Being hit with a federal tax lien can destroy your finances. When the IRS files a lien against you, it shows on your credit report. In addition to tanking your score, many banks won't lend money to you because the federal government will always have first dibs on any property you have that may serve as collateral. In general, you are typically required to pay the tax bill in full to get the lien released. However, there are a couple of ways you can get it taken off your credit report before then.
Setup a Payment Plan
Despite its reputation, the IRS is fairly reasonable. If you set up a payment plan to pay off your tax debt, the agency will withdraw the tax lien. This will result in the lien being removed from your credit report, though you may have to follow up with the credit agencies directly to get it taken off.
To qualify for this option, however, you must set up a Direct Debit installment agreement with the agency. This is different from the regular installment plan the agency has available in that the payments are taken directly from your bank account. Additional qualifications include:
- Owing less than $25,000 in tax debt
- Making a minimum of three payments on the installment plan
- The full amount must be paid within 60 months
- Must be up to date with other filing requirements
- Never have defaulted on a prior Direct Debit agreement
After you set up the Direct Debit agreement and have fulfilled the minimum payment requirements, you can file the Application for Withdrawal of Tax Lien with the IRS to have them review your case. Upon approval, the lien will be withdrawn and you can notify the credit reporting agencies to update your credit report.
Do an Offer in Compromise
If you have enough money to pay off a large portion of the tax debt, but not the whole amount, you can do what's called an offer in compromise. Essentially, you tell the IRS how much you're willing to pay and the agency has the option to accept your offer or reject it. If they accept and you pay the agreed amount in full, they will release/withdraw the lien and you can clear your credit report.
To get the IRS to accept your proposal, you must show the amount you're offering is more than what the agency is likely to get from you if it initiates collection activities against you. It can be challenging calculating this amount because it's based on your current income and how much time is left before the statute of limitations for tax debt collection expires among other factors, so it's best to have a tax professional help you with this portion of the petition.
For more information about getting a tax lien released or assistance with negotiating with the IRS, contact a tax professional or attorney.Share