What to Do When the IRS Files a Tax Lien? - Understanding Your Rights - Resolution Strategies

Are you having trouble getting on top of your tax debt? You’re not alone, millions of Americans deal with tax problems every year.

But if you fail to address the taxes you owe, IRS actions will escalate beyond penalties and interest charges. The agency could decide to file a federal tax lien against you, meaning the government has a claim on your assets, whether real estate, wages, or financial accounts. When this happens, the IRS will send you Letter 3172, notifying you of the lien and of your right to a hearing.

A federal tax lien is serious, but it doesn’t always mean the IRS will actually seize your property. If you’re wondering what to do when the IRS files a tax Lien?, this guide will walk you through the steps to take and how to protect your financial future.

Key Takeaways:

The IRS may file a federal tax lien against your property when you have unpaid taxes. This is a public record that your other creditors can see.
When this happens, you’ll get Letter 3172 in the mail, which notifies you of the lien and your right to request a collection due process (CDP) hearing.
Options for getting rid of a tax lien include withdrawal, discharge of property, or subordination.
You may not need to do anything after receiving Letter 3172 if you have already paid off the debt or entered into a direct debit installment agreement.

How Does a Tax Lien Work?

A federal tax lien is a public record that alerts your other creditors that the government has a claim on your property. So, if you’re trying to open a new line of credit, the lender will see that you have unpaid taxes when they do a lien search. However, IRS tax liens don’t appear on your credit history; they just exist in the public records.

Federal tax liens attach to all of your assets, and they affect your ability to sell or transfer those assets. For instance, say that you sell your car – the proceeds of the sale will not go directly to you. First, if you have a car loan, the proceeds will go to that lender (they have a lien on your car). Then, the remaining proceeds will go to the IRS (they also have a lien on your vehicle). If there’s anything left, you get it.

Similarly, liens make it hard to borrow against assets. Say that you own your home outright, and you want to take a loan against it to pay off your taxes. When the lender sees the tax lien, they may deny the loan. Mortgage lenders use your home as collateral, and if the lender sees that the IRS already has a lien against the home, they may not move forward because their lien will be behind the IRS. To get around that issue, you can ask the IRS to subordinate your lien to the mortgage holder’s lien, which is often one of the key steps when considering what to do when the IRS files a tax Lien.

When Does the IRS File Tax Liens?

When you have unpaid taxes, the IRS takes a few different steps before filing a tax lien against your property. The collections process starts with sending you notices and assessing penalties and interest for failing to pay on time.

However, the more time that passes, the more the IRS will escalate its enforcement actions. After you’ve received IRS notices that you have a balance due and you don’t do anything within the given time frame, you may get Letter 3172 in the mail about a tax lien for your unpaid taxes.

What Is Letter 3172?

When you have unpaid taxes, be on the lookout for Letter 3172, Notice of Federal Tax Lien Filing and Your Rights to a Hearing. This document notifies you that the IRS has filed a federal tax lien, so the government has a claim on your assets.

If you don’t agree with this action, the notice gives you 30 days from the date of the letter to request an appeal via a hearing from the Independent Office of Appeals. The letter outlines instructions for requesting a collection due process (CDP) hearing.

While you may not have to do anything right away to respond to Letter 3172, never ignore it. Read it through carefully to ensure that the information is accurate. Talk to a tax professional if you’re not sure why you received Letter 3172.

Understanding the CDP Hearing Option

So, what is the CDP hearing, and how do you request it? A CDP hearing allows you to explain why the IRS shouldn’t file the tax lien and to propose payment plans. If you haven’t already had a chance to do so, you can also dispute the tax due.

You must request this hearing within 30 days from the date of your Letter 3172. To proceed, fill out Form 12153, Request for a Collection Due Process Hearing, and send it to the address provided on your lien notice. The request goes to the Independent Office of Appeals.

Aside from your personal information and the basis for your hearing request (lien or levy notice), you’ll need to list the reason for your request. Options are as follows:

You’re not liable for the tax.
You’re claiming innocent spouse relief.
Your tax debt was discharged in bankruptcy.
You made payments that haven’t been applied.
You want to pursue lien withdrawal.
You are experiencing financial hardship.
You can’t afford to pay in full and want to explore other options.

