If you owe the IRS money, you’re probably afraid of what’s going to happen, and you have good reason to be afraid—the IRS has more power to involuntarily collect unpaid debts than any private creditor. The agency can garnish your wages more aggressively than other creditors, and the IRS can also issue liens and seize assets without taking you to court.
The IRS has broad power to seize most of your personal and real property, but what about your home? Can the IRS take your home for unpaid taxes? The bottom line is yes, the agency has that power, but only in certain situations.
This post explains IRS liens and home seizure to help you understand the risks. It then explains the proactive steps you can take to safeguard your home.
Understanding IRS Liens
A federal tax lien is a legal claim by the government against your property, which comes as a result of a failure to pay a tax debt. Tax liens can be issued after the IRS sends you a bill that you ignore or refuse to pay or after you file a tax return and don’t pay the full liability shown.
Because the debt remains unpaid, the IRS can choose to enforce its legal interest in your assets instead as an alternative method to have the debt repaid.
The lien protects the IRS’s interest in your assets and can cover all property types, including real estate, personal property, financial assets, and income. While a lien does not mean immediate loss of property, it can complicate your finances and make it almost impossible to refinance a mortgage or qualify for a new loan.
Generally speaking, in order for a federal tax lien to be placed against you by the IRS, certain conditions and steps need to be in place. First of all, the IRS will assess your tax liability and determine that you owe a debt.
Then, the IRS will send you a bill that details how much you owe, known as a Notice and Demand for Payment. If you fail to pay that bill within the allotted time frame or fail to contact the IRS to inquire about alternative payment arrangements, the IRS will begin to send further notices reminding you of your debt. When the bill remains unpaid, the IRS can file a Notice of Federal Tax Lien. This action publicizes your debt and alerts creditors to the government’s legal right to your property.
If things progress, the last notice will be a Notice of Intent to Levy and Notice of Your Right to a Hearing. At this point, you will have 30 days to pay the bill in full, set up a payment arrangement with the IRS, or make an appeal. Otherwise, the IRS could move forward with the seizure.
The IRS never starts by taking your home. In fact, the agency doesn’t start with any tangible assets. Instead, in most cases, the IRS seizes your state or IRS tax refunds if possible. Then, the agency may initiate a bank levy or a wage garnishment. If those moves don’t cover your tax debt, the agency will start to seize tangible assets such as business assets or real estate. In rare situations, the IRS may seize your home, as explained below.
Method by Which the IRS Can Take a Home
When the IRS decides to take enforcement action against your home due to unpaid taxes, there are two primary legal avenues they can pursue: court approval to seize a primary residence and a foreclosure lawsuit.
Court Approval to Seize a Primary Residence
The IRS must obtain approval from a federal court before it can seize and sell a taxpayer’s primary residence. Under US Code 6334(e)(1), the IRS must meet specific legal requirements to gain court approval for seizing a primary residence. Remember that it is rare for the IRS to seize a home using this method. Strict legal requirements are designed to ensure due process and protect taxpayers’ rights. Here’s a run through the process:
Exhaustion of Remedies: The IRS has to demonstrate that it has exhausted all reasonable administrative efforts to collect the tax debt, including offers of payment plans, compromise settlements, and issuing levies on other assets before targeting your home.
Issuance of Final Notice: The IRS must issue a Final Notice of Intent to Levy and Your Right to a Hearing at least 30 days before taking any action. This notice allows you to resolve the debt or request a hearing to dispute the levy.
Court Petition: At this point, the Department of Justice, on behalf of the IRS, will file a petition with a federal district court seeking permission to levy the residence. This petition outlines the taxpayer’s debt, the efforts made to collect the debt, and the justification for seizing the property.
Notice to Taxpayer: The IRS then notifies the taxpayer of the court petition and gives them an opportunity to respond. This ensures you are aware of the proceedings and have the chance to present your case.
Court Hearing: A court hearing is held where the IRS presents its case, and the taxpayer also has further opportunity to present their defense. The judge evaluates whether the agency has met the legal requirements and whether the seizure is warranted.
Court Order: If the court is satisfied that the IRS has met all requirements and the seizure is warranted, it issues an order permitting the seizure of the property. This then allows the IRS to proceed with the levy and sale of the home.
While it is possible for the IRS to pursue the enforcement of a tax lien in this manner, as we’ve mentioned, it is very rare. With the combination of strict legal requirements, judicial processes, and the IRS’s preference for less drastic collection methods, obtaining court approval for home seizures is a challenging and often unnecessary endeavor for the IRS.
Foreclosure Lawsuit
Alternatively, the IRS could potentially take any home that is not your primary residence through a legal process known as foreclosure.
