IRS Form 668, IRS Form 12277 and IRS Form 10916(c) set up a federal tax lien, request a federal tax lien withdrawal. and finally, actual withdrawal of the federal tax lien.
Hi, I’m Gary Bode, a tax lien CPA. Federal tax liens don’t automatically disappear from your credit report, despite you fully satisfying the IRS in some way (please read below). The IRS only releases your tax lien once you satisfy them. But the tax lien remains on your credit report for seven years, ouch. You need the IRS to withdraw the tax lien by issuing Form 10916(c). You request Form 10916(c) with Form 12277. Generally there are multiple federal tax liens and you need to prepare a Form 12277 for each one. Here’s our past post on Form 668(Y).
You won’t find Form 10916(c) on the IRS website. This is an internal form issued after approving your Form 12277, Application for Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien.
Steps in the IRS Tax Lien and Tax Lien Withdrawal Process – Form 12277
- The IRS sends you multiple tax notices, each one more aggressive e.g. Notice CP504. If you can possibly avoid a tax lien I suggest doing so. Ask your tax lien CPA for help.
- You or your business receives IRS Form 668(Y), Notice of Federal Tax Lien. Form 668(Y) establishes the lien on certain assets, up to the amount of tax, penalty and interest due.
- You satisfy the tax lien or disprove the back taxes. See below for ways to accomplish this.
- They release the federal tax lien once satisfied.
- Then you can request withdrawal of the tax lien through File Form 12277, Application for Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien.
- The IRS issues Form 10916(c). They will send a copy of Form 10916(c) to the three credit agencies. The credit agencies must remove the tax lien(s) from your credit report.
- Follow up to make sure the tax lien vanishes from your credit report.
Reasons for the IRS to withdraw the tax lien established by Form 668(Y) – sometimes even if it’s not paid off yet
- An approved Offer in Compromise. The IRS streamlined this “pennies in the dollar” procedure and expanded their criteria to accept more of them. Our earlier posts include: Form 656, Offer in Compromise and the related Form 433-B business collection statement. I think most CPAs investigate ways for their clients to pay less than what the IRS initially demands.
- Paying off the IRS demand in full.
- If your tax lien stems from back non-filed tax returns, preparing and submitting these un-filed tax returns inevitably reduces the IRS demand. Here’s our post on back taxes explaining this important process.
- Sometimes CPA accountants amend earlier tax returns if we can reduce your actual tax liability.
- Proving the IRS violated their own internal controls on issuing Form 668(Y). Their agents have explicit guidance for Form 668(Y). But of course, tax lien CPAs read these guidelines too and check to make sure the IRS followed their own rules. This is a long shot, but it pays to mind the details.
- Completing an IRS Installment Agreement (Form 9465). The IRS relaxed their requirements for an Installment Agreement, especially for businesses during the Recession. Once the IRS sees compliance with Form 9465, they may withdraw a tax lien, if requested to do so. Here’s our post on Form 9465, Installment Agreement.
- A tax lien destroys credit. Bad credit can limit employment possibilities. Will an IRS tax lien withdrawal actually increase the chance of collection?
- Has the statute of limitations passed?
- Perhaps one spouse can avoid a federal tax lien in their name by claiming Innocent Spouse relief. You should talk to a CPA accountant about this option.
Remember your State Taxes too
I’ve seen clients handle their federal tax lien and then come to us because they forgot about their State’s taxes.
You can request the IRS to send the federal tax lien withdrawal to the three credit agencies. But it still takes some cajoling to get the tax lien off your credit report.
Can you Handle Form 12277 and Form 10916(c) Yourself?
Yes. Tax lien CPAs are the most valuable when preventing a federal tax lien. But we have clients who prefer us handle the lien withdrawal. Our fee is about $325. Maybe a CPA signing off on Form 12277 helps. Our free phone consult doesn’t cover helping you fill the form. Please note we don’t deal with the credit agencies. But once the IRS issues Form 10916(c), removing the tax lien from your credit report is straight forward.
