If you’ve spent sleepless nights wondering about your outstanding income taxes and whether you could lose your home, there’s good news and bad news. If you haven’t been able to remain in good standing with the IRS, ownership of your home may come under threat.

That’s because the IRS is entitled to get a lien on your home if you don’t pay your federal taxes. However, this is seldom a route that the IRS chooses to go when resolving outstanding tax balances.

What is a federal income tax lien?

When you don’t settle your annual tax bill, the IRS can apply for and get a federal lien that attaches to your property. This includes real estate, financial, and other tangible assets.

Before applying for such a lien, the IRS assesses your liability and informs you of your outstanding balance and the payment due date. If you fail to pay the debt, which includes back taxes, interests, penalties, and costs in full, the IRS goes ahead with the lien.

Consequences of a federal tax lien

With the lien in place, the IRS could insist on foreclosure. However, this is rarely the case. Before opting for foreclosure, the IRS will assess whether there is sufficient equity in the house to cover the mortgage and the outstanding tax bill. 

Additionally, the IRS is hesitant to foreclose on a property and kick people out of their homes. The optics in the media don’t reflect well on the IRS and the entire federal government, which aims to treat citizens with dignity and offer them tax relief where possible. 

Consequently, once the IRS has the lien on your home, it remains in place until you sell or refinance your home. Once that happens, the IRS will claim the money it is owed. If you find out the IRS intends to place a lien on your home, it is best to consult a specialist at Tax Fortress who can represent your interests and avoid the lien.

Future implications of a federal tax lien

If you sell your home, the federal tax lien is paid to the IRS out of the proceeds of the sale. The same applies to if you refinance your home. However, there are opportunities to request a deferment from the IRS on applying the lien, provided you meet specific criteria.

The federal lien remains in place even if your mortgage lender decides to foreclose on the property. However, the recovery of the mortgage comes first, and the IRS can claim from the remaining funds.

What to do about a federal tax lien

To avoid a federal tax lien on your home, you should pay your taxes each year. However, for some people, this is just not possible. But it’s not the end of the road for you if this is the case. Upon receipt of the IRS notification about the lien, you become entitled to a collection due process hearing.

This is your chance to explain your side of the story and demonstrate that you haven’t paid your taxes because you were unable to, not because you’re avoiding them. It is also an opportunity for you to negotiate with the IRS. 

The IRS is usually receptive to negotiated installment agreement plans that allow you to pay your taxes off over a longer time. You can also try the offer in compromise option when the IRS permits you to settle the bill for a lesser amount. During the hearing, you can also discuss other options with the IRS that allow you to pay off your taxes and avoid losing your home.

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