Consider this common scenario - you owe the IRS for back taxes - you think you’ve come up with a plan to put the debt behind you - you can sell your home, pay off your mortgage, pay off the IRS, and have a few dollars left over.
You list your home for sale and, lo and behold, you discover that a potential buyer has disappeared. Apparently the IRS has put a lien on the house. What happened and what do I do next??
If you’ve read our previous posts you know that the IRS automatically obtains a lien against all your property if you fail to pay your taxes. This “silent” lien arises automatically after the IRS demands payment and there is no payment.
In connection with this lien the IRS files a Notice of Federal Tax Lien (NFTL) against the taxpayers property. This is the public notice of the tax debt - it indicates that the IRS has an interest in all assets - including a home. The filing of this notice can result in a number of issues - obtaining or increasing credit, problems when submitting a rental application, pursuing a new job - in any situation where the taxpayers public records are being accessed.
Back to our situation - there is a solution to the problem. Remember the IRS wants to be paid - they will work with taxpayers if the end result is payment of outstanding taxes. In this case a potential buyer is hesitant to offer to buy the home where the IRS has an interest in the property.
At the end of the day the IRS does not want to own your house - they want to be paid. In the interest of being paid the IRS will allow for the sale. Technically the IRS will not release the lien at this point but they will provide a payoff letter which will allow for a sale of the property - similar to a lien created for a home equity line of credit.
If the available sales proceeds satisfies the tax debt then IRS will release the lien after payment. If there are proceeds available but not sufficient to cover the debt the IRS will release the property from the lien once the taxpayer proves that all remaining equity (after satisfying debts with priority over the IRS) is paid to the IRS. If there are no available sales proceeds (i.e. a short sale) the IRS will release the property from the lien once the taxpayer provides documentation that the taxpayer has no equity in the home.
What about a refinancing of the property? Homeowners refinance existing debt for the purpose of lowering a loans interest rate or allowing access to home equity. Without cooperation from the IRS lenders generally will not allow for a refinancing. The bank would be put in the position of giving up a claim against the house that was ahead of the IRS (since its lien arose before the IRS lien) in exchange for a claim that fell behind the IRS claim.
The purpose of a tax lien is not to punish the taxpayer - it is to preserve the right of the IRS to payment. A loan refinancing that lowers the interest rate could allow a taxpayer to increase monthly payments toward the tax debt. A refinancing to allow access to equity could allow the taxpayer to use this equity to make a payment to the IRS. In these situations the IRS will allow for a “subordination” of their lien - basically allowing for the new bank lien to step ahead of its lien - in exchange for an additional monthly or lump sum payment.
A few more point about liens.
Generally the IRS will not release a lien prior to payment of all outstanding taxes. However liens of $25k or less can be be released prior to full payment. In order to request a lien removal you need to enter into a direct-debit installment agreement (where you agree to pay the debt with monthly payments withdrawn directly from your bank account). After making three payments under the agreement you can request that the notice of lien be withdrawn.
Liens are “self-releasing”. The NFTL includes a date on which the lien becomes released. Collection efforts by the IRS are generally limited to a ten year period. The lien release date is therefore ten years after the date the tax is “assessed” (after a tax debt goes unpaid). Due to the self-releasing nature of liens the IRS does not formally “release” the lien. But after the date listed on the lien has passed the IRS no longer has a lien against the taxpayers property.
In summary the lien serves as a powerful tool by the IRS in its collection activities. But at the end of the day the IRS does not want to own your assets - it wants to be paid. Issues caused by the lien can usually be resolved by keeping this fact in mind.
In our next blog post we’ll discuss tax levies.
Link to Outline Slides: Lien Release Outline
Link to Video: Lien Video
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