Here are the instructions for Form 12277 cut and pasted from the IRS website.
Form 12277: Application for Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien (as based on Internal Revenue Code Section 6323(j))
1. Attach a copy of the Form 668(Y), Notice of Federal Tax Lien, affecting the property, if available. You may also provide other documentation that you feel substantiates your request. If the information you supply is not complete, it may be necessary for the Technical Services Group Manager to obtain additional information before issuing the notice of withdrawal.
2. Please mail your request to the IRS, ATTN: Technical Services Advisory Group Manager, in the area where you live. Use Publication 4235, Technical Services Advisory Group Addresses , todetermine where to mail your application.
3. If a determination is made to withdraw the filed Form 668(Y), we will send you a Form 10916(c), Withdrawal of Filed Notice of Federal Tax Lien , and we will notify your creditors if you provide the names and addresses of the credit reporting agencies or financial institutions.
4. If, at a later date, additional copies of the Form 10916(c) are needed, you must provide awritten request to the Technical Services Group Manager. The request must provide thefollowing information:
a. The name, current address and taxpayer identification number of the person requesting that the credit reporting agency, financial institution or creditor be notified of the withdrawal of the Notice of Federal Tax Lien;
b. A copy of the notice of withdrawal, if available; and
c. A list of the names and addresses of any credit reporting agencies, financial institutions, or creditors that you want notified of the withdrawal of the filed Form 668(Y).
NOTE: This document also serves as our authority to release the notice of withdrawal information to the agencies or financial institutions you have identified.
Here’s a verbatim copy of IR-2011 that describes the revised parameters for tax lien withdrawal.
IR-2011-20, Feb. 24, 2011
WASHINGTON — In its latest effort to help struggling taxpayers, the Internal Revenue Service today announced a series of new steps to help people get a fresh start with their tax liabilities.
The goal is to help individuals and small businesses meet their tax obligations, without adding unnecessary burden to taxpayers. Specifically, the IRS is announcing new policies and programs to help taxpayers pay back taxes and avoid tax liens.
“We are making fundamental changes to our lien system and other collection tools that will help taxpayers and give them a fresh start,” IRS Commissioner Doug Shulman said. “These steps are good for people facing tough times, and they reflect a responsible approach for the tax system.”
Today’s announcement centers on the IRS making important changes to its lien filing practices that will lessen the negative impact on taxpayers. The changes include:
• Significantly increasing the dollar threshold when liens are generally issued, resulting in fewer tax liens.
• Making it easier for taxpayers to obtain lien withdrawals after paying a tax bill.
• Withdrawing liens in most cases where a taxpayer enters into a Direct Debit Installment Agreement.
• Creating easier access to Installment Agreements for more struggling small businesses.
• Expanding a streamlined Offer in Compromise program to cover more taxpayers.
“These steps are in the best interest of both taxpayers and the tax system,” Shulman said. “People will have a better chance to stay current on their taxes and keep their financial house in order. We all benefit if that happens.”
This is another in a series of steps to help struggling taxpayers. In 2008, the IRS announced lien relief for people trying to refinance or sell a home. In 2009, the IRS added new flexibility for taxpayers facing payment or collection problems. And last year, the IRS held about 1,000 special open houses to help small businesses and individuals resolve tax issues with the Agency.
Today’s announcement comes after a review of collection operations which Shulman launched last year, as well as input from the Internal Revenue Service Advisory Council and the National Taxpayer Advocate.
Tax Lien Thresholds
The IRS will significantly increase the dollar thresholds when liens are generally filed. The new dollar amount is in keeping with inflationary changes since the number was last revised. Currently, liens are automatically filed at certain dollar levels for people with past-due balances.
The IRS plans to review the results and impact of the lien threshold change in about a year.
