The Tax Lien Cometh

Back Taxes Can Impact Your Real Estate Title. Here’s How to Deal With Them.

Historical image of a window on a downtown building with the words "Pay Your TAX Now Here!" painted on it. Captioned: Back Taxes Can Impact Your Real Estate Title

What happens when a taxpayer doesn’t pay tax? If the Internal Revenue Service is slighted, it follows its age-old tradition and imposes a tax lien on the person’s property. Boats, financial accounts, the house — an IRS lien attaches to everything. And federal tax liens are resilient; they can even stay on the title through a homeowner’s bankruptcy, if they were imposed before the bankruptcy was filed.

With the lien, the government isn’t actually taking the property. But if the homeowner wants to sell the property, the government will take its cut from the sale proceeds.

Concerned you might have a lien? You can check with the recorder of deeds in the county where your home is, or review your debt records on the IRS website. If you find yourself dealing with back taxes, find a way to make good on the tax bill, or get the relief you need.

Here, we delve into the most frequently asked questions about the impact of a lien on a taxpayer’s home title, and steps the homeowner can take to keep that title clean.

What Is the IRS Tax Lien Process?

If you owe $10,000 or more in back taxes to the Internal Revenue Service, you’re at high risk of being flagged for a federal tax lien. Go online to see how much you owe the IRS and pay the balance or request an installment plan. If you take no steps to work out the bill, the IRS will soon deploy its debt collection process:

  • First comes the Notice of Demand for Payment.
  • If payment is not promptly made, the IRS records a tax lien against the home and other property.
  • Next, the IRS sends the homeowner a Notice of Federal Tax Lien.
  • For large amounts, the IRS might deploy one of the revenue collectors who go out and knock on doors.
  • In the most serious cases, the government suspends the homeowner’s passport or places a levy on a taxpayer’s home property.

A lien creates enough trouble without even getting to the levy stage. Since 2017, the major consumer reporting firms no longer put liens in people’s credit reports. But the IRS lien is still a public document, appearing in title searches and lenders’ databases when the owner goes to sell or refinance the home. Meanwhile, the interest on the debt may be around 5%; the IRS adjusts its interest rate quarterly. Monthly IRS late fees can accrue over time, too — up to a whopping 25% of the total debt.

For a comprehensive overview, refer to The IRS Collection Process [PDF].

What Is the IRS Levy Process?

Beyond the lien process, the going gets rougher still. A levy is the actual seizure of assets — property, bank accounts, wages. IRS levies have superpowers. They can take over a portion of a person’s Social Security benefits. They can get into retirement accounts, including IRAs. They can even pierce the homestead shield, because federal law overrules state provisions.

A homeowner who receives a Final Notice of Intent to Levy will have a right to a hearing, but, if due process is followed, the owner could potentially endure an IRS seizure of the house for a judicial sale. After taking out administrative fees and costs, the government would then use the sale proceeds to the satisfy the unpaid bill for back taxes. What if the house sale makes more money than the IRS needs to pay off your balance? Then, the IRS will send instructions on getting a refund.

Note that the Department of State also gets involved in serious tax debt cases. It can turn down passport applications from homeowners “with a seriously delinquent tax debt” — anything more than $52,000 in back taxes, penalties and interest. Perhaps most striking of all, the federal government has the authority to take away a valid passport to be dead sure you’re not going to abscond without handing over the loot!

How Can I Derail the Tax Lien Process?

Obviously, any part of this process is stressful and best stopped in its tracks. Step in as quickly as you can — before the IRS even knows you’ll be late, if possible. If the tax deadline is approaching and the bill is overwhelming, file anyway, and pay any amount you can — as soon as you can. Keeping the debt under the $10,000 limit will normally avoid a tax lien. Unfortunately, whenever payments are late, the taxes, interest, fees and penalties won’t disappear.

You can consider:

  • Payment extensions. If all you need is just a few extra months to pay, file for a payment extension. This plan can help taxpayers who can pay back the tax debt within 120 days. To keep the interest charges to a minimum, pay what you can before the deadline.
  • Direct-debit installment agreements. If the tax bill is too heavy at the moment, call the IRS and explain. If you are an individual who owes $50,000 or less or a business who owes $25,000 or less, you may be eligible for a direct debit installment plan. The IRS won’t file a federal tax lien if a taxpayer sets up an installment agreement. If you qualify to start an IRS payment plan, pay the initial fee, then pay regularly to avoid falling out of the system and being charged for reinstatement.

Can I Get the IRS to Cancel My Lien?

The government might even agree to withdraw a lien already imposed, if:

  • You owe less than $25,000 in back taxes. Taxpayers may be able to keep their balances under the ceiling by using a credit card to carry some of the debt.
  • You agree to an IRS installment plan, through which the direct debits will be taken monthly for 60 months from your bank or wages.
  • You have made these installments for three consecutive months.

Sometimes, a homeowner simply cannot pay at all, or doesn’t think the bill is fair or accurate. For these situations, there are several ways to proceed.

  • Offer in Compromise. The government might agree to accept your offer to settle your case by paying an amount lower than the total due. Can you qualify for an Offer in Compromise? Enter your details to find out. If your application succeeds and you follow through with the compromise, the tax debt and lien will be forgiven.
  • Doubt as to Liability. Apply for a Doubt as to Liability using Form 656-L if you dispute the tax bill. An explanatory Offer in Compromise PDF is available to explain the Form 656-L option in further detail. It explains what to do if you believe you have legitimate reasons for not paying. For just one example, you might be an innocent spouse who shouldn’t get stuck with the bill.
  • Currently not Collectible. The IRS, understanding that blood can’t be squeezed from a turnip, also has a  Currently Not Collectible status. If you agree you owe the debt but can’t pay it back without cutting into your basic needs, the IRS will keep any refunds that you might have otherwise received, but otherwise suspends its debt collection activities. The main trouble with this? It only delays the tax collection. Meanwhile, interest and penalties keep building up. It also means the IRS will be sizing up your income each year and — for at least ten years — looking for a chance to collect.

How Do I Get a Tax Lien Released?

Freeing up a home’s title from a tax lien normally happens when the owner pays off the total owed, plus additional charges, including the fees requested by the county recorder’s office that ultimately releases the lien. Once it is paid, the IRS has 30 days to release the lien.

Other lien release scenarios may include:

What About My State Taxes? Can the State Place a Tax Lien on My House?

Yes, state tax collectors can place a lien on their residents’ assets. Every state enables local tax offices to impose tax liens and pursue tax sales of real estate. They might do so to recover overdue property taxes or state income taxes, to name two major examples.

Tax lien rules, procedures, and statutes of limitations vary by state. Look up your state tax authorities online to learn about them, and check with the county where the lien is recorded (where the house is) to find out about existing liens.

As the federal government does, state government offices have plans available for paying overdue bills and getting liens released. Here again, the available plans are unique to each state.

Can Someone Help Me Fix My Tax Problems? 

Where do you start? Commercial tax relief companies support clients with lien releases and related matters. They generally allow free initial consultations. The rub? During the course of a case, many of the for-profit firms charge hundreds, even thousands, of dollars.

This guide for readers is general in nature, and the best approach in a specific case needs to be tailored to the individual. So, consider this guide a jumping-off point for you to carry out your own research. The IRS itself offers a useful set of resources through its online Taxpayer Advocate Service. Cities offer low-cost or free legal aid through non-profits, too, such as this one in Cleveland, Ohio. You may also seek assistance from your own tax professional if you use one.

Finally, always be sure to check the IRS site for updates in law, policy, and current fees and debt thresholds.

Photo credit: The New York Public Library, via Unsplash.