IRS Form 12277: Application for Withdrawal of Filed Form 668(Y)

If you’ve incurred tax debt and failed to either pay in full or make other payment arrangements with the IRS, they will continue notifying you of your obligations until they are forced to take more aggressive action. When it gets to this point, they will often proceed with a lien. 

A lien on your assets gives the IRS a legal claim to your current and future property, and it can make it very difficult to get loans against your assets. However, there are situations where you can get federal tax liens withdrawn.

If you believe you have reason to ask the IRS to withdraw their lien, the process starts with Form 12277, Application for Withdrawal of Filed Form 668(Y).

Understanding Tax Liens

Tax liens represent a government’s legal claim against your property. A lien attaches to all of your property, including vehicles, real estate, bank accounts, retirement accounts, and personal property.

A tax lien can affect your financial well-being in many different ways. When there’s a lien on your property, the IRS has the right to the proceeds if you sell the asset. If you transfer the asset—for example, by giving it to someone—the lien stays attached to the asset.

Tax liens are also public record. While they should not affect your credit score or show up on your credit report, this information is viewable by creditors and may cause them not to extend credit to you. In particular, you won’t be able to use your assets as collateral. Creditors won’t use assets as collateral if they know that there’s already an IRS lien that supersedes the lien they would issue with the loan.

If you work in an industry that checks this type of information, the presence of a federal tax lien can be a glaring red flag. This is particularly true for anyone who works in financial or legal fields, but even if you’re a small business owner, a lien can hurt your reputation.

Overview of IRS Form 12277

IRS Form 12277, Application for Withdrawal of Filed Form 668(Y), allows you to ask the IRS to withdraw a tax lien on your assets. When you pay your taxes off in full, the IRS will automatically release the tax lien. This simply means that public record will show that the lien is paid off. Withdrawing the tax lien completely removes it from public record.

What is IRS Form 12277?

This form is your formal request to the IRS to withdraw a lien. It allows you to choose from several different reasons to request a withdrawal and provide supporting documentation or reasoning for your request.

Legal Basis for Withdrawal of a Tax Lien

Withdrawal of tax liens is covered in section 6323(j) of the Internal Revenue Code. Under this section, there are several reasons given for the withdrawal of a lien:

• Lien was filed prematurely or not in accordance with the IRS’s administrative procedures
• Taxpayer entered an installment agreement that satisfies the liability; this is only permitted when the terms of the installment agreement specify that the NFTL will be withdrawn
• Withdrawal of the lien will assist in the collection of the tax debt
• Withdrawal of the lien is in the best interests of the United States and the taxpayer

Eligibility Criteria

You must meet several different criteria before the IRS will consider withdrawing your tax lien. If you have paid your tax debt in full and the lien has been released, you can request a withdrawal as long as you have been compliant with your tax filings for three years and you are current on your estimated tax payments and federal tax deposits, if applicable.

Even if you haven’t yet paid off your tax debt, you may still qualify for withdrawal of a tax lien if you meet a separate set of requirements. These criteria include:

• You are an individual, business with only income tax liability, or an out-of-business entity
• You owe $25,000 or less; you may also satisfy this requirement by first paying down the balance to $25,000
• Your installment agreement will fully pay off your tax debt within 60 months or before the CSED, whichever is earlier
• You are compliant with all other filing and paying requirements
• You have made three consecutive direct debit payments
• You have not defaulted on this or any other direct debit installment agreement 

The IRS Fresh Start Initiative, which started in 2011, aimed to make it easier for taxpayers to get caught up on their tax debt, avoid aggressive collection actions, and avoid tax liens. One of the major changes introduced in this initiative allowed taxpayers to request withdrawal of a lien upon entering a direct debit installment agreement.

Completing Form 12277

When you’re ready to ask the IRS to withdraw their lien, you can start by filling out Form 12277. You begin by filling out your personal information in Sections 1 through 8, including your name, address, SSN or EIN, and representative information.

After the first section, you move onto the questions that relate specifically to your lien. The IRS requests that you attach a copy of Form 668(Y), Notice of Federal Tax Lien. If you do not have a copy of the NFTL, you can provide the lien’s serial number, the date that the form was filed, and the recording office where the form was filed. You’ll also need to indicate the current status of the tax lien. It may be open, released, or unknown.

From there, you get into the details of why you believe your lien should be released. You’ll need to indicate which legal basis for withdrawal fits your situation. This includes the same options as those listed in the Internal Revenue Code:

• NFTL filed prematurely or outside of IRS procedures
• Entered a direct debit installment agreement or another installment agreement that allows for the lien to be withdrawn
• Withdrawal will allow IRS to collect tax debt more easily
• Taxpayer believes withdrawal is in the best interests of the government

Once you’ve marked off which applies to your case, you have space to explain the basis for the withdrawal request. The IRS also notes that you should attach additional sheets or documentation as needed. For example, if you have proof that withdrawing the lien will make it easier for the government to collect your tax debt or that lien withdrawal will put you in a financial position that allows you to pay off your tax debt, you’ll want to provide that here.

