A Federal Tax Lien (FTL) is the government’s legal claim against a taxpayer’s real and personal property that arises by operation of law (automatically) when a taxpayer incurs a tax debt and fails to pay. The taxpayer, other creditors, credit reporting entities, and the general public may only become aware of the tax lien when the IRS files a “Notice of Federal Tax Lien” — and it’s at that point that it can damage one’s credit.
Previously the only sure-fire way to get a FTL removed was to pay the liability in full. However, under the government’s Fresh Start program the IRS will agree to withdraw a lien notice if certain requirements are met. But even if you meet the criteria, you still have to request withdrawal of the lien by completing Form 12277.
If a taxpayer cannot pay the tax debt in full and does not meet the criteria for withdrawal of the lien, the taxpayer may want to consider requesting a “lien subordination.” This does not remove the lien, but it allows other creditors to “cut” in front of the IRS in line and it is normally required before a lender will refinance a home loan. Of course, if the IRS is allowing others to cut, then it is on their terms and with their permission. You must either be willing to make a big payment — sometimes up to the amount of the lien — or you must be able to show that it would be in the IRS’ best interest to subordinate their lien. From the IRS’ perspective, the only way it would be in their best interest is if it would result in them collecting more money from you.