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As discussed in our last article, “The Federal Tax Lien: A Staple of IRS Enforcement Action,” the Internal Revenue Service will file a tax lien against you when you fail to pay your taxes. The lien attaches to all property you own, becomes public record, and puts others on notice of the IRS’ legal claim to your property.
If there is a federal tax lien on your home, typically you must satisfy the tax lien before you can sell or refinance the property. However, most buyers will not purchase a home subject to a tax lien and most lenders will not refinance a home subject to a tax lien, creating a conundrum for the taxpayer looking to access the equity in their real property assets.
This article explores the ways in which a taxpayer can sell or refinance property subject to a federal tax lien.
Satisfaction of Tax Liability – Lien Release
The easiest way to get a tax lien removed for the purpose of selling or refinancing property is to pay off the tax debt. We note that some taxpayers are eligible to settle their tax liability for much less via an offer in compromise.
Once the outstanding tax liability is paid, the lien associated with the tax will get released within thirty (30) days of payment. The IRS will send a notice of release of tax lien which you can file in your local county recorder’s office to put third parties on notice that the lien is no longer active.
A tax attorney can obtain your IRS account transcripts to confirm that payment has been applied to the appropriate tax period and coordinate with the IRS Lien Desk to ensure that the lien gets released timely.
Removing the Tax Lien from the Public Record – Lien Withdrawal
You can request that the Notice of Federal Tax Lien get withdrawn from the public record (however you are still liable for the amount due) if the following conditions exist:
- You are a qualifying taxpayer (individuals and businesses with income tax liability only),
- You owe $25,000 or less (some taxpayers opt to make a lump sum payment to bring their balance below the threshold requirement),
- The withdrawal request is in writing, (IRS Form 12277 Application for Withdrawal of Notice of Federal Tax Lien),
- You have a direct debit installment agreement which fully pays the amount you owe within the earlier of sixty (60) months or before the collection statute expires,
- You are in full compliance with other filing and payment requirements,
- You have made three consecutive direct debit payments, and
- You haven’t previously defaulted on any installment agreement.
A tax attorney can help you establish the requisite installment arrangement, file the application for lien withdrawal, and ensure that the notice of tax lien gets removed from the public record.
Selling Property Subject to a Tax Lien – Lien Discharge
When you sell real property subject to a tax lien and you have some equity in the property, the tax lien gets paid in whole or in part (depending on the amount of equity in the property) out of the proceeds of the sale at the time of closing.
If you owe more on your mortgage than the home is worth, or if the proceeds from the sale of the property will not be enough to pay the mortgage plus the tax debt associated with the lien, it may be possible to have the lien discharged from the property to effectuate the sale.
When the IRS discharges a lien, it does so only with respect to a specific property. The IRS will still maintain liens against all other property owned by the taxpayer.
An application for discharge of federal tax lien will be successful if the sale price of the property is for fair market value (FMV). The IRS will not agree to discharge a tax lien if you are selling the property for less than it is worth. You will need a qualified appraisal and typically the purchaser must be a disinterested third party (i.e., not a family member or friend). Sometimes the IRS will approve a non arms-length transaction but in those cases will require two appraisals or one appraisal and a letter from a disinterested real estate agent.
Fair market value constitutes a critical component of a successful request for lien discharge. The IRS will rely on third party sites such as Zillow and Trulia to help determine fair market value. Taxpayers can also request that the IRS consider the equalization value where a property’s assessed value for property tax is multiplied by an applicable factor to determine FMV for a sale.
A tax attorney can help you apply for a discharge of federal tax lien in connection with the sale of your real property asset.
Refinancing Property Subject to a Tax Lien – Lien Subordination
You likely will not be able to borrow against your home or refinance an existing mortgage with an IRS tax lien in place. For example, if you are looking to take out a second mortgage or home equity line of credit to pay your taxes, or if you are looking to refinance your home to lower your monthly payments, most lenders will require that the lien get addressed first.
When you have an IRS tax lien on your property it takes priority over any loans you take out after the existence of the tax lien. Subsequent creditors will not agree to refinance or provide an additional loan because their security interest will be inferior to the IRS tax lien interest.
A lien subordination allows a new creditor to move ahead of the IRS in priority. The IRS tax lien remains on the property however it will have a lower position than the new lender’s security interest.
If the IRS approves your application for a lien subordination, it will issue a Certificate of Subordination, permitting a junior creditor to move ahead of the IRS tax lien in priority. The IRS is inclined to issue a certificate of subordination if:
- You agree to pay an amount equal to the amount the IRS is subordinating: (i.e., your refinance must yield sufficient funds to allow you to pay the full amount of the tax lien), or
- You will be able to pay the IRS more as a result of subordination: (e.g., your refinance reduces your monthly mortgage payment thereby allowing you to pay more each month to the IRS).
A tax attorney can help you apply for a certificate of subordination of federal tax lien in connection with a loan or refinance related to your real property.
Do You Need a Tax Attorney?
If you are looking to sell or refinance property that is subject to a federal tax lien, it is advisable to consult with a tax attorney who can assist with lien removal via satisfaction and lien release, withdrawal of lien from the public record, lien discharge, or lien subordination, whichever your circumstances may require.
The experienced attorneys at Segal, Cohen & Landis represent clients with federal tax liens and can address an underlying tax lien to ensure the successful completion of real property transactions. Some of the services we provide in this regard include:
- Successful completion of an offer in compromise,
- Release of tax lien following satisfaction,
- Lien subordination,
- Lien discharge,
- Withdrawal of the Notice of Federal Tax Lien via direct debit installment arrangement,
- IRS Appeals related to the foregoing.
If you are interested in having a complimentary consultation with one of our partner attorneys regarding your tax matter, please feel free to contact us at 866-505-1872. We would be happy to speak with you and will advise you how we can resolve your case and how much it will cost.