You can also select “Other issue(s) and/or comment(s)” and provide your own answer. If you want to explore an alternative, the form gives you the option to select Installment Agreement, Offer in Compromise, Currently Unable to Pay, or Other. You’ll also need to include an information collection form with your request in this case (Form 433-A or 433-B).

Once you request this hearing, collections are paused. Ask a tax expert if you’re unsure how to complete your request.

How to Get Rid of a Tax Lien

You may be able to get a lien removed if you qualify. Here are three options the IRS provides, along with eligibility requirements:

Withdrawal

If granted, withdrawal means the lien is removed from the public record, and you no longer have to worry about the IRS having a claim on your property. You are, however, still required to pay the unpaid tax amount.

Here are ways to qualify for withdrawal:

The IRS filed the lien prematurely, or it wasn’t filed with required IRS procedures.
You have an installment agreement in place for the tax debt in question.
The withdrawal will allow the IRS to collect the tax from you.
You or your representative think it’s in the best interest of both you and the government to withdraw.

Use Form 12277 to apply for withdrawal, where you’ll select a reason from the above list and then provide an explanation for your request.

You may also qualify for withdrawal if you are eligible under one of these two options, as added in 2011 through the Fresh Start program:

You’ve satisfied your tax liability, the lien has been released, you’re current on all tax obligations, and you have been in compliance for the last three filing years.
You entered into an installment agreement or converted your existing agreement to a direct debit installment agreement, and you:
- Qualify as an individual or business
- Owe no more than $25,000
- Will pay the full amount owed within 60 months or before the expiration of the collection statute, whichever is earlier
- Are in compliance with all other tax requirements
- Have made three consecutive direct debit payments
- Haven’t defaulted on any direct debit installment agreements

Discharge of Property

With this option, the lien will no longer be associated with certain property. You may be eligible if:

The property in question is worth double the amount of your tax liability.
You settle your interest owed with the IRS related to the applicable property being discharged.
The property in question has no value.
You sell the property in question.
Another party pays the interest owed via cash or bond.

For discharge, complete Form 14135, Application for Certificate of Discharge of Federal Tax Lien.

Subordination

With tax lien subordination, the lien isn’t removed, but other creditors can be higher in the priority line when making a claim on your assets. This way, you could more easily get approved for a loan or mortgage. Taxpayers may request this option if they’re refinancing their home.

When you apply for subordination using Form 14134, you must select one of two options under the Basis for Subordination section. The first option, section 6325(d)(1), applies if you pay the IRS an amount equal to the lien or interest through refinanced loan equity, for instance.

The second option, section 6325(d)(2), applies if the IRS finds that offering subordination will make collecting the tax liability easier.

When You Don’t Need to Do Anything with Letter 3172

There are cases when you don’t need to do anything after receiving Letter 3172 about a federal tax lien. This could be when you have already entered into an installment agreement to cover the taxes you owe, or the IRS has agreed to an offer in compromise or temporary hardship status on your account.

The lien itself has no immediate impact in some cases, but it doesn’t mean you should ignore the letter. Always read it through carefully so you can determine if you agree with the amount owed and the next steps you want to take. Talk to a tax expert about your letter if you’re not sure whether you need to act now or if you want to discuss your tax resolution options.

When You Need to Act Quickly with Letter 3172

So, when do you need to do something after getting Letter 3172 in the mail? Here are a few reasons to act now:

You need to refinance your home.
You’re selling your property.
A lien is getting in the way of your ability to get a new loan.
You’re worried a lien is harming your reputation or business.
You want to request a CDP hearing.
Your hearing deadline has passed, but you want to explore other relief options.

If you’re in any of these situations, you’ll want to take steps immediately to get that lien off your record, pay off your debt, or put other lenders in front of the government regarding claims to your property.

Getting Help with a Federal Tax Lien

Getting Letter 3172 in the mail about a tax lien can be pretty alarming. The good news is that it doesn’t necessarily mean the IRS is going to seize your property right now. However, you want to be sure to act to resolve your tax debt so the situation never gets that far, especially if you’re unsure what to do when the IRS files a tax Lien.

Never ignore IRS notices. When you’re not sure what to do with Letter 3172 or how to get out of tax debt, the team at Paladini Law is here to guide you. Our tax law firm specializes in common tax problems you may be dealing with, like penalties, liens, and levies.

Contact Paladini Law to set up a call with a tax attorney today.

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