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If you’re in debt to the IRS, Uncle Sam can slap a tax lien on your home. A federal tax lien can make it difficult for you to sell your house, refinance the mortgage or get credit until the debt is paid.
A lien also attaches to other assets, including your money, vehicles and any other property you own. If you’re a business owner, those assets may be included in the lien, too. And filing for bankruptcy will not clear a federal tax lien. The lien may continue after bankruptcy.
Anyone past due on their federal taxes is subject to a tax lien. The IRS will assess your liability and then file a Notice of Federal Tax Lien, which alerts creditors that the IRS has a legal right to your home. You will receive that notice, too.
“IRS tax liens on homes are generally triggered whenever the IRS perceives it will be difficult to collect the full amount you owe within the statute of limitations for the payment of IRS debt, which is 10 years,” says Elizabeth Gonsalves, a tax attorney in Los Angeles.
A federal tax lien doesn’t mean the IRS has taken over your property. But if you want to sell the home, the IRS has a right to collect the proceeds from the sale to satisfy your tax bill.
Using home equity to pay taxes
If you want to refinance, the federal government may be willing to “subordinate” the lien, especially if you plan to use home equity to pay your taxes. Subordination allows other creditors to move ahead of the IRS, but it does not remove the lien. A tax lien can make it tough to qualify for a mortgage refi, though.
“If you want to refinance and can demonstrate to the IRS that you intend to use the savings on your mortgage or cash from your home equity to pay your taxes, the IRS will usually agree to subordinate the lien,” Gonsalves says.
An IRS tax lien will stay on your credit history for seven years after it’s paid, says Rod Griffin, director of public education for Experian. “The further in the past the lien was paid, the less impact it will have on credit scores and lending decisions,” he says.
Other ways to get rid of a tax lien
1. Pay your bill in full
This is the best way to get rid of a tax lien on your home. The IRS releases the lien within 30 days of the debt being paid.
2. Apply for lien ‘withdrawal’
A withdrawal of the lien removes the public Notice of Federal Tax Lien and shows that the IRS is not competing with other creditors for your property. But you are still liable for the debt.
You have to apply for a withdrawal, however, and the IRS determines whether you qualify. You may be required to set up payment installments and have the payments debited directly from your bank account. The IRS may not even consider you for a lien withdrawal unless you owe less than $25,000 and can pay it off in 60 months or less.
“It could take two or three months to have the lien removed,” says Gonsalves. “But once (withdrawal) happens, it’s as if the lien never existed, even though you’re making monthly payments on the debt.”
Once the lien is withdrawn, you should notify Experian, TransUnion and Equifax, the major credit-reporting bureaus. “If the lien is withdrawn and reported as such, Experian deletes it from the file. As a result, it will no longer appear in the credit report,” Griffin says.
3. Sell your house
If you have enough equity in your home to satisfy your federal tax bill, you may ask the IRS to “discharge” the lien and use your sales proceeds to pay off the IRS. A discharge removes the lien from the house so that it can transfer to the new owner, free of the lien.
You would need to provide the IRS with complete documentation of the sale. The best move, if you expect the IRS to put a tax lien on your home, is to sell it before the lien is triggered, advises David L. Mortimer, a certified public accountant in Alexandria, Virginia.
Tax lien vs. levy
Although an IRS tax lien on your home is never good, taxpayers do have more options today than they used to for resolving their tax debt and offsetting the damage to their credit.
What you never want to do is ignore your federal tax bill to the point that Uncle Sam takes your property to satisfy the debt. If you don’t pay or make arrangements to pay, the U.S. government can seize and sell any type of real or personal property you own or have an interest in. That’s known as a levy, a legal seizure of property to satisfy a tax debt.