Understanding the various IRS forms can confuse taxpayers. One form often misunderstood is IRS Form 12277, which is the Application for Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien. Understanding how and when to use this form, as well as how to fill it out, can help taxpayers improve their financial situation if they’ve faced back taxes in the past.
what is the purpose of form 12277?
As the title suggests, IRS Form 12277 exists to allow a taxpayer to apply for Public Notice of Federal Tax Lien (NFTL) removal. An NFTL is simply the IRS registering its legal lien interest in the taxpayer’s property. Under federal law, the IRS has a statutory lien on a taxpayer’s property after a tax liability is ten days past due. It means the IRS has an automatic tax lien at that time. however, they must file this lien in the taxpayer’s home state to properly enforce their lien interest.
If the irs files an nftl, it is claiming an interest in the income that comes from the sale of assets or property to pay taxes before the owner or other creditors receive any of the income. An NFTL does not give the IRS superior rights over all creditors. For example, they would generally be entitled to the proceeds from the sale of the taxpayer’s home only after mortgage holders or other creditors with superior claims are paid, under state law.
does the irs have to contact the taxpayer before i file an ntfl?
Federal law only requires the IRS to make “reasonable efforts to communicate with the taxpayer” before filing the NFTL. IRS policy states that this means an NFTL can be filed at any time after the CP-14 Notice of Balance Due is submitted. A taxpayer would receive this notice in the mail after filing their taxes and failing to pay the debt in full. However, the usual IRS method is to send Notice CP-504: Notice of Intent to Levy before filing an NFTL. In addition, the IRS will generally automatically file an NFTL when the taxpayer enters a collection alternative. for example, collection alternatives such as an offer in compromise, an installment agreement, or a currently uncollectible status. Ultimately, failure to pay a tax liability in full by the due date will likely result in the IRS filing an NFTL against the taxpayer until the taxpayer settles the outstanding taxes.
adverse effects of a tax lien
After the IRS files a tax lien against a taxpayer, it can be challenging to remove it. It’s also a challenge for taxpayers to get back on track financially after the IRS has taken any collection action against them. Unfortunately, a federal lien can affect your credit. makes it more difficult to qualify for loans or other financial options. Some jobs even require a credit check before offering employment. therefore, having a federal tax lien on your financial record could make it difficult to get a job.
form 12277 grew out of the irs fresh start initiative, which offers options to taxpayers to allow them to improve their standing with the irs and get back on track. After settling a tax lien, a taxpayer can file Form 12277 with the IRS to request that the lien be removed. A taxpayer may also need to take additional steps, as the IRS often considers other components of your credit history when reviewing your application.
Although federal taxes due are resolved within 30 days of full payment, consumer and business credit reports may still reflect that you had a federal lien in the past. the mark on your credit can affect a taxpayer’s financial capabilities and opportunities. That’s why the IRS offers an option to remove it, instead of having it appear on the credit report as released or resolved. Removing the federal tax lien by filing Form 12277 can help improve a taxpayer’s credit. it can even put the taxpayer in a better position when applying for a mortgage or other line of credit.
In what situations would you use form 12277?
Taxpayers who pay their due taxes will release the tax lien. however, it may still show up as something that affected your finances in the past. therefore, any taxpayer who has received form 668(y) from the irs will probably want to consider filing form 12277 for removal after taxes are settled.
taxpayers have options if they can’t pay the taxes they owe to the irs. taxpayers can submit an offer in compromise or set up a payment plan if he or she is eligible. an offer in compromise is an offer less than the full amount owed. If the IRS accepts a taxpayer’s offer in compromise, it accepts the amount as payment in full. A taxpayer may qualify for a payment plan if they meet the IRS criteria for this option. The IRS offers several short-term and long-term payment plan options to taxpayers.
four situations the irs will consider to remove a tax lien
The IRS will not always approve a request to remove a federal lien from a taxpayer’s credit. Specifically, Form 12277 outlines the four situations in which you will consider withdrawing the tax lien. the form instructs the taxpayer to put an “x” in the applicable options:
- the notice of federal tax lien was filed prematurely or not in accordance with its procedures.
