The tax lien is the primary passive collections device for the IRS and State Departments of Revenue. The lien issued following a series of statutorily-required notices. Once issued, a lien attaches to all the property of the taxpayer, though the most common impact of a lien is on the transferability of property like real estate or vehicle and on the credit score of the taxpayer. The lien is frequently confused with the levy, which is a more active enforcement device that is used to seize funds or property without levy negotiation.
A lien may be negotiated by release, withdrawal, discharge or subordination.
A lien may be released upon satisfaction of a debt or granting of an Offer in Compromise. Barring an error, the lien release is generally automatic in these circumstances. The issuance of a lien release does not automatically resolve the adverse effect on credit score, and the release normally needs to be presented to the credit agencies to have the desired improvement in score. Because the original lien history remains on the score, the impact of a release is not as significant as with a lien withdrawal.
A lien may be withdrawn upon achievement of a certain compliance with payment or settlement agreements. It is rarely automatic, however, and typically requires a proper petition for withdrawal to qualify. Once presented to the credit agencies, however, the lien withdrawal has the effect of erasing all history of the lien immediately.
A lien may be discharged from a particular piece of property to facilitate a transfer. Sometimes this discharge is conditioned upon receipt of the proceeds of a transaction. Other times, the discharge is conditioned upon proof that there are no proceeds subject to the lien due to superior claims, or upon proof that there are no proceeds at all (such as a short sale of property). The petition for certificate of discharge of lien is important both as a way to convey good title to a buyer, but also as a way to facilitate property sales and keep the buyer at all.
A lien may be subordinated, or made inferior, to a new entity’s interest in a piece of property. This is the property refinancing scenario where an inbound lender is refinancing a piece of property, but the departed lender is moving the lien up into the first position, leaving the inbound lender in second. Since the refinancing lender will not likely sign off on the transaction in this scenario, a petition for subordination of lien allows the lien to move to second place behind the new lender. Approval of such a petition is conditioned upon the IRS understanding how the transaction is in the interest of the IRS. For example, if the refinancing is lowering the overall mortgage payment, freeing up funds for an IRS Installment Agreement, the IRS should approve the petition. Underwriting policies have been in tremendous flux since the Great Recession, however, making the lender policies the more difficult area in these transactions.