04 / 08 / 16

IRS Tax Liens: Avoiding the “Elephant” in the Real Estate Room

You’re recently divorced and finally getting your life back together — ready to move out of the apartment you’ve been living in with your kids into a home with a yard. After touring dozens of homes with your Realtor, you finally find the perfect home. The Realtor perfects the purchase agreement and the loan application is submitted to the mortgage company. But, then the “elephant” emerges. When the mortgage company pulls your credit report, you discover for the first time that the IRS filed a notice of federal tax lien three years ago in your ex-husband’s name.

You’re shocked. You had no idea. He was supposed to have taken care of that for the family. Since Louisiana is a community property state and you and your ex-husband filed joint income tax returns, you are both equally responsible for the tax bill and the IRS can collect 100% from you. Your credit is blemished, and you won’t qualify for the mortgage unless the lien is handled.

To make matters worse your Realtor is annoyed because she has poured hours of time, tons of energy and her own money into helping you find your new home. Your Realtor is about to lose her sales commission because the IRS lien may prevent you from qualifying for the loan.

How could you have avoided the “elephant” in the real estate room? Preliminarily, it is helpful to understand IRS tax lien basics. The IRS tax lien affects the property of any taxpayer who has an unpaid tax bill. The IRS sends the taxpayer a bill and if it’s not paid by the due date given, the IRS can then legally file the lien notice at the courthouse anytime thereafter. It is very common for taxpayers to be unaware that the lien notice has even been filed — until they try to sell their property.

The IRS tax lien acts like a “super” mortgage and attaches to all of the taxpayer’s property, including the property the taxpayer owns when the lien notice is filed and any property acquired after filing. In practical terms, this means the taxpayer cannot sell, borrow against or even donate her property without either paying the tax bill or negotiating some other resolution with the IRS.

There are two ways the divorced woman could have avoided the scenario described at the beginning of this column. She could:

  1. Discover the IRS lien before starting a home search by pulling her credit report or working with her lender to pre-qualify for the mortgage.
  2. Conduct a quick mortgage records search at the local courthouse before getting too far into the real estate process. Some parishes offer online searches.

By knowing about possible IRS lien issues before jumping into the real estate sales process, she could have avoided frustration for everyone involved. Once the lien is found her options are:

  1. Apply for an Apply for an innocent spouse relief request or an an offer in compromise (settlement) with the IRS. (settlement) with the IRS. While these do take time, if granted she could be relieved of all or most of the tax bill.
  2. Request a lien release from the IRS. With a lien release, the notice of federal tax lien is released from courthouse records. This remedy tells others that the IRS bill has been satisfied, so the lien is not being enforced. It could be that the tax bill is being paid, it is legally unenforceable, or a bond for the payment of the tax bill has been placed.
  3. Request a discharge of the notice of federal tax lien from a specific piece of property. If granted, the lien remains in place as to the taxpayer’s other property.
  4. Request a lien subordination from the IRS. A lien subordination allows the mortgage lender to “leap frog” or “move ahead” of the IRS’ creditor priority. Subordinations are granted when the taxpayer refinances property and uses the equity obtained to pay part of IRS tax bill, or if the IRS determines subordination will increase the amount the IRS realizes, and that doing so will make collection of the tax bill easier.
  5. Request a lien withdrawal from the IRS. Here, the lien is removed from the courthouse as if it was never filed. Lien withdrawal is a good option when the buyer is trying to restore her credit score quickly so she may qualify for a new mortgage or loan. It is permitted by the IRS when the tax has been paid. It can also be permitted when withdrawal would “be in the best interest of the government and the taxpayer.”

Knowing about an IRS tax lien before you start the home buying or selling process is critical for all parties involved. Knowing early broadens the options available for lien resolution, and makes it much more likely that the resolution requested from the IRS will granted by the IRS in time to allow the sale or purchase to take place. Don’t let yourself be surprised by the “elephant” in the real estate room. If you suspect there might be an IRS lien issue, work to bring it out into the open before it surprises you --- and everyone else.