Federal Tax Lien Information
Few things cause as much aggravation or grief than a federal tax lien on a property you want to buy or sell. A federal tax lien is placed on a property by the Internal Revenue Service (IRS) for nonpayment of federal income taxes. Unfortunately, the lien is also placed on the property owner's credit report, so until it is cleared up, it is difficult for that person to get a loan or credit on anything. Refinancing a home also is difficult because most mortgage companies will do a credit check.
What the IRS Can and Can't Do
Contrary to popular belief, it is not easy for the IRS to seize the home in which you are living. First, the your IRS debt must be at least $5,000. Second, the IRS must go through a local, impartial judge to acquire your home. In addition, if the equity (the market value minus what is owed) in your home is not enough to cover what you owe, the IRS will most likely not be interested in seizing it.
It is much easier for the IRS to garnish your wages or seize your bank accounts because a court order is not required. The IRS also can take money from your retirement accounts.
What You Can Do
The IRS has two main options that you can choose from if the taxes owed can't be paid all at once. An installment agreement allows you to pay so much a month for a certain length of time, usually five years. This is hard to negotiate because the IRS often wants more per month than you can afford.
The other option is an offer in compromise. You make the IRS an offer for a lesser amount than what you owe. A major drawback to this solution is that a taxpayer seldom wins an offer in compromise without an attorney, so attorney fees have to be considered as well. These fees can be $2,000 or more.
As you can see, if you are a taxpayer who owes the IRS a large sum of money, your options are limited. Equity loans can sometimes be acquired if your home has enough equity, however, if the lien has affected your credit, they are often hard to get. One thing you might consider is selling your home.
Selling a Home with a Federal Tax Lien
There are several things to think about before selling your home if it has a federal tax lien. First and foremost is the equity. If you owe more on your home than what the fair market value is on the property, selling it will not help you get out of debt. You will need to figure out what you would net from the sale after paying the balance on the mortgage and the closing costs. If there is not enough left over to pay the IRS, you may be able to get an offer in compromise. At any rate, the sale of the property will most likely not go through until the debt to the IRS has been paid.
Talk to the IRS
The most vital point to remember when you have a federal tax lien is to talk to the IRS. Explain your situation and try to come to some sort of settlement. Communication is essential. The IRS needs to know that you are sincere in wanting to settle your debt. If you can afford it, and you determine it's worth the money in the long run, hire an attorney to do an offer in compromise.
The worst thing you can do is ignore the problem. The IRS can and will garnish your wages and seize your bank accounts. You may be able to avoid all of that by talking to them and making an arrangement.
Buying a Home with a Federal Tax Lien
First, and perhaps the most important factor in buying any home is to go through a title company. Once a contract has been accepted by the seller and everyone has signed it, the title company "opens title." That is, the title company starts its research into the background of the property. During this title search a federal tax lien would probably show up. Any tax lien (federal, state, or county) has to be resolved before the title company will issue a clear title on the property. In the majority of cases, it is the seller you are buying from who owes the tax and the lien can be cleared up at closing. A title company has access to attorneys who will issue the proper paperwork (usually a release of lien) that the IRS will sign. In the event the seller is not receiving enough money at closing to pay off the lien, the title company may be able to negotiate with the IRS for a lesser amount, or work out some sort of compromise that allows the property to be sold with a clear title. In some instances, the mortgage company can be called to compromise on the amount owed by the seller, particularly if the seller is behind on payments or facing foreclosure.
In some cases, title companies find federal tax liens that have been paid but no release of lien was drawn up or filed. This can be corrected fairly easily by proceeding with the proper paperwork and filing it with the court.
