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Federal tax liens are a product of the Internal Revenue Service (IRS). Federal tax liens are created and filed in the property records by the IRS when a taxpayer owes the IRS money that the taxpayer hasn’t paid. If you have ever had a federal tax lien against your property, you may wonder if the IRS can foreclose on your property. By understanding how a federal tax lien works, it can equip you to avoid foreclosure or know how to handle it. However, in full disclosure, dealing with a federal tax lien can get messy quickly, which is why the majority of individuals or companies facing this situation turn to successful attorneys for guidance and representation.
Suffice it to say, you do not want a federal tax lien against you. It is the first thing that hits the public record, so creditors and credit reporting agencies will know there is a federal tax lien. A federal tax lien is filed in the county in which the debtor has property and theoretically puts a lien on all the property, real or otherwise, the debtor has in that county. For these reasons and so many more, federal tax liens should always be taken seriously.
Although federal liens are attached to everything a taxpayer owns within that county, there may be some wiggle room. A homeowner with a lien may still be able to sell furniture, such as a couch, to their neighbor without interference from the IRS. However, if a factory with a lien is selling expensive equipment worth millions of dollars, the IRS could come after that equipment and leave the buyer empty handed.
What Happens When a Federal Lien Is Issued on Property with an Existing Mortgage?
In the event that the IRS has a federal tax lien against a house with an outstanding mortgage, the question becomes which is superior? The tax lien or the mortgage? In general, most states have a first come, first serve rule which means that if the mortgage is in existence prior to filing the tax lien (i.e. the deed of trust in favor of the mortgage lender is filed in the public record before the federal tax lien), the mortgage will most likely be superior.
However, it would be a mistake to think that the IRS cannot do anything if there is a current mortgage on the house. For example, if there is a house with an existing mortgage and a federal tax lien is filed, the IRS can still foreclose. A foreclosure requires the IRS to go through some procedural hurdles first, which typically makes this process uncommon, but it can happen.
The Steps the Government Takes to Follow Through with a Foreclosure
For the government to foreclose on a property, there is a procedure they must follow which can generally look like the following:
- The government gives notice by sending intent letters to the taxpayer
- If the taxpayer does not provide a satisfactory answer or any answer at all, then the IRS will do a public notification. This is most often done with commercial property and office buildings, but it may also be done with a house.
- The IRS will prepare to sell their interest in your house, which means they will foreclose on the property if you do nothing to stop them.
- Foreclosure means the IRS will conduct the sale of the property and issue a special kind of deed.
In most cases, the IRS applies the eighty percent rule, which means they are looking to get eighty percent of the value of the house. So, if you have a $300,000 house, $240,000 mortgage and a $60,000 tax lien on it, there is not enough equity.
Right of Redemption
The taxpayer has a right of redemption which can be a specific number of months for the taxpayer to come up with the funds to pay the amount the property sold for, plus a redemption premium, which can be somewhere around twenty percent.
For instance, if a buyer at a foreclosure auction bids $100,000 for the property, the buyer’s right to possess the property isn’t final. There is a window of time in which the taxpayer has an opportunity to redeem the property. The taxpayer would have to pay the buyer $120,000 and then they could redeem the property. If the taxpayer can’t or chooses not to do this, the taxpayer must surrender the property. The buyer would then be the new property owner. Remember, though, there is a mortgage still in place. So, the buyer would own the house, subject to the first mortgage, meaning if they want to keep the house, the buyer would need to make the necessary payments to the mortgage company.
It is worth noting that although mortgage companies do not have to be notified of the property foreclosure sale, most sophisticated mortgage companies and banks have people whose sole job is to look for these federal notices and match them up with properties that are secured by a loan from them. In other words, even if you do not notify the mortgage company about a federal tax lien or IRS foreclosure, they will most likely find out anyway.
Perhaps even more problematic is that the mortgage company can decide that if a federal tax lien goes into place, they can start their own foreclosure. This is because most deeds-of-trust say that an additional lien on the property constitutes a default on the first lien mortgage, freeing the deed-of-trust holder to foreclose on the property. It can get quite complicated quickly, which is why enlisting the help of an attorney can be key to success in cases like these.
Ways to Keep the IRS from Foreclosing on a Federal Tax Lien
There are two primary ways to keep the IRS from foreclosing on a federal tax lien, and they are:
- Pay the lien.
- Enter into some sort of installment program or offer in compromise. This can happen while the tax lien is in place.
Limited Life Span of a Federal Tax Lien
The fact is that federal tax liens have a ten-year life during which the IRS can collect the debt or reduce it to judgment. To reduce a lien to a judgment means filing in a court with proper jurisdiction and getting a court to issue a judgement against the taxpayer. This comes with its own administrative burdens and costs that the IRS will decide may or may not be worth doing.
The statute of limitation (the 10-year life of the lien) could help some individuals in the long run. There have been cases where taxpayer has simply waited out the ten-year life of the lien and then the IRS released it. Typically, if you owe the IRS a couple hundred thousand dollars and the IRS chooses not to foreclose on their tax lien, you may be able to wait out the ten-year period without much of an issue. However, during that time, you will not be able to sell or refinance the house.
Generally, if the individual is current on payments and taxes, and the mortgage company gets all the required information, most banks are content to do nothing and simply accept their monthly repayment. Yet, if you have a federal tax lien and are behind on payments, the mortgage lender may choose to be strict simply because the risk is now greater.
In short, the IRS can foreclose on your property, but by understanding a federal tax lien you are taking steps toward preventing that from happening, or at the very least knowing what to expect if it does become a reality. Whichever situation you find yourself in, enlist the help of a reputable tax attorney to make sure your rights are protected and that the actions you take best serve your interests.