What is Form 668(Y) and what is it used for? If you don’t already know, Form 668(Y) is known as the Notice of Federal Tax Lien. When the IRS issues one to you, it means they have placed a federal lien on one or more of your properties. A lien is a claim to the rights to a property. This means if you sell your property, the proceeds must go first to the IRS to satisfy your back taxes. Only after all your tax debts are settled, the leftover proceeds (if any) are given to you.
Also, once a Form 668(Y) is issued to you, it goes on public record and the lien appears on your credit reports, and your FICO credit falls by up to 200 points. Besides that, even after your tax liability is fully settled, Form 668(Y) stays on your credit record for 7 years thereafter. Sucks, huh? So the best thing to do is to avoid a lien altogether.
Since prevention is better than cure in this case, it’s important to ensure that you are current in your filings. You have to file your tax returns every year regardless of whether you can afford payment or not. Then if you truly cannot afford to pay off your entire tax debt, you should negotiate with the IRS to make installment payments. When you have agreed on an installment plan, stick to it at all costs. This will prevent the IRS from issuing Form 668(Y) to you.
If you default on your installments, you should immediately re-negotiate your position with the IRS, explaining to them why you cannot honor your agreement. Worse comes to worse, you can make an offer in compromise where you propose to pay less than your total tax liability as full settlement. If the IRS accepts your offer in compromise, you can then have Form 668(Y) expunged from your tax case.
But if you have already been issued with Form 668(Y), what can you do about it?
The essential thing you must do is settle your entire tax debt. As stated above, you can do so via an installment agreement. When you have fully settled your taxes, then to annul Form 668(Y), you need to fill out Form 12277 Application for Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien. On Form Form 12277, make sure you have checked the box indicating that the request was in the best interest of the government and the taxpayer. Once the IRS is satisfied with your tax settlement, they will issue IRS form 10916(c), Withdrawal of Filed Notice of Federal Tax Lien to you.