The foreclosure process starts with the IRS issuing a tax lien and then filing a lawsuit in federal court. The IRS notifies all related parties, including the homeowner and any creditors who have liens on the home. This ensures that the homeowner is fully aware of the situation and can take necessary actions, such as negotiating a settlement or preparing a defense.
If the case goes to trial, both the agency and the homeowner present their evidence and arguments. The court then makes a decision based on the evidence presented. If the IRS is successful, the home is sold at a public auction after the IRS calculates the minimum bid price. This will ensure that the IRS doesn’t sell your home for less than it’s worth.
The funds from the auction go to any lenders who have liens that supersede the IRS. For instance, if you have a mortgage, the lender will get paid before the IRS. Then, any remaining funds cover the tax debt, penalties, and the cost of seizure. Finally, if there is anything left, it goes to the taxpayer.
Likelihood of IRS Taking a Home
While it is possible for the IRS to seize a home through both court approval and a foreclosure lawsuit, the reality is that the IRS is reluctant to seize primary residences. Doing so is seen as a last resort, and there will generally be attempts to satisfy the outstanding tax debt through several other methods.
The IRS is aware that severe enforcement actions can have substantial negative consequences when it comes to public perception. This can also create subsequent problems, such as leaving taxpayers or their children and dependents unhoused.
While the IRS may choose to pursue this option if, for example, a taxpayer has been completely uncooperative or has a disproportionately valuable home, it is unlikely the IRS would pursue seizure of a home in standard circumstances. Additionally, as we’ve seen above, the seizure of such assets can only come at the end of a very long and well-documented process. It is practically impossible for the IRS to take a primary residence without giving the taxpayer lots of notice during the collection process.
For these reasons, being suddenly evicted from your home by the IRS is extremely unlikely, and losing your home due to unpaid taxes at all can only come as the very last resort of a lengthy collections process.
IRS Lien Implications for Homeowners
Because a federal tax lien goes on public record, it can make it extremely difficult to sell or refinance your home. Any creditor who performs a credit check on you will be aware of the lien and the fact that the IRS will likely be first in line in the event that you fall behind on your debts.
For the same reason, a tax lien can also make it next to impossible to take out a loan or even open a new line of credit. Creditors will generally be hesitant to provide a loan to anyone with such a significant tax debt. However, if you want to take out a loan against your home to pay off your taxes, the IRS will generally agree to remove its lien or subordinate the lien in exchange for you to pay off your taxes.
If you don’t want the IRS to act on the lien, you must make arrangements to pay off your tax debt. If you set up a payment plan or offer in compromise, the IRS will not levy your assets.
Effect of Home Equity on IRS Payment Plans/Settlements
The IRS will often consider the taxpayer’s assets, including home equity, in determining the terms of the offer or payment plan. If you owe under $250,000 and there isn’t a revenue officer assigned to your case, you can typically set up a monthly payment plan without giving the IRS details about your income or assets.
If you need special considerations such as a lower monthly payment a longer payment term, or you owe over $250,000, you will generally have to provide financial details, including information on the equity in your home. Similarly, the IRS will also want to know about your home’s equity if you apply to settle for less than you owe.
Home equity is the difference between a home’s current market value and the outstanding balance on any mortgages or liens against it. The IRS may require taxpayers to provide information about the value of their home and any outstanding mortgage debt when applying for an offer in compromise or a payment plan.
Options for Homeowners with IRS Liens
While there are options when it comes to dealing with existing liens, it is important to know how to prevent a tax lien from being issued against your property. Filing your taxes on time and as correctly and comprehensively as possible is essential.
When it comes to paying your taxes, it’s vital that you either pay the balance in full on time or contact the IRS and ask about your options if paying the balance in full isn’t something you can do right now. The first step on the road to a tax lien is ignoring your tax bill and taking no action.
If you’ve already reached the point where a tax lien has been or is about to be issued against you, you have options. If you disagree with the tax bill you’re being charged with or take issue with some part of the collections process, you have the right to request a Collection Due Process Hearing. This is an option that your lawyer or tax attorney can help you explore if needed.
In addition to disputing debt, there are alternative payment options that the IRS may offer to those with outstanding tax debts. Depending on the size of your debt, the IRS may allow you to take on a monthly payment plan instead of paying the debt outright. This is known as an Installment Agreement (IA). In particular, you may want to explore the possibility of a Direct Debit Installment Agreement (DDIA).
