PICPA - Lien Release vs. Lien Withdrawal

Lien Release vs. Lien Withdrawal

By Brian Mahany

Clients dread tax liens. Many say that the IRS or their state revenue department is an unresponsive large bureaucracy, but, boy, do tax liens get people’s attention. During my term as state revenue commissioner in a northeastern state, I quickly learned that nothing gets attention faster than liens and levies.

A tax lien will cause a major decrease in your credit score. Anecdotally, clients have told me their credit score dropped 100 points when a tax lien was filed. Immediate payment of the tax debt will help one's credit score improve, but it will take a long time to get the score back to where it was. In other words, a tax lien may cause your score to drop 100 points overnight, but paying those taxes doesn’t erase the memory of the lien filing – it remains on your credit history for years.

For most with tax liens, the historical fix is to pay the tax and obtain a lien release. Obviously, paying the tax and getting a lien release is better than not; but in terms of credit score, the lien release only scores a C-.

Are there alternatives?

The IRS says addressing a tax problem before it gets to the lien stage is always the best solution. However, our clients often come to us after liens have already been filed.

For many, the better route is a lien withdrawal. A lien withdrawal is different than a lien release. Lien releases are automatically filed once a tax debt is paid. Lien withdrawals, however, are not automatic. You have to ask (Form 12277 – Application for Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien). If you are successful in obtaining a lien withdrawal for your client, his or her credit score can be restored overnight. The withdrawal erases, or “pulls back,” the original lien as if it was never there.

Sometimes, you can obtain one even if your client’s taxes are not fully paid.

The IRS is obligated to provide a withdrawal if the debt was liened in error. There are strict notice requirements and time deadlines that must be followed before the IRS or most state tax agencies can file a lien. If you can show a mistake in this process, you get a lien withdrawal and your client’s credit can be repaired quickly.

The IRS is also permitted to provide a withdrawal if doing so “facilitates the collection of tax.” A similar criterion says that the lien can be withdrawn if it can be shown that withdrawal is in the “best interest of the government and taxpayer.”

Admittedly, these criteria are quite broad. A good tax lawyer or accountant can craft a winning argument with the IRS collections representative.

Keeping one's professional license and keeping the doors open on a business are two arguments that have been successful in the past to persuade the IRS to issue lien withdrawals, even though a debt was not fully paid. To qualify for a withdrawal before all tax debts are fully paid, there must be an installment agreement in place and all current taxes must be paid.

Convincing clients that your services are essential may be the hardest thing to do. Navigating the collection process, avoiding seizures and other enforced collections, and qualifying for an offer in compromise or lien withdrawal are all very different prospects. Clients must understand that this work is best left to professionals.

Brian Mahany is a tax and fraud recovery attorney for Mahany & Ertl. He can be reached at brian@mahanyertl.com.

LAST UPDATED 7/14/2011