- the taxpayer entered into an installment agreement to satisfy the obligation for which the lien was imposed and the settlement did not provide for the filing of a federal tax lien notice.
- the taxpayer is under a direct debit contract in installments.
The fourth situation is the most general. why? because it is difficult to quantify what is best for the government and the taxpayer. It is also the situation that many taxpayers select when filing form 12277 when the other conditions do not apply.
When taxpayers complete Form 12277, they must choose a valid reason for requesting withdrawal. In addition, the chances of your request being granted are increased when you can provide detailed documentation. The documentation must describe why the IRS should remove the tax lien. If the taxpayer chooses the fourth option as a reason for requesting removal of a federal tax lien, they must explain why it is in the best interest of the taxpayer, as well as the best interest of the government.
In addition, the IRS is more likely to accept the application if the taxpayer explains that removing the federal lien will help in the process of collecting the taxes due. For example, if a taxpayer has no assets or other secured creditors, she can make larger payments through an installment plan than through asset seizure or wage garnishment. Therefore, eliminating the federal tax lien could be beneficial to the IRS. it can benefit the irs because the irs is more likely to receive the payment.
If you do not meet the above criteria, a tax lien appeal may also be considered.
Breakdown of Form 12277 Sections
sections 1-8
Taxpayers will enter their personal information in the first eight sections of Form 12277. All the information you include must exactly match your tax returns and other records. consists of the taxpayer’s social security number or tax identification number associated with the federal lien.
section 9
Section nine explains the importance of including a copy of Form 668(y). including a copy of this form will speed up the process. will ensure that the information correctly matches the details of the taxpayer.
section 10
next is part 10, which requires the taxpayer to select the state of their federal tax lien. the options are:
- open
- released
- unknown
If a taxpayer hasn’t paid their taxes or has paid them in the last 30 days, the status is likely open. If the taxpayer settled the taxes 30 or more days ago, and has been released from the taxpayer’s credit as an outstanding liability, the status is released. Otherwise, a taxpayer can contact the IRS or select unknown if the taxpayer doesn’t know.
section 11
Section 11 is the reason the taxpayer is requesting withdrawal of their federal tax lien. The IRS describes the reasons or situations in the section above. therefore, taxpayers should select the one that most closely aligns with the reason they are asking the IRS to remove the tax lien.
section 12
Taxpayers can go into more detail about the withdrawal request in section 12. In this section, you can include tax return records, proof of a payment plan the taxpayer has with the IRS, documentation of an offer accepted commitment or other details.
Finally, taxpayers must sign and date the affirmation section. gives the taxpayer the word that what they have included in the form is true and correct.
submit and be notified by the irs
Taxpayers will then send the form to the IRS by certified mail. Within 30 to 45 days, the taxpayer should receive a response from the IRS. will come in the form of a confirmation to approve or deny your request to remove the federal lien. If the IRS accepts the taxpayer’s application, they will also receive a copy of the application that the IRS will send to the local court. it will effectively remove your tax lien.
After you are approved, you may want to contact the three major credit reporting agencies to make sure they removed the tax lien. Transunion, Experian, and Equifax make up the Big Three credit reporting agencies. however, since 2017, the credit bureaus have decided to remove the tax liens on credit reports anyway. however, business credit reports and other consumer reports may contain them. For example, Lexisnexis RiskView Lien and Judgment Reports can still report tax liens, and lenders can take advantage of this tool. If necessary, you can dispute the tax lien and provide the IRS approval letter as proof.
Form 12277 can help taxpayers get a fresh start on their credit history. will allow taxpayers to move forward with financial freedom. After taxpayers complete the form, they should make sure they understand what each section asks for. they need to fill it out as completely and exhaustively as possible. doing so can increase a taxpayer’s chances of obtaining approval for an application to withdraw a federal tax lien. is one of the best ways to improve a taxpayer’s credit history if they have faced back taxes in the past.
Disclaimer: The content on this website is for educational purposes only and does not serve as legal or tax advice. For specific help regarding your tax situation, contact a licensed tax professional or tax attorney.