Federal tax liens are one of the most powerful tools that the IRS has when trying to collect a tax debt. Liens arise automatically by law once a taxpayer owes money and fails to pay it. If the taxpayer owes more than $10,000 in taxes, the IRS will file a Notice of Federal Tax Lien. The Notice is public information and typically causes a taxpayer's credit score to drop by as much as 120 points.
It will be very hard, if not impossible, to find a bank that will give a loan, or refinance an existing loan, to someone with a federal tax lien on their record.
Nevertheless, there is a "work around" for people with a federal tax lien who are in the market for a mortgage or a refinancing: the loan subordination.
A loan subordiantion is a deal between the IRS and a bank, whereby the the bank becomes a preferred creditor on the loan, provided that a portion of the loan proceeds are used to pay down the back taxes or enable the taxpayer to increase their monthly payment to IRS. The task of the CPA is to make a "pitch" to the IRS that it will be best off by allowing the subordination of the loan.
In addition to the tax rules, mortgage rules also need to be considered. According to those rules, if you are in the market for a new home and you have an outstanding tax lien, you must be willing to purchase your new home in a different county than where the lien is filed. If you do NOT have a lien, but have delinquent taxes that have NOT yet turned into a lien, then you can buy in any county.
In conclusion, all is not lost for the home owner, or aspiring home owner, with a tax lien. A lien subordination can be used to get you the mortgage or refinancing that you want. A CPA or mortgage broker with experience in loan subordinations should be able to help you to navigate these waters.
If you have any questions about loan subordinations or tax liens, feel free to contact Gary Massey, CPA at 678-235-5460, or Travis Johnson (404-786-5859) and Tyler Johnson (678-595-4394) of Residential Funding Consultants.
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Massey and Company, CPA is a boutique tax and accounting firm located in the Buckhead neighborhood of Atlanta.
Residential Funding Consultants, LLC is a mortage and refinancing firm located in Marietta.