Legacy Law Blog

Receiving a Notice of Federal Tax Lien (NFTL) can feel overwhelming, but several strategies exist for removing—or at least reducing the impact of—a federal tax lien.

This post provides an overview of the main options for removing a federal tax lien, including key steps and explanations about what you can expect from the Internal Revenue Service (IRS) during the process.

Pay the Tax Debt in Full

The fastest and most straightforward way to remove a federal tax lien is to pay all outstanding taxes, penalties and interest in full. Once paid, the IRS will release the lien within 30 days.

Once the lien is lifted, the impacted asset(s) are free to be used in credit applications, future property sales or refinancing.

Request an Installment Agreement (Payment Plan)

If you can’t pay the entire amount at once, you may qualify for a payment plan, especially if you owe $25,000 or less.

Establishing a direct debit installment agreement can make you eligible for lien withdrawal after making three consecutive payments. The IRS may keep the lien in place during repayment, but you can apply for withdrawal once certain conditions are met.

Apply for a Lien “Withdrawal”

A lien withdrawal removes the NFTL from public records, as if it was never filed. This is important for taxpayers who are focused on repairing or restoring their credit.

A taxpayer may request a lien withdrawal under the following circumstances:

• You pay your debt in full.
• You enter a qualifying payment plan (usually with direct debit and a balance of $25,000 or less).
• The lien was filed in error, or withdrawing it improves your ability to pay.

To request a lien withdrawal, a taxpayer must file IRS Form 12277 (Application for Withdrawal of Filed Form 668(Y)). It is important to note that the lien withdrawal only removes the public notice—it doesn’t erase the underlying debt unless it’s paid.

Request a Lien “Release”

A lien release formally removes the lien from your property or assets once the debt is paid. Unlike a lien withdrawal, a lien release doesn’t instantly wipe the lien from public records but shows it has been satisfied.

Once the underlying debt is paid in full, the IRS usually releases the lien automatically within 30 days. Note that for Offers in Compromise, settling a tax debt for less that the amount owed, the IRS will generally release, but not always withdraw, the lien.

Discharge of Specific Property

A lien discharge removes the lien from a particular piece of property, enabling you to sell, refinance or transfer it unencumbered by the tax claim. This is useful if you plan to sell an asset or need to refinance it.

A lien discharge allows for a single asset to be removed from the NFTL while the rest of your assets are still subject to the lien. A discharge of specific property can be requested using IRS Form 14135 (Application for Certificate of Discharge of Property from Federal Tax Lien).

Lien Subordination

The IRS may allow another creditor to “jump ahead” of them in claim priority, making it possible for you to get a mortgage or loan even with the lien in place. Subordination doesn’t remove the lien.

The IRS simply allows the lender to take the first priority lien position in exchange for assurances that the refinance will allow the taxpayer to make a lump sum payment towards their tax debt or that the lowered mortgage payment will allow the taxpayer to afford greater monthly installment agreement payments.

To request a lien subordination, a taxpayer must file IRS Form 14134 (Application for Certificate of Subordination of Federal Tax Lien). Be prepared to provide the IRS with the proposed settlement or closing documents from the title company for the new refinance.

Appeal the Lien or Correct IRS Errors

If you believe the lien was filed in error, you can appeal to the Office of Appeals. Examples of incorrectly filed liens include liens containing clerical errors, liens filed based on procedural mistakes and liens filed after the collection statute has expired.

A written appeal must be filed to appeal a lien. The appeal should request a Collection Due Process hearing to resolve the issues. Alternatively, Form 12277 should be filed to request a lien withdrawal based on error.

Key Takeaways

• Paying off your debt is the quickest removal method.
• Installment agreements can make you eligible for withdrawal or release.
• The IRS has formal procedures for removing or appealing a lien—use the right forms and follow all requirements for the option selected.
• Tax professionals can help maximize your chances of success.
• Start as soon as possible. The sooner you act, the sooner you can restore your financial standing and access to credit.

By understanding and leveraging these options, you can navigate your way out of a tax lien situation and regain financial stability.