Death and taxes are the only two certainties of life. Unfortunately, regardless of how hard you try, you cannot avoid either of these unyielding entities.
Admittedly, taxes are supposed to serve the greater good, so most people are not completely against paying them. But, what happens when you cannot afford your taxes or your taxes do not get paid resulting in tax debt? When this happens, a lien gets placed against your property.
A lien is a legal claim against an asset or assets to ensure that a debt or obligation will be paid or fulfilled. An asset may be subject to a tax lien if the owner of that item has failed to pay taxes. Because doing so makes it simpler for the property owner to sell the assets or gain access to lines of credit, the property owner has a strong incentive to pay the tax debt or take the actions necessary to eliminate the tax lien.
A lien is a charge or encumbrance placed on another person's property to secure the payment of a debt or obligation, according to the legal definition of the term. Liens indicate a claim against a property, but they do not affect the owner's legal claim.
Liens get classified into common-law liens, consensual liens, and statutory liens. In the United States, the tax lien is a statutory lien created by the Internal Revenue Service (IRS). Moreover, General Tax Liens, sometimes known as "secret" or "silent" liens, are the most common type of federal tax liens.
Creditors have two main tools for recovering unpaid debt: liens and levies. But, they each have their unique applications.
A formal claim against real estate as collateral or security to repay a debt. You must use selling earnings to pay off remaining debt if the property gets sold.
Confers authority to take possession of and sell the property. A more aggressive form of debt collection since the creditor has legal power to seize and sell assets.
A tax lien is a notice from the government that you have a tax debt that has not been paid. If your local government has filed a tax lien against your home, it indicates you have neglected to pay your property taxes.
Important: Do not disregard IRS mailings or communications if you cannot file or make payments on time. If you cannot afford to pay off your tax bill in full immediately, payment plans can help you spread out your payments over time.
By far, the simplest way to get rid of a tax lien is to fully pay any tax debts in full. But, the IRS understands tax debts can burden the financial stability of debtors. The IRS offers three main options to help reduce the impact of an existing lien.
A discharge of property removes the lien on a specific property. This discharge comes from a certificate of discharge which requires very specific situations.
Apply with: Form 14135 (see IRS Publication 783 for complete directions)
Although Subordination does not provide removal of your lien, it allows creditors to jump ahead of the IRS. This makes it easier for someone with a tax lien to qualify for a loan or mortgage.
Key Benefit: Enables refinancing or selling your home to eventually pay off tax debt, while the IRS lien remains on the property.
Apply with: Form 14134 (see IRS Publication 784 for complete directions)
Withdrawal removes the public Notice of Federal Tax Lien, assuring other creditors that the IRS will not compete for your property.
Apply with: Form 12277
When a tax lien is left unpaid, the IRS can seize property and sell it at auction. All property seized by the IRS must be sold at a public auction or a sealed bid auction. The IRS can seize real estate, cars, boats, and any other property of value when a tax lien is left unpaid.
Tax debtors can still sell their homes even with a federal tax lien in order to satisfy any tax debts. However, the lien must be satisfied prior to the sale of the home. Typically, the lien will be satisfied with the proceeds from the sale of the property with a lien at the time of closing.
If the property is sold for less than the amount of the lien, the taxpayer must request the lien be discharged prior to the sale in order for the sale to complete.
Even though a debtor may owe taxes and other fees, there may be circumstances when their property and other assets will be exempt from being seized. The following groups may qualify for exemptions:
When governments foreclose on properties under their control because of unpaid taxes, this is known as a tax levy. Due to the superiority of federal tax liens over other liens, their foreclosure cancels out all other liens, including mortgage liens.
Once the real estate is sold at auction by the IRS, the proceeds go towards the amount owed to the federal government. Should the amount the real estate is sold for not satisfy the amount owed to the federal government, the taxpayer must still satisfy any remaining tax debt.
Redemption Period: After the auction of seized property, there is a period called the redemption period. During this time, the owner has the opportunity to try to redeem their property by paying any taxes owed.
In the hands of seasoned investors who are well-versed in the real estate market, property tax liens may provide a lucrative alternative investment opportunity. However, due to the extensive due diligence required in tax lien investing, it may be worthwhile to consider making a passive investment