Can the IRS Take Your Home?
Yes, but not likely, it’s important to understand your options and take action now. Here’s what you need to know:
If you are a homeowner and you fail to pay your federal income taxes, the Internal Revenue Service (IRS) can place a lien on your home…and everything that you own. Once this happens, the IRS could eventually decide to foreclose on your home in order to collect the tax. Does it happen often? No, but it does happen and it depends on the circumstances. In reality, the IRS most often uses the lien to get paid when you sell or refinance the home.
How the IRS Gets a Federal Income Tax Lien On Your Home
Most everyone who earns income must file a federal income tax return if you’re a U.S. citizen or resident alien and your taxable income is above a certain level.
If you fail to pay your federal income taxes, a federal tax lien can attach to your property including your real estate (house and or land), personal property, and financial assets. The lien arises after:
- the IRS assesses your liability
- the IRS sends you a notice and demands payment, and you fail to pay the balance in full on time.
- The lien amount will include the past-due taxes plus any interest, penalties, and costs they add on top.
Federal Income Tax Liens and Foreclosure Of Your Home
In order for the federal tax lien to have priority against certain other liens on your home—like a mortgage lien, judgment lien, or HOA lien—the IRS must file a public document called a Notice of Federal Tax Lien in the county records.
What is lien priority? Lien priority determines the order in which creditors get paid following a foreclosure. The priority of the IRS lien is based on the lien’s recording date. For example, if the IRS records its lien before a judgment creditor records its lien, the IRS lien has priority over the judgment lien. In other words the first entity to file the lien has priority.
Once there is a federal tax lien on the home, the IRS may foreclose. But it probably won’t. The IRS would consider foreclosing only if there is enough equity in your home to pay off any superior liens first, such as a mortgage, as well as cover the IRS balance. Even then, the IRS generally doesn’t kick homeowners out of their primary residences as this gives them a very bad reputation in the media. Normally, the IRS will leave the lien on the home until you sell, refinance or pay off the back tax.
What Happens If You Sell or Refinance the Home
If you have equity in your home, the federal tax lien is typically paid out of the sales proceeds at the time of closing. If sales proceeds won’t cover the lien amount, you can ask the IRS to discharge the lien to allow the sale to go through.
In a refinance, you can either refinance for an amount that is sufficient to pay off the lien (if possible) or ask that the IRS subordinate its lien (make it secondary) to the lender’s lien to allow for the refinancing of the mortgage.
What Happens to an IRS Lien If the Mortgage Lender Forecloses on Me?
In cases where the mortgage lender recorded its lien (the mortgage) before the IRS records a Notice of Federal Tax Lien, the mortgage has priority. This means that if the lender forecloses, the federal tax lien on the home—but not the balance itself—will be wiped out in the foreclosure. If there are any excess proceeds after the foreclosure sale, the IRS may seek to recover that money and apply it to the outstanding back tax.
IRS May Redeem After a Foreclosure of Your Home
When an IRS lien is foreclosed, the IRS gets 120 days to “redeem” the home by paying the amount the home sold for at the foreclosure sale, plus interest and various other amounts. If the IRS redeems, it becomes the legal owner of the home.
IRS redemptions really don’t happen very often. Unless the cost to redeem is less than the fair market value of the home, there’s no incentive for the IRS to redeem. This is rarely the case. The IRS only redeems in situations where it believes the property could be resold for more than the cost of redemption and typically only if it already has a guaranteed buyer for the home. Although this outcome is unlikely, it does happen – you do not want to risk it!
What You Can Do About a Federal Tax Lien On Your Home
You can avoid a federal tax lien by filing and paying your taxes on time. If this isn’t possible and you receive a notice that the IRS has filed a federal tax lien, you can request a review of your case called a “Collection Due Process” hearing. Your request for a hearing about a federal tax lien filing must be postmarked by the date indicated in the lien notice.
At the hearing you may request a payment option such as:
- an installment agreement to pay your taxes in monthly installments over a period of up to six years, or
- an offer-in-compromise, which is when the IRS allows you to pay less than what it claims you owe. (Learn more about IRS Installment Payment Plans, offers-in-compromise, and other options if you can’t pay your tax bill.)
There is one way to have the lien removed through a payment plan. If you owe less than $25,000 and you enter into a Direct Debit Installment Agreement to pay back the balance in 72 months you may be eligible for a lien discharge. After three payments, you can negotiate with the IRS to have them remove the lien.
Tax debts and unfiled returns can make it challenging to buy a home, but it’s not impossible. For best results, you should file all back taxes and set up payments on tax debts. If you purchase a home while ignoring your tax debt, you risk facing liens and levies on the home.
The W Tax Group has licensed tax attorneys and/or CPAs who are experienced and well qualified to help you quickly deal with your tax liability and any federal tax liens. We offer a 100% free tax case evaluation where we review your situation, provide you guidance and offer you a way out.