Title Tip: IRS Liens Are The Pitfalls of The Tardy Taxpayer

We’ve all heard the saying that the only certainties in life are death and taxes. I propose that the only certainties in real estate are ownership and taxes.

From a real estate prospective, your annual tax bill from the county is not the only concern. The taxes in real estate can go beyond property taxes. We are speaking of the dreaded Federal Tax Lien. Yes, the long arm of the IRS can (and will) reach out and lay claim to any property associated with someone owing them money. When it comes to taxes, the federal government is the supreme law of the land.

Four Facts About IRS Tax Liens

While I suppose our gracious readers pay their taxes in a timely manner, for purposes of ease, I will address this issue as if the reader is the tax avoider and the IRS has caught you in their crosshairs.

1. There is no hiding from an IRS lien. IRS tax liens attach to all property, any interests in, and any rights to property of the taxpayer owing them money. If the real estate is in your spouse’s name, the lien will attach to your community property interests in that real estate. Placing the property in a trust will not protect it from an IRS lien. If you inherit a property and you have an IRS lien against you, that IRS lien attaches to whatever interests you may have in the inherited property. An IRS lien will attach to a property you purchase in the future and remain in place for as long as the lien is unpaid.
2. It takes a long time to get an IRS lien removed. Folks not in a hurry to pay their delinquent taxes shouldn’t expect the IRS to be in a hurry to remove a lien on their property. You’ll need to complete an IRS application for discharge that includes all details of the sale of your property. This must include the sales price, all contracts, and agreements, payoffs of existing mortgages, itemized closing costs, and a third-party price opinion. Once all required information is complete and the application is submitted to the IRS, the feds will take 45-60 days at a minimum to review it. Title companies usually suggest that all parties allow 90 days to secure a Certificate of Discharge. If the seller is slow to obtain the required information or submit the paperwork, the process can take longer. The sale cannot close until the IRS approves the transaction and provides a Certificate of Discharge.
3. An IRS Certificate of Discharge only releases that particular property from the IRS lien. It does not release the debtor from their personal liability to remaining back income taxes. The debtor is still responsible for the remainder of any tax debts owed. Often the amount owed to pay off the lien exceeds the original debt to the IRS due to the addition of penalties and interest.
4. If a mortgage company forecloses on a property, that mortgage company must give the IRS at least 25 days advance notice of its intent to foreclose. If notice is given, the IRS has 120 days from the date of foreclosure to release the property. If the notice is not given, the IRS lien remains attached to the property. This is one of the potential pitfalls of buying a property at a foreclosure sale.

It’s no surprise why title companies and agents dread IRS liens. The bulk of the responsibility for removing an IRS lien lies with the taxpayer. Or should I say the non-taxpayer?

The opinions expressed are of the individual author for informational purposes only and not for legal or tax advice. Contact an attorney or accountant for any particular issue or problem.