Fresh Start tax lien withdrawal: the two routes, and how Form 12277 works

Two numbers that get confused

Fresh Start lien rules involve two different thresholds, and many websites merge them or get them wrong.

The first is about filing. The Internal Revenue Manual tells IRS employees that a Notice of Federal Tax Lien should generally be filed when the total unpaid balance of assessments is $10,000 or more. Below that, notices are generally not filed, though the manual allows filing to protect the government's interest. This is the threshold Fresh Start raised in 2011. It is internal guidance, not a rule you can enforce.

The second is about withdrawal. A notice that has already been filed can be withdrawn under a direct debit agreement only if you owe $25,000 or less. That figure has nothing to do with whether a notice gets filed in the first place.

Release, withdrawal, discharge and subordination

Four remedies exist, and they do different things. The one most people mean when they say they want the lien removed is withdrawal, because it takes the public notice away.

The existing guide to the federal tax lien explains how the lien arises, what a filed notice does, and how discharge and subordination work when a property is being sold or refinanced. This page covers the two Fresh Start withdrawal routes.

Route 1: withdrawal after the lien is released

Paying the balance releases the lien, but the notice stays on the public record as a released lien. The first Fresh Start option lets you ask for the notice itself to be withdrawn afterward. The IRS lists the general eligibility as:

• Your tax liability has been satisfied and the lien has been released
• You are in compliance for the past three years in filing all individual returns, business returns and information returns
• You are current on your estimated tax payments and federal tax deposits, as applicable

Route 2: withdrawal under a direct debit installment agreement

The second option applies while you still owe, if you are paying through automatic withdrawals from your bank account. You can enter a direct debit agreement from the start or convert an existing plan to direct debit. The IRS lists the general eligibility as:

• You are a qualifying taxpayer: an individual, a business that owes income tax only, or an out-of-business entity with any type of tax balance
• You owe $25,000 or less. If you owe more, you may pay the balance down to $25,000 before requesting withdrawal
• The direct debit agreement will pay the balance in full within 60 months or before the collection period expires, whichever is earlier
• You are in full compliance with your other filing and payment requirements
• You have made three consecutive direct debit payments
• You have not defaulted on your current direct debit agreement or any previous one

A Simple Payment Plan can run longer than 60 months and does not have to be paid by direct debit. A plan that suits your budget may therefore not meet the withdrawal conditions. If withdrawal matters to you, check the 60-month and direct debit conditions before you choose the payment amount.

How to request withdrawal on Form 12277

Form 12277 is a two-page application. Withdrawal is discretionary: the IRS reviews the request and may ask for more information before it decides.

1. 1.Find the lien notice, Form 668(Y). If you do not have a copy, note its serial number, filing date and the recording office where it was filed
2. 2.Complete sections 1 to 8 with your name and taxpayer number as shown on the notice and your current contact details
3. 3.In section 10, mark whether the lien is open, released or unknown
4. 4.In section 11, check the reason. For the direct debit route, check the box stating that the taxpayer is under a Direct Debit Installment Agreement. For a released lien, the instructions say to check the best interest box
5. 5.In section 12, explain the basis for the request and attach documents, such as proof of the three direct debit payments or of the release
6. 6.Sign under penalties of perjury and mail the form to the IRS office assigned to your account. If none is assigned, the instructions direct it to the Advisory Group Manager for your area, listed in Publication 4235

What withdrawal does and does not change

The IRS describes a withdrawal as removing the public notice and assuring that the IRS is not competing with other creditors for your property. You remain liable for the amount due. The underlying claim against your property continues until the balance is paid or the collection period ends.

The IRS also says that once a notice is filed it may limit your ability to get credit. How lenders and credit reporting companies treat a filed or withdrawn notice is their decision, not the IRS's, so ask the lender involved what it needs to see.

• If you are selling or refinancing a specific property, discharge or subordination may be the faster route. See the federal tax lien
• If a levy is the immediate problem, a lien withdrawal does not release it. See getting a levy released
• For routine questions, such as verifying a lien or requesting a payoff amount, the IRS Centralized Lien Operation is at 800-913-6050

Where we come in

Whether you meet the conditions is a question of record: the balance by year, the collection date for each assessment, your filing history for the past three years and the payment history on the agreement. We read the transcripts, prepare any returns that are missing, work out those dates and tell you in writing whether the withdrawal conditions are met. Form 12277 itself is a form you can complete and mail. We give you a scope and a price in writing before anything starts. See tax resolution for the scope.