Tax Lien = Passive I.O.U.
A tax lien is a relatively passive way for the IRS or California’s Franchise Tax Board to get paid the back taxes you owe. Why passive? Because it can take a long time for the IRS or FTB to get paid. Suppose there’s a lot of equity in your house and owe you the IRS: when the IRS files a notice of tax lien against your house, nothing changes immediately. People checking on your credit may do a double-take because a notice of federal tax lien is a public document telling the world how much tax you owe. But little else will change, until you try to sell the house. At that point, the IRS will be paid any proceeds from the sale of the house, after what’s left on the mortgage is paid to your mortgage lender. A tax lien is like an IOU on the sale proceeds of whatever asset it’s attached to.
Tax Lien = Signal to Vultures
A tax lien, unfortunately, is also a marketing opportunity for bottom-feeding law firms and accountants. Once a notice of federal tax lien hits the county recorder’s office, dozens of firms will send offers to “help” you. They generally offer to settle the lien at 9 percent of the lien’s stated value. Of course, they charge you thousands of dollars to begin their “work.” Should you hire one of these companies? No.
By the time the IRS puts a lien on a taxpayer’s property, all options for negotiating (installment agreements, using bankruptcy to get rid of the tax debt, etc.) have expired. That’s why it’s so important to take the many IRS threatening notices seriously, and not ignore them or wish them away.
No One Can Negotiate Away a Tax Lien
Tax Liens cannot be negotiated away. The taxpayer owes the money, and the IRS has the legal duty and the legal authority to collect the tax. Clients often ask if I can negotiate away a lien. For example, can I convince the IRS that their business is hurt by the lien, so the IRS should release the lien and accept a payment plan to get at least some of what it’s owed. After all, getting something is better than nothing, right? While this makes sense in terms of the IRS’ collection mission, it goes against the IRS’ equity mission.
The IRS must treat every taxpayer equally in its attempts to collect back taxes. Individually negotiated deals and exceptions are not allowed. Period. If they were, then the legally well-connected would be able to get all sorts of special deals unavailable to less sophisticated Americans. That’s fundamentally unfair. Thus the IRS has been ordered by Congress to apply the collection tactic exactly the same to every tax payer, and not to cut side-deals.
How to Get Rid of A Tax Lien? Pay What You Owe
There are only two ways to get rid of tax liens. First, pay off what you owe – all of it. Not ninety-five percent. All of it. Why? Because the IRS and the FTB have the legal authority to keep coming after every asset you own, attach liens, and get paid until all of what you owe is paid. Plus, they have a mandate to do this for every tax debt. The second, and only other way to get rid of a tax lien is if you can prove that the doesn’t legally belong on the property. This is very rare.
So, if some vulture approaches you and says they can horse-trade with the IRS and get it to drop a tax lien or negotiate it down to pennies on the dollar, run away. This offer appeals to hope (I really want to owe less than I do), not to reality (the IRS can and will enforce the full amount of tax liens). Don’t pay someone who promises to do what cannot and is not done.
June 15, 2020