Important Details and Documentation

Most of this form is very routine, but choosing the basis for lien withdrawal and explaining the reasoning behind your request may require some additional work. The first two reasons are easy to document; if the NFTL was premature or violated IRS procedures, you can provide paperwork showing that they filed too early or did not properly notify you. If you entered an installment agreement, you can provide proof of the installment agreement.

However, when it comes to proving that withdrawal will facilitate tax collection or that withdrawal is in the best interests of the government, plan on providing as much supporting documentation as possible. If withdrawal of the lien will allow you to sell your assets and free up additional money for tax debt, be prepared to support that claim with documentation.

The Application Process

After you finish Form 12277 and attach all supporting documentation, you can send it to the IRS office assigned to your account. The IRS will then review your request, potentially request more information if necessary, and make their decision.

After Submission: What to Expect

The IRS office assigned to your case will review everything you’ve submitted as soon as possible. The timeframe varies quite a bit, depending on your assigned office and their workload. If they request additional information, provide it immediately to avoid unnecessary delays.

The IRS may decide to withdraw the NFTL. If they do, they will file Form 10916(c), Withdrawal of Filed Notice of Federal Tax Lien. You’ll then receive a copy of the form in the mail. If the IRS decides not to withdraw the lien, they will let you know of their decision, provide information supporting their decision, and let you know about your appeal options.

Problems and Solutions

A number of issues may arise during this process. Being prepared and working with a tax professional can help you avoid these hurdles:

• Misunderstanding eligibility: The IRS requirements for a lien withdrawal are fairly clear and straightforward. If you do not qualify, it does not matter how complete and thorough your form is—you will likely be denied. Verify your eligibility with information directly from the IRS or a tax professional.
• Missing information: Form 12277 must be completely and accurately filled out for the IRS to consider a lien withdrawal. Failing to attach a copy of the lien or the correct lien details can slow down the process or result in an outright denial. Double-check everything before submitting, and if there are any errors, fill out a new copy before submitting.
• Not including necessary documentation: Remember, the IRS places a lien on assets to make it easier to collect the taxes they are owed. If you want them to withdraw the lien for your benefit, you need to provide substantial proof that doing so is in their best interests. Do not expect them to take your word for it.
• Failure to respond to information requests: If the IRS requests additional information after you submit your form and you do not respond, your application will likely be denied and you’ll need to start all over again.
• New tax liabilities: You need to comply with all filing and paying requirements to receive a lien withdrawal. If you are falling behind on more recent tax years or otherwise showing non-compliance, the IRS is unlikely to grant your request.

Impact of Lien Withdrawal

If the IRS agrees to withdraw their lien, your life will improve in several different ways. First, the lien will be removed from public record. When potential employers and creditors look for lien records, they will not find your federal tax lien. 

This can strengthen your creditworthiness in the eyes of creditors. This may also give you access to new financing opportunities, such as lines of credit. A lien withdrawal will also allow you to sell or refinance your property, providing significant financial flexibility. Many people also find that a lien withdrawal provides tremendous stress relief, leading to better mental health and overall quality of life.

Frequently Asked Questions

How do I know if I’m eligible to use IRS Form 12277 for lien withdrawal?

The IRS provides specific information on which taxpayers qualify for withdrawal of a tax lien. You can qualify by paying off the tax debt and being compliant with IRS filing and paying requirements for three years or setting up a direct debit installment agreement and being compliant with all filing requirements.

Can IRS Form 12277 help improve my credit score by removing a tax lien?

A federal tax lien withdrawal will not improve your credit score. A tax lien does not affect your credit score. However, since creditors often check public records for liens and other creditworthiness red flags, a withdrawal can still positively affect your credit.

What should I do if my Form 12277 application is denied by the IRS?

Along with the reason for the denial, the IRS will also provide you information on your appeal rights. Use that information to determine whether or not you wish to appeal.

How long does the IRS take to respond to a Form 12277 application?

The IRS generally aims to respond within four to six weeks. The actual response time may be longer or shorter, depending on the complexity of your application and the workload of the IRS office holding your file.

What documents should I attach to my Form 12277 application?

You should attach your federal tax lien and anything supporting your reasoning for requesting a withdrawal. For example, you may want to include proof that a lien withdrawal will free up enough money to allow you to pay off your tax debt or make larger monthly payments toward your debt.

How does the Fresh Start program affect my Form 12277 application?

The Fresh Start program provided more ways for people to request lien withdrawal, giving more opportunities for taxpayers to get caught up.

What are the common mistakes to avoid when filing Form 12277?

Avoid rushing through the application, as this often leads to careless mistakes that can result in denial or unnecessary delays. This may also cause you to leave out important information that could convince the IRS that they should withdraw the lien. Verify that you qualify for withdrawal before applying so you don’t spend too much time asking for relief that the IRS will automatically deny.

Get Help With Tax Lien Withdrawal

When a federal tax lien is keeping you from paying off your tax debt and getting back on track financially, a lien withdrawal could be the next step for you. Getting the IRS to give up their stake in your property can be challenging, which is why many people find it helpful to work with a tax attorney. 

If you’re ready to find out if a lien withdrawal is the best option for you or if there are other paths open to you, let’s talk. Call Damiens Law at 601-476-1361 or request your free discovery call online.