A federal tax lien gives the IRS a legal claim to a taxpayer’s property for the amount of an unpaid tax debt. Filing a Notice of Federal Tax Lien is necessary to establish priority rights against certain other creditors. Usually the government is not the only creditor to whom the taxpayer owes money.
A lien informs the public that the U.S. government has a claim against all property, and any rights to property, of the taxpayer. This includes property owned at the time the notice of lien is filed and any acquired thereafter. A lien can affect a taxpayer’s credit rating, so it is critical to arrange the payment of taxes as quickly as possible.
“Raising the lien threshold keeps pace with inflation and makes sense for the tax system,” Shulman said. “These changes mean tens of thousands of people won’t be burdened by liens, and this step will take place without significantly increasing the financial risk to the government.”
Tax Lien Withdrawals
The IRS will also modify procedures that will make it easier for taxpayers to obtain lien withdrawals.
Liens will now be withdrawn once full payment of taxes is made if the taxpayer requests it. The IRS has determined that this approach is in the best interest of the government.
In order to speed the withdrawal process, the IRS will also streamline its internal procedures to allow collection personnel to withdraw the liens.
Direct Debit Installment Agreements and Liens
The IRS is making other fundamental changes to liens in cases where taxpayers enter into a Direct Debit Installment Agreement (DDIA). For taxpayers with unpaid assessments of $25,000 or less, the IRS will now allow lien withdrawals under several scenarios:
• Lien withdrawals for taxpayers entering into a Direct Debit Installment Agreement.
• The IRS will withdraw a lien if a taxpayer on a regular Installment Agreement converts to a Direct Debit Installment Agreement.
• The IRS will also withdraw liens on existing Direct Debit Installment agreements upon taxpayer request.
Liens will be withdrawn after a probationary period demonstrating that direct debit payments will be honored.
In addition, this lowers user fees and saves the government money from mailing monthly payment notices. Taxpayers can use the Online Payment Agreement application on IRS.gov to set-up with Direct Debit Installment Agreements.
“We are trying to minimize burden on taxpayers while collecting the proper amount of tax,” Shulman said. “We believe taking away taxpayer burden makes sense when a taxpayer has taken the proactive step of entering a direct debit agreement.”
Installment Agreements and Small Businesses
The IRS will also make streamlined Installment Agreements available to more small businesses. The payment program will raise the dollar limit to allow additional small businesses to participate.
Small businesses with $25,000 or less in unpaid tax can participate. Currently, only small businesses with under $10,000 in liabilities can participate. Small businesses will have 24 months to pay.
The streamlined Installment Agreements will be available for small businesses that file either as an individual or as a business. Small businesses with an unpaid assessment balance greater than $25,000 would qualify for the streamlined Installment Agreement if they pay down the balance to $25,000 or less.
Small businesses will need to enroll in a Direct Debit Installment Agreement to participate.
“Small businesses are an important part of the nation’s economy, and the IRS should help them when we can,” Shulman said. “By expanding payment options, we can help small businesses pay their tax bill while freeing up cash flow to keep funding their operations.”
Offers in Compromise
The IRS is also expanding a new streamlined Offer in Compromise (OIC) program to cover a larger group of struggling taxpayers.
This streamlined OIC is being expanded to allow taxpayers with annual incomes up to $100,000 to participate. In addition, participants must have tax liability of less than $50,000, doubling the current limit of $25,000 or less.
OICs are subject to acceptance based on legal requirements. An offer-in-compromise is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed. Generally, an offer will not be accepted if the IRS believes that the liability can be paid in full as a lump sum or through a payment agreement. The IRS looks at the taxpayer’s income and assets to make a determination regarding the taxpayer’s ability to pay.
• IRS Begins Tax Season 2009 with Steps to Help Financially Distressed Taxpayers; Promotes Credits, e-File Options ( IR-2009-2)
• IRS Speeds Lien Relief for Homeowners Trying to Refinance, Sell ( IR-2008-141)