Tax privilege: what is it and how to stop one

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Tax privileges (and their cousins, tax deductions) are serious business if you owe back taxes. Here’s how they can affect you, along with some tips on how to remove a tax lien.

A tax lien is a legal claim that a government places on real property or other assets when the owner is in arrears on taxes. Municipalities can sell tax liens to investors who foot the tax bill in exchange for the right to collect money and interest from landowners.

What does it mean if you have a tax lien?

If you owe back taxes and the IRS gives you a federal tax lien, here’s what might happen next.

  • Your creditworthiness could take a nosedive. Tax liens may no longer appear on credit reports, but the IRS can still file a public notice of the tax lien, telling creditors that the government has an interest in your property. It could compromise your ability to get a loan, says David Klasing, CPA and tax lawyer in Irvine, California.

  • This can jeopardize the sale or refinancing of a home. Tax privileges often surface during title searches. If you have equity in a home you’re trying to sell or refinance, you’ll likely need to use some of that to pay your taxes in order to close.

  • It can cost you a lot of time. The IRS is routing many overdue taxpayers through its Automated Collection System, or ACS, which can mean spending hours on hold with the call center, Klasing warns. Some taxpayers could be assigned a revenue officer, which could mean in-person visits, he adds.

  • You may end up with a tax levy. If you don’t pay your back taxes after the IRS files a federal tax lien, the IRS can then issue a notice of intent to levy.

Take charge of your financial life now

How to remove a tax lien

  • Pay your tax bill. It sounds obvious, but in most cases paying your tax arrears is the only way to end a tax lien or levy. “The most important thing I can tell you is to cooperate with the fundraising action. If they ask for something, you give it to them. If they contact you, go back. Communicate with them, ”Klasing says.

  • Get an IRS payment plan. Your tax balance will still accumulate interest and penalties until it’s paid off, but if you allow the IRS to take at least three consecutive payments directly from your bank account (called a direct debit payment agreement) , you could convince the IRS to remove the federal tax lien from the public record. (You’ll still have to pay your tax debt, of course.) You don’t necessarily need to hire anyone to get a payment plan – you can apply directly on the IRS website. The fees range from $ 0 to $ 225 depending on the plan and your income.

  • Ask for an offer in compromise. This is an offer to settle your tax arrears for less than the total amount you owe. Beware: there are many rules, and the IRS typically accepts less than half of all claims received in a year. To be considered, you must have filed all of your tax returns and made the estimated tax payments required for the current year. You will also not be considered if you are bankrupt or if you are audited. (Learn more about how to do this here.)

  • Appeal. You can request a due process hearing from the IRS Appeals Office if you want to review a lien or debit notice. Additionally, if you disagree with an IRS employee’s decision regarding a lien or levy, you can request a conference with the employee’s manager and ask the Appeals Office to. examine your case.

  • Bankruptcy. It’s not a great option, but in some cases it can get rid of tax debt. However, it’s often a long process, there are a lot of rules and it doesn’t always work, Klasing warns.

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