Can the IRS take your home for back taxes?
A lot of people ask about the possibility of the IRS taking their home. The direct answer is that it’s rare that the IRS will directly seize a personal residence, but there is an indirect approach. In the twenty plus years of working with clients I have only seen the IRS directly seize a personal residence twice, so it’s pretty rare. The IRS doesn’t like bad press and it is bad press when they evict a family from a home and sell it at auction. Keep in mind the IRS policy is different for a rental property. The IRS will seize rental properties if there is equity that would help pay off an IRS debt, which is much more common.
Yes, the IRS can take the home without directly seizing it?
This is much more common. The back door approach is a two pronged strategy that the IRS uses to get to equity in a personal residence. First the IRS files a tax lien in the county which the property is located. This is very common and they file liens all the time. The IRS lien on your house attaches to your home and it cannot be sold without the IRS getting their money prior to you. Don’t get me wrong, the lien is not a foreclosure or anything like that. It just sits there until the house is sold. When the house is sold the IRS gets paid what is owed before the owner. The order of payment is determined by the filing date of the lien. In this case, if the house was sold the bank would get paid first (and any second mortgage paid next, if it was in place before the IRS lien), and then the IRS would get paid and any other liens. Anything left over would go to the owner.
The second prong then, is that the IRS levies bank accounts and garnishes paychecks. A garnishment is continuous. In other words, the IRS takes all the money out of the bank accounts and savings accounts, and then by garnishing the wages, take any future cash as well.
This one-two punch is devastating to the finances of the household and it then becomes all but impossible to pay the mortgage. Once a few payments have been missed the bank then starts the foreclosure to get paid. Due to the lien the IRS has put on the property, once the bank forecloses on the house the IRS automatically gets paid any leftover equity, up to the amount that is owed for back taxes. This does not make for bad press, as it’s the bank that forecloses and not the IRS, yet the result is the same; the home is lost and the IRS gets paid.
Truth is though, that the IRS really doesn’t want to take your home. What they want is to get paid, so it’s very important to not ignore them. Once you set up an alternative solution the IRS will not continue with collection actions such as levies and garnishments (however they will often file a lien, just in case).
If you are worried about the IRS garnishing your wages and thus making it difficult to pay your mortgage the solution may be as simple as setting up a payment plan. If you have no money to pay them, it may be a little more difficult, but you may want to consider applying for uncollectable status or an Offer In Compromise . In an Offer situation, the IRS will allow and exemption of 20% of the value of the house that you can keep outside the offer. In other words, you can still walk away with an Offer settlement that allows you to keep quite a bit of equity in the personal residence. The important thing is to do something. Don’t ignore the IRS as they have a tremendous amount of collection powers!