Tax debt can quickly become a significant burden. This sort of debt can even inhibit the enjoyment of owning property you have worked hard to accumulate. Failure to pay your taxes can have serious repercussions in both the short and long term. If you are a homeowner, the IRS may place a lien on your home for failure to pay your tax debt. A federal tax lien can cause numerous complications in your personal, financial, and business affairs, so it is important to understand what the lien entails and how you can remedy the issue.
Federal Tax Lien
A federal tax lien is the federal government’s way of claiming unpaid taxes by laying claim to your property, in order to protect their financial interest. Prior to placing a lien, the IRS will send a Notice and Demand for Payment explaining the amount of tax owed. You are responsible for contacting the IRS to resolve your account, even if you believe the notice is erroneous.
Failure to respond or pay the tax owed can result in one placed on your property. If you are not sure how to handle a Notice and Demand, consult with a tax attorney who can help you resolve your tax problems and avoid a potential lien. Keep in mind that these can also be placed on other assets or personal property, so it is wise to resolve the issue as quickly as possible.
A Lien Upon Property
The IRS can place a lien upon property you own – even if title to that property is free and clear. An IRS tax bulletin concerning federal tax liens explains in plain language actions the government can take when it comes to tax debt. In the bulletin, it states that a lien is a “legal claim” by the government in the event you fail to pay a tax debt.
When it comes to liens, there is very little property that the government cannot reach. “The lien protects the government’s interest in all of your property, including real estate, personal property and financial assets.”
A lien can attach to future assets you acquire while the lien is in place. The lien can even attach to business property and accounts receivable. The lien can negatively impact your credit, and the existence of a lien could potentially continue even if you were to file bankruptcy.
It is therefore important as a Michigan taxpayer to understand your rights when it comes to protecting your property in the event of a tax lien. Though the IRS has the power to file liens, the agency must still follow certain requirements before putting a lien in place.
Also, there are ways that you can rid yourself of the lien. This includes paying the debt in full, discharge of the specific property which will remove the lien, and other options.
What Does This Mean for You?
When the IRS places a lien on your home, they are claiming a portion of that property value in lieu of the debt owed. A federal tax lien can negatively affect every aspect of your life, from your credit score to new property and selling your home.
Harms Your Credit Score
A lien on your home reflects negatively on your personal and business credit score, and can prevent you from taking out loans and opening lines of credit. This can apply to both business and personal credit, which can limit your ability to effectively run a private business or manage your personal financial affairs. If you are looking to sell the home, the lien will cause additional complications and may prevent you from selling altogether.
Attaches to New Assets
As long as you owe taxes to the IRS, the associated lien will carry over to all eligible property and any new property you acquire. This can include real estate, financial assets, and personal property such as vehicles and furniture. Until you have paid your debt in full or made acceptable payment arrangements, nearly all of your property can potentially be liquidated to pay the debt.
Property Seizure and Disposal
If you disregard or refuse to make payment arrangements for your federal tax debt, the IRS can seize and sell your property in order to recover the amount owed. This is the last resort for debt collectors, in the event that all other avenues have been explored, and can largely be avoided by paying the debt or arranging a payment plan with the IRS.
What Happens Next?
You have just been notified that a federal tax lien has been placed on your home by the IRS due to unpaid taxes, so what do you do now?
Request Current Documentation
If you have not received a Notice and Demand, you should contact the IRS immediately to ensure that they have correct contact information. You can request a copy of the notice to verify the amount owed and discuss payment options with the IRS.
Pay the Debt in Full
If you pay the debt in full, the IRS will release the lien within 30 days. This is the easiest and quickest way to remove the lien on your home. If you are unable to pay the full amount, there are other options available to limit the lien’s impact.
Discharge of Property
If you are trying to sell your home, the lien will move with the property, essentially making the buyer responsible for your tax debt. In order to prevent this, you can contact the IRS to request a Discharge of Property. This can remove it from the property you are selling; however, you will still be liable for the debt to the IRS, including all interest and fees. The lien will still apply to your other assets and property.
Apply for a Certificate of Subordination
You also have the option of applying for a Certificate of Subordination which allows other creditors to take precedence over the IRS. This can help you to obtain a mortgage or loan, or refinance your current mortgage. It is important to understand that the lien will remain in place, it will simply become subordinate to the claim by the approved creditor.
When a federal tax lien is applied to your property, a public Notice of Federal Tax Lien is published. You can request to have this notice withdrawn in two circumstances:
- You have paid your tax debt and it has been released. To qualify, you must have filed fully compliant tax returns for the past three years, including personal, business, and informational returns. You must also be able to prove that you are current on any additional tax payments or deposits.
- You have entered into a Direct Debit Installment agreement for payment of your tax debt. Qualifying individuals must owe $25,000 or less in federal taxes and the Direct Debit installment agreement must ensure that they full amount is paid within 60 months or prior to the expiration of the Collection Statute, whichever is sooner. Individuals must also be in full compliance with filing and payment requirements, be in good standing with their Direct Debit agreement, and have made at least 3 consecutive debit payments prior to submitting the request for withdrawal.
How to Prevent an IRS Lien on Your House
Responding to a letter or notice from the IRS can be daunting. It is important to remember that even when you owe a high amount, there are options to help you address your tax debt. Whatever you do, don’t avoid or ignore correspondence from the IRS, as it can grow into a much larger issue. The best away to avoid an IRS tax lien is to pay your tax debt or make payment arrangements.
Silver Tax Group is here to help you navigate the complexities of the tax process. Whether you are dealing with tax debt and want to avoid a lien, or a lien has already been placed on your home, we have the knowledge and experience necessary to help you achieve a swift resolution. Contact our tax professionals today to learn more!