This is an arrangement where taxpayers authorize the IRS to automatically withdraw monthly payments from their bank account to pay off their tax debt. This payment method reduces the risk of missed payments and could potentially lower your installment agreement fee. Importantly, setting up a DDIA means you could have your federal tax lien removed from public records once certain conditions are met.
As indicated above, you may also consider applying for an Offer-in-Compromise, which involves settling your debt with the IRS for a compromised value lower than the total debt owed.
Special Situations
In the event of a mortgage lender foreclosing on a property before the IRS enforces its tax lien, the mortgage lien will generally hold priority over the IRS lien. The proceeds from the foreclosure sale are first allocated to satisfy the outstanding mortgage debt, with any surplus possibly applied towards other liens, including IRS tax liens.
However, if the funds from the foreclosure sale aren’t sufficient to cover the entire tax debt, the IRS may pursue other collection methods. This could involve seeking a deficiency judgment against the taxpayer for the remaining balance owed. Despite the foreclosure, the taxpayer is still liable for their tax debt, and the IRS will still have the legal authority to pursue collection actions to recover the debt amount owed.
The IRS also has the right to redeem a home after foreclosure if its tax lien was placed on the property before the foreclosure took place. Although this right is rarely exercised in practice, the IRS could choose to redeem the property by paying the amount owed to the mortgage lender or by bidding on the property if it’s sold at auction.
This would allow the IRS to regain possession of the property and potentially sell it to recover the tax debt owed. However, due to practical considerations and the costs involved, the IRS typically only exercises its right to redeem in exceptional cases.
What if you own the home jointly?
Unfortunately, the IRS can seize jointly owned homes even if just one of the owners owes back taxes. The lien attaches to the entire home and can be subject to a seizure and judicial sale. The IRS would only receive the portion of the sales proceeds attributable to the joint owner with the tax debt. The non-liable joint owner would receive the rest of the proceeds.
What if the IRS tries to take my home for my spouse’s debts?
If you own the home jointly, the IRS may be able to seize the home for your spouse’s debts. The IRS would only receive sales proceeds for the portion of the home owned by your spouse. You would have the right to intervene in the IRS’s suit to foreclosure on the property, and you would receive any proceeds that you are entitled to.
Practical Steps to Protect Your Home
If you owe a tax debt to the IRS, it’s important to take action. Taking the following steps can help you manage the stress of your tax debt and protect your home in the long term:
Communicate with the IRS: Engaging in open communication with the IRS is the best place to start. Contact them early if you’re facing difficulties when it comes to paying taxes. From there, you can explore alternative payment options and prevent the escalation of your case to collection actions.
Seek Professional Advice: If you owe a tax debt that you can’t or don’t want to pay, it’s worth considering the help of a tax attorney. They can provide guidance tailored to your specific situation and help you understand your rights and available options.
Review Finances: It’s also vital that you take the time to assess your financial situation thoroughly. Understanding your income, expenses, assets, and liabilities can help you develop a realistic plan for addressing your tax debt and protecting your finances.
Documentation and Records: Maintaining accurate records of your financial transactions, tax filings, and communications with the IRS will help you stay clear and confident. Having organized documentation can help you effectively navigate discussions with the IRS and makes it easier to support your case if disputes arise.
By taking proactive steps and seeking professional guidance, anyone facing a tax debt can mitigate the risk of the IRS seizing their property and work towards effectively resolving their tax obligations.
If you’re feeling confused or unsure about your tax debt and how to handle it, it’s especially important to consider the advice of a tax professional. Dealing with the IRS can be a complex and stressful process, especially when trying to manage your work and life commitments. Tax attorneys are familiar with IRS negotiations and can help you understand exactly where you’re at and how best to proceed with your case.
Get Help From Wiggam Law
As we’ve seen, the IRS has methods available that can result in the seizure of a home. However, the likelihood of a typical taxpayer losing their home to the IRS is extremely low. And even in those rare cases, there is virtually no chance of the IRS taking possession of a primary residence overnight. The tax debt collection process is lengthy, with many opportunities to resolve the debt long before the IRS considers extreme enforcement actions.
That said, it is vital for taxpayers to address any outstanding tax debts promptly. The worst thing you can do is ignore tax debt, even if you’re stressed about how you will pay it. Contacting the IRS as early as possible to explore alternative options if paying the debt outright isn’t possible for you.
If you’ve got tax debts hanging over you, contact Wiggam Law today to help get you on the right track. Our tax attorneys have the expertise and experience to navigate complex tax laws and IRS procedures. They can provide tailored advice based on your unique situation, as well as help you understand your rights and payment options, and ultimately save you time, money, and stress in the long run. Call us today at (404) 233-9800 or fill out our online consultation form to schedule a consultation.