What is a tax lien?
By Todd Whalen - January 18, 2019
What are Tax Liens? Good question! A tax lien is very similar to the lien a bank places on your house as security for your mortgage debt. One big difference however, is that once the IRS has filed a Notice Of Tax Lien it attaches to EVERY asset you own, not just a house. Some items, such as a house, cannot be sold until the lien is paid in full. What if the bank already has a lien and then the IRS files a lien? The way it works is that liens are honored in order of filing dates. So if you have a house and the bank has a lien on the mortgage, then should the house be sold, the bank would be paid first. Next, the IRS lien would have to be satisfied. Technically, the IRS would have to be paid in full before they would release the lien and let the house transfer to the buyer after that. If there was any additional money after the tax lien and bank lien were paid, then you would get that.
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What if you don’t have enough equity in the house after the bank is paid off to pay the IRS in full? Great question. The IRS has a formal process called a lien subordination. The IRS is willing to release the lien as long as they get all the equity that is left after the bank lien is paid in full. In other words, you would not receive any money, and the IRS would get everything that was available after the bank loan(s) were paid. You don’t receive anything, but at least the IRS would agree to let the house transfer to the new owner without the lien being attached. It is very similar to a “short sale” at a bank. They don’t get paid in full, but at least you can still sell the house. Please note, however, that you STILL OWE the unpaid balance, and the liens still exist for all other assets.
Will the IRS take my house if they file a lien? The answer is kind of “no”. Congress set up rules that make it hard for the IRS to enforce a lien and close it against your house to take it. In other words, it’s much harder for the IRS to take your house. That’s the good news. The BAD news is that the IRS knows how to get around that. If you try to sell your house they get paid. Even worse, if the bank forecloses on the house, the IRS gets paid with any equity in excess of the bank lien. So, the IRS can garnish your wages (take your paycheck) and if you can’t pay your mortgage, they are in line with their hand out at the banks foreclosure waiting for the equity. I’ve seen this many times and it’s a real problem if you are trying to keep your house! In cases like this, it’s very important to set up a payment plan or other solution BEFORE the wage levy hits. It’s also possible to get a wage levy released so you can get paid, but it’s more expensive in professional fees, and is a time consuming and personally invasive process. ALWAYS try to get a payment plan set up before a levy, but it’s especially true if you have a house!
Can an IRS lien be removed? This is a tough question! It is extremely tough for a lien to be removed once publically filed. The reason is that the IRS does not even see this as a collection action. Once you file a tax return, there is a lien that automatically exists due to the return being filed and it shows a balance due. A lien exists automatically because there is a tax balance due. It’s called a statutory lien, and NOBODY else has the power to do that! Only the government can. You can see who writes the rules! If you read the letter that you receive from the IRS you will notice it’s not called a tax lien. It is a NOTICE of tax lien. It is simply the IRS telling the world via the public credit processes that a lien exists. That’s why it’s hard to get them to release it. The lien exists no matter what, and what you are really asking them to do is keep it quiet and remove the notice to the world that the lien is there. They rarely will release it unless it’s in the government’s best interest. For example, if you were a banker making $400,000 per year and you can prove you’d lose this very high paying job if the lien shows up in the public records and you are not qualified for any other type of high paying job, then the IRS may consider releasing the lien so you can pay them more due to your high paying salary. It’s in their best interest to remove the NOTICE of lien (but not the lien itself).
The GOOD news about liens is that recently the IRS has adopted a streamline process that allows for easier lien removal if your balance is $25,000 or less, and you are in a direct debit payment plan for at least 3 months. This may make it easier for some people, but it still takes a while before you can even apply.
Tax liens, whether they be federal, state, county or other can make life simply deplorable. The IRS can and will establish a lien against all of your assets, be it real estate or other when your taxes are not paid. The IRS can legally collect taxes from the sale of your assets which includes anything and everything that you may own.
A lien can be against you, a spouse, or your company. So anything you own, your spouse owns, or accounts receivable from your company can, in the blink of an eye, be property of the United States Government. This is one of the worst feelings anyone can have.
A tax lien will show up on your credit report and prevent you from obtaining funds from assets or from opening a checking account. Banks just will not want to deal with this kind of issue. If you were trying to get a loan for a purchase, the interest will be ridiculous and not worth even entertaining. The list of how a tax lien can affect you is long.
Tax liens are a bummer to say the least.