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Getting a Federal Tax Lien Removed Is Not As Easy As 1-2-3

The Simple Explanation

Federal Tax Liens exist for one reason and one reason only.  Liens exist to protect the government if you are trying to sell assets or property.  Let's say you owe the IRS $500,000 and you've got a home, mortgage free, worth $500,000.  Your not to keen on turning over that equity to the IRS, even though you know you owe the back taxes.  What is stopping you from selling the property to a cash buyer and fleeing to Brazil to enjoy an 'extended vacation'?  The Federal Tax Lien is the government's way of suppressing your impulses to liquidate assets that could go toward paying your debt.

Why IRS Sometimes Releases Liens

The main reasons liens are released are: (1) to allow you to liquidate an asset for the purposes of paying your taxes; or (2) to prevent you from experiencing a hardship or a negative economic consequence caused by the lien.  For instance, maybe you are looking for a job as a stockbroker and the Tax Lien would be a reportable item on your U4 that would prevent a firm from hiriing you.  The IRS might see the wisdom in removing the lien (albeit, perhaps temporarily) when faced with such an event. 

IRS May Withdraw Liens to Facilitate the Collection of Tax

If the withdrawal (or non-filing) of a lien will “facilitate the collection of the tax liability,” then the IRS is authorized to forego the lien. A lien serves little purpose other than to harass and annoy, if it actually makes collection less likely. If a taxpayer can show he has no assets which the IRS can currently secure by filing a lien, the basis for filing a lien is not as strong. By filing a lien, the IRS may substantially reduce the chances that a given taxpayer will be able to full pay his tax liability, if the lien will threaten the taxpayer's ability to earn a living. I.R.M. section 5.17.2.8.6(4) states pertinently: “The Service must exercise good judgment in weighing the risks and deciding whether to subordinate the federal tax lien. The Service’s judgment is similar to the decision that an ordinarily prudent business person would make in deciding whether to subordinate his/her rights in a debtor’s property in order to secure additional long run benefits.”

Recent Tax Court Cases Have Adressed Circumstances "Facilitating Collection"

Recent Tax Court cases have picked up on this logic and have asked Settlement Officers and Revenue Officers to exercise “prudent business judgment” in deciding whether to take collection action, such as filing a lien. See Alessio Azzari, Inc. v. Commissioner, 136 T.C. No. 9, (United States Tax Court, 2011). The operative question is whether filing the lien will “facilitate” collection or will “harm” the IRS’s ability to collect.

Additional Resources

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Understanding-a-Federal-Tax-Lien