TAX LIEN HELP FROM THE IRS
With tax time behind us, many of us e-filed or mailed tax returns with balances due that we cannot pay. In the past, one of the biggest fears was the high probability that a tax lien being filed. And tax liens are problematic for several reasons. The most obvious are that tax liens impair credit, often foreclose lending opportunities, and cause personal interest rates to increase (assuming that you are even extended new credit).
The IRS “Fresh Start” Program is a relatively new IRS policy (2011) certain to take advantage of. The Program increases the IRS lien filing threshold for tax amounts due to $10,000, up from $5,000. The most important part of the program however is its lien removal procedures. If you qualify (individual, business with income tax liabilities, or out-of-business with any taxes due), owe less than $25,000, and voluntarily enter into a Direct Debit installment agreement (from checking account) with the IRS, the IRS may then agree to withdraw its lien against you. Your installment agreement must be sixty (60) months or less, you must remain filing and paying compliant, you must show good faith by making three (3) consecutive direct debit payments, and you must not have defaulted on a previous direct debt agreement. If you qualify, the lien withdrawal request must be in writing. Do so by completing IRS Form 12277, Application for Withdrawal, and on line 11, “Reason for Requesting Withdrawal,” check the third box “The taxpayer is under a Direct Debit Installment Agreement.“ See IRS Form 12277.
Also, importantly, the IRS allows taxpayers to convert a traditional installment agreement to a Direct Debit installment agreement and take advantage of the more liberal lien withdrawal policy.
While this IRS option may be a good one in the short-term, remember that an installment agreement is essentially just “government financing” to pay a tax debt. Almost always, private lending is a better option. Why? Because private lenders are not armed with the same powerful collection mechanisms should you default on the agreement (immediate garnishment and levy). Also, private lenders (generally) “may” have a different (and lesser) priority status should you be forced into bankruptcy at some later time. Therefore, it is not a bad plan to enter into a Direct Debit installment agreement in the interim and have the lien removed… with an eye towards private lending at a later time. In the alternative, you also can enter into an installment agreement with the IRS with an eye towards “waiting out” your time to file your taxes in bankruptcy and receive a discharge, but we’ll discuss that tax-debt strategy at a later time. In the meantime, take advantage of a little IRS leniency if you can.
A good article about the process can also be found at:Journal of Accountancy.
* Contributing author, Larry D Lawson, EA, of Carolina Law Partners