When an individual or business owes federal taxes, a lien arises in favor of the IRS in all property of the delinquent taxpayer. The IRS will often file a notice of this tax lien – a Notice of Federal Tax Lien or “NFTL” – in the state offices where the taxpayer resides or has property. The IRS generally uses IRS Form 668(Y), Notice of Federal Tax Lien, for this purpose. If the taxpayer is able to fully pay all the taxes owed to the IRS, the IRS will then issue a “Release” of the NFTL. The IRS is also authorized to “Discharge” its tax lien in specific property of a taxpayer (but otherwise retaining its lien in all other property of the taxpayer), and can also agree to “Subordinate” its tax lien in property to other creditors of a taxpayer.
When a taxpayer pays his or its taxes, or the taxes otherwise become legally not collectable (e.g. through expiration of the 10-year statute of limitations on collections of taxes) and where the IRS has recorded a NFTL, the IRS will issue a separate “Release” of its tax lien in all property of the taxpayer. The IRS is required to issue and record a “Certificate of Release of Federal Tax Lien” (IRS Form 668(Z)) within 30 days after full payment by a taxpayer (including full payment of any associated penalties and interest) or the tax debt becomes legally unenforceable. The “Release” is recorded by the IRS with the same state office where the original NFTL was recorded. A taxpayer can sue the IRS for damages if an IRS official “knowingly or through negligence” fails to release a tax lien required to have been released.
While the filing of a “Release” of its NFTL by the IRS will be recorded after payment of the taxes by a taxpayer, and will reflect that the IRS no longer asserts a tax lien against the taxpayer’s property, the original NFTL document still remains of record. Taxpayers may be concerned (perhaps justifiably) that credit reporting agencies and others can still access the original NFTL filed with the state office to see that the taxpayer once had owed taxes to the IRS. To remedy this issue, the IRS has a process where, under certain circumstances, a NFTL may not only be “Released” but also “Withdrawn” as well.
The IRS has the authority to “Withdraw” a NFTL under certain circumstances, and to also provide notice of this withdrawal to credit reporting agencies. IRS Form 10916(C), Withdrawal of Filed Notice of Federal Tax Lien is used for this purpose. While there are a number of instances where the IRS has the authority to withdraw a filed NFTL, the most important perhaps is where the IRS determines that withdrawal would be “in the best interests” of both the taxpayer and the IRS. Requests for withdrawal should be filed by a taxpayer with the IRS using IRS Form 12277, Application for Withdrawal of Filed Form 668 (Y), Notice of Federal Tax Lien.
Where a taxpayer has paid his or its taxes, and the IRS has issued a “Release” of its NFTL, a taxpayer may apply for “withdrawal” of the IRS NFTL, typically by showing that withdrawal would be in the “best interests” of the taxpayer and the IRS. Withdrawal of the NFTL will typically be granted by the IRS in these situations where the taxpayer can show the following:
- The taxpayer requests withdrawal in writing (use Form 10916(C));
- The taxpayer has fully satisfied the liabilities reflected on a recorded NFTL;
- The IRS has already issued a “Release” of the NFTL;
- The taxpayer has filed all required tax returns for the prior three (3) years; and
- The taxpayer has made his required estimated tax payments and its federal tax deposits for the current tax periods.
If the IRS grants the taxpayer’s withdrawal application, the IRS will record the required NFTL withdrawal notice with the state office where both the original NFTL and the “Release” were filed, and the IRS will also notify credit reporting agencies about the withdrawal.