Published by PICPA By Brian Mahany
Tax Liens. We dread them. Many will say that the IRS or their state revenue department is an unresponsive large bureaucracy but boy do tax liens get people’s attention. During my term as state revenue commissioner in a northeastern state, I quickly learned that nothing got people’s attention faster than liens and levies. A tax lien can make it nearly impossible to sell one’s home or obtain credit.
Although the formula for credit scores is proprietary and somewhat secret, everyone agrees that a tax lien will cause a major decrease in your credit score. Anecdotally, clients say their credit score dropped on average of 100 points when a tax lien was filed.
Immediately paying the tax debt will help your credit score improve; however, it takes a long, long time to get one’s score back to where it was. In other words, having a tax lien may cause your score to drop 100 or more points overnight but subsequently paying those taxes doesn’t make the lien filing go away – it remains on your credit history for years.
People who were laid off or businesses with cash flow problems may not be able to simply pay the taxes off right away anyway.
For most taxpayers with tax liens, the historical fix is to pay the tax and obtain a lien release. Obviously paying the tax and getting a lien release is better than not; but in terms of credit score, the lien release only scores a C-.
Are there alternatives?
The IRS will say that addressing the tax problem before it gets to the lien stage is always the best solution. We assume, however, that anyone reading this article is beyond that point or has a client who is beyond that point.
For many taxpayers, the better route is a lien withdrawal. A lien withdrawal is much different than a lien release. Lien releases are automatically filed once a tax debt is paid. Lien withdrawals, however, are not automatic and you have to ask. But if your tax advisor is successful in obtaining one, your credit score can be restored overnight. The withdrawal erases or “pulls back” the original lien as if it was never there.
Better yet, you can sometimes obtain one even if your taxes are not fully paid!
The IRS is obligated to provide a withdrawal if the debt was liened in error. Yes, tax agencies do make mistakes. There are very strict notice requirements and time deadlines that must be followed before the IRS or most state tax agencies can file a lien. If your tax advisor can show a mistake, you get a lien withdrawal and your credit can be repaired quickly.
The IRS is also permitted to provide a withdrawal if doing so “facilitates the collection of tax”. A similar criterion says that the lien can be withdrawn if it can be shown that withdrawal is in the “best interest of the government and taxpayer”. What does that mean?
Admittedly, these criteria are quite broad and often, a good tax lawyer or accountant can craft a winning argument with the IRS collections representative.
Keeping one’s professional license (for example, in many states mortgage brokers can lose their license if they have liens on their records) and keeping the doors open on a business are two arguments that we have used successfully in the past to persuade the IRS to issue lien withdrawals even though a debt was not fully paid.
To qualify before all tax debts are fully paid there must be an installment agreement in place and all current taxes must be paid. Involving the taxpayer advocate is also helpful.
Once you have reached the lien stage, consider hiring a tax professional immediately. Navigating the collection process, avoiding seizures and other enforced collections, and seeing if you qualify for an offer in compromise or lien withdrawal is best left to professionals.
Of course, we are happy to assist you or your accountant.