Eliminating A Federal Tax Lien After Discharging Tax Debt In Bankruptcy

23 April 2015
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If you owe federal income taxes, you can eliminate the arrearages, as well as the interest and penalties, by filing chapter 7 bankruptcy. As long as the debt meets the minimum requirements, it will be wiped out when you receive your discharge from the court. Unfortunately, any liens the federal government placed on your property prior to your filing bankruptcy will remain. However, there are three things you can do that may help you get rid of the lien on your property.

An Important Note About Federal Tax Liens

The only way to remove a federal lien is to pay what is owed. Chapter 7 bankruptcy only erases your legal obligation to pay the debt and prevents the federal government from garnishing your wages or dipping into your bank account to collect those back taxes. This is why filing bankruptcy before the government has a chance to attach a lien to your assets is the best course of action if you truly want to get rid of tax debt for good.

A tax lien is a legal instrument that allows a creditor to claim part of the value of the asset it's placed on. If you want to sell the asset, you must pay the lien first. Theoretically, you could get away with never paying those back taxes if you never sell the attached asset. However, the federal government is a very persistent creditor and may force the sale of the asset if the tax obligation is high enough and there is sufficient equity to pay the debt.

In addition to that, a tax lien can make it difficult to refinance your home and cause complications when you try to leave the property to your heirs.

Offer in Compromise

One way to eliminate the lien is to negotiate payment of your back taxes. Since the debt was discharged in bankruptcy—thus taking away your obligation to pay—the IRS may be amendable to discounting the debt to an amount you can pay.

You can start the process by submitting an Offer in Compromise. When considering your offer, the IRS will factor in your ability to pay, income, debts, and assets. If what your offer falls in line with what the agency predicts it's likely to receive based on your financial picture, they'll typically accept the offer. You can then either pay the amount in one lump sum or make monthly payments.

Be aware that there is a non-refundable fee of $186 and you must send in an initial payment with your offer.

Apply for the IRS Fresh Start Program

The Fresh Start Initiative is a tax payment program designed to make it easier for people to take care of arrearages. The program has an option where people who still owe back taxes can have the lien removed from their assets as long as they meet certain requirements:

  • The taxpayer has entered a Direct Debit installment agreement. This allows the IRS to take monthly tax payments directly from your bank account.
  • The person owes $25,000 or less in back taxes.
  • The balance owed is predicted to be paid off within 60 months or before the statute of limitations kicks in.
  • The taxpayer is up to date with current tax filings and payments.
  • Three consecutive Direct Debit payments have been made on the account.
  • The person has not or is not in default on a Direct Debit plan.

You'll need to file a formal withdrawal request to have the lien lifted. If you fail to complete the program, the government can reinstate the lien.

Set Up an Payment Plan

If neither of the previous options work for your situation, you can set up a payment plan with the IRS to pay the full amount. To qualify for this alternative, you must owe less than $50,000 in back taxes, interest, and penalties. However, paying the assessed amount in full may cause the IRS to remove some of interest and penalties you were charged.

You must file your taxes on time and pay any newly assessed tax in full. Refunds you may be due will be applied to the balance owed until the bill has been paid off.

There may be other ways you can deal with a tax lien before, during, or after filing bankruptcy. Talk to a chapter 7 bankruptcy attorney for information about your options.