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Tax liens, part 2: How do you clear up a federal tax lien?

In the first part of this post, we discussed several possible responses to a federal tax lien.

One option, as we noted, is to resolve the underlying tax debt through an offer in compromise or an installment agreement before you are hit with a tax lien. It is also possible to contest the validity of the debt itself.

In this part of the post, let's turn our attention to how to clear up a lien after it has been imposed.

"Clearing up" a lien is certainly not a legal term. Neither is "getting rid of." There are several terms in tax law with more specific meanings that apply to tax liens.

Let's start with the term "subordination." To subordinate a federal tax lien doesn't mean it goes away. It means the IRS has agreed to let other creditors have priority over the federal government.

It is also possible to "discharge" a lien. This involves talking the lien away from particular property. This could also be called removing the lien from that property.

Neither subordination nor discharge actually releases the lien. But such a step can make it easier for you to refinance your house or get access to credit for your business -- even though there is still a lien on your property.

What about actually getting the lien released or getting the IRS to withdraw it?

That can be a bit more difficult, especially if you don't have the money to pay off your tax debt.

You can apply for the "withdrawal" of a Notice of Federal Tax Lien (NFTL) by using the applicable form. Withdrawal means that the NFTL goes away, but you remain on the hook for the tax debt.

In recent years, as part of its Fresh Start program, the IRS has opened up more eligibility options for lien withdrawal. We will explore those further in an upcoming post.

For purposes of today's post, the key point is that there are several ways that a federal tax lien can be addressed. A knowledgeable tax attorney can counsel you on which response is best for your specific situation.

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