A federal IRS tax lien is filed when a client fails to pay owed tax debt after receiving their first bill. The lien gives the government a claim against the client’s present and future assets and property without actually removing the property from the client’s possession (which is the difference between a levy and lien). Filing a federal tax lien may seem like a passive way for the IRS to collect tax debt, but a pending lien can be a serious impediment to your client’s life. In addition to the stress of having a government lien in place, your client is limited in how they can deal with their assets and property.
Understanding and Managing IRS Tax Liens
An IRS tax lien is filed when a client fails to pay their owed tax debt after receiving their initial bill. This federal tax lien provides the government with a claim against the taxpayer’s present and future assets and property without actually removing the property from the client’s possession (which differentiates a lien from a levy). While filing an IRS tax lien may seem like a passive approach for the IRS to collect tax debt, a pending lien can significantly impact your client’s life.
In addition to the stress of having a government lien in place, your client’s ability to deal with their assets and property becomes restricted. IRS tax liens can damage credit scores, hinder the sale or refinancing of property, and make it challenging to secure loans or lines of credit. As a tax professional, it’s crucial to understand how to manage IRS tax liens and help your clients navigate the complexities they present.
Why a Federal Tax Lien Matters to Your Client
As of April 2018, credit bureaus no longer report tax liens, which means the lien shouldn’t affect your client’s ability to take out a credit line or get a job, but that doesn’t mean it can be ignored. During the time a federal tax lien is active, the client can’t sell assets or property without turning the money gained in the sale over to the IRS. Everything your client worked hard to accumulate and everything they purchase while the lien is in place, in essence, belongs to the IRS until the lien is lifted.
What Can You Do For Your Client?
Obviously, paying the tax debt is the easiest way to get the IRS to release the lien. But if that’s not possible for your client and if an Offer in Compromise can’t be reached, there is a way to have the lien removed.
If your client owes less than $25,000 in debt or can pay the debt down to that amount, you can set up a direct debit Installment Agreement (using Form 433-D). Once three consecutive direct debit payments are made, you can then fill out an Application for Withdrawal of the federal tax lien (Form 12277) to have the lien lifted. When a lien is withdrawn, it’s as if it never existed.
To effectively handle IRS tax liens, consider the following steps:
- Verify the tax lien: Begin by ensuring that the IRS tax lien is accurate and valid. Check the underlying tax debt, the lien’s filing date, and other essential details to confirm that your client indeed owes the tax liability.
- Communicate with the IRS: Reach out to the IRS to discuss the tax lien and inquire about potential options for resolving the issue. Establishing open communication with the IRS can help you negotiate on your client’s behalf and find the most suitable resolution.
- Explore resolution options: Investigate various options for resolving the tax debt, such as setting up an installment agreement, applying for an offer in compromise, or requesting a penalty abatement. Assess each option’s viability for your client’s specific situation and determine the most appropriate course of action.
- Assist with lien release or withdrawal: Once the tax debt is resolved, help your client request a lien release or withdrawal. A release indicates that the lien is no longer enforceable, while a withdrawal removes the public notice of the lien and potentially improves your client’s credit.
- Educate your clients: Guide your clients on how to avoid future IRS tax liens by encouraging timely tax filing and payment, as well as providing advice on proper tax planning and financial management.
By understanding IRS tax liens and offering your clients guidance on managing them, you can alleviate their stress and help them regain control over their financial situation. As a tax professional, your expertise in handling IRS tax liens can make a significant difference in your clients’ lives.
How IRS Solutions Software can help
The forms to help your client escape a tax lien can leave you swimming in data. But if you use IRS Solutions as your CPA Accounting software, much of the work is done for you. Our software has the ability to directly request, download, and analyze your client’s unredacted wage and income transcript through the IRS e-services Transcript Delivery System (TDS). Once that data is in our system, the software automatically populates the forms you need to calculate and file a direct debit Installment Agreement and, eventually, an Application for Lien Withdrawal.
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