some states but we won’t list them all here. The point is, state law controls where the IRS has to file its federal tax lien to be considered public notice that you owe them back taxes and that they have a claim against your assets. Most states have one place where federal tax liens need to be filed to be considered valid as against real estate while they have another place for IRS tax liens filed against personal property. To be sure, one must research their state’s law to determine where it requires federal tax liens to be filed.

To obtain a certificate of release of federal tax lien, one of several things has to happen. Either you have to full pay the tax, settle your tax debts through an Offer In Compromise and full pay the settlement amount, run out the statute of limitations on collection, or discharge the back taxes in bankruptcy. If there is real estate when you discharge any back taxes owed, the IRS will not release the lien until it expires. Liens generally last ten years but can be refiled if for some reason the collection statute has been extended beyond 10 years. There are several events that can extend the collection statute but we will discuss that in another article.

Keep in mind that with bankruptcy, some types of taxes are never dischargeable and for those types that are, you must have filed tax returns and wait certain periods of time before the taxes become dischargeable. There are also other rules beyond whether the taxes are old enough and of the proper type which must be met before one can qualify to file bankruptcy and discharge back taxes in bankruptcy. You should always consult a qualified tax resolution specialist as well as a bankruptcy attorney before filing. Otherwise, you may be surprised after you come out of bankruptcy court and the IRS is in hot pursuit, threatening to levy and seize every asset in sight.

To fix your credit rating, one must obtain a certificate of withdrawal of federal tax lien. A certificate of release of federal tax lien will not do as it only demonstrates that the IRS tax debts have been resolved to the satisfaction of the IRS. The problem with a certificate of release of federal tax lien is that it effectively lets the world know you have resolved your back tax debts but it does not remove the fact that at one time you owed the IRS back tax debts. Mailing a copy of the IRS certificate of release of federal tax lien to the big three credit agencies (Equifax, Trans Union, and Experian) only helps them update your credit file and notate that you have resolved your outstanding back taxes with the IRS. The original federal tax lien will stay on your credit report, along with the notation that it has been resolved, for 7 years. This hardly restores your credit score to its former level pre-IRS lien.

Obtaining a certificate of withdrawal of federal tax lien necessitates first requesting and receiving a release of federal tax lien with one exception which we will discuss in a bit. Once the back tax debt has been resolved through normal means (either full paid, discharged in bankruptcy—with no real estate owned, settled through an Offer In Compromise, or the collection statute has expired) and a certificate of release of federal tax lien has been requested by the taxpayer and issued by the IRS, then a request can be made for a certificate of withdrawal of the federal tax lien and the IRS will issue a certificate of withdrawal of federal tax lien.

As stated above, there is one exception where there is no need to obtain a certificate of release of federal tax lien first before requesting a certificate of withdrawal of federal tax lien. In fact the strange thing is that IRS procedure does not allow for a certificate of release of federal tax lien to be issued unless one of the above four criteria is met but it will allow a certificate of withdrawal of federal tax lien to be issued under new guidelines if the taxpayer enters into a Direct Debit Installment Agreement. Only certain taxpayers qualify to enter into a Direct debit Installment Agreement and they must meet one of several eligibility requirements as well.

Due to the current state of our economy, the IRS realized that the filing of federal tax liens was doing great damage to people’s credit ratings and their ability to borrow money for life’s necessities (car, home, college tuition, etc). So, they developed a new program that would allow those taxpayers who have resolved their tax debt or entered into a Direct Debit Installment Payment Agreement and that are currently compliant with all tax filings and current tax estimates or withholding levels, to request a withdrawal of federal tax lien. What the withdrawal effectively does is eliminate the effect of the original federal tax lien. It’s as if the original federal tax lien should have never been filed by the IRS in the first place. With a certificate of withdrawal of federal tax lien in hand, you can effectively remove and completely eliminate any trace of the federal tax lien from your credit report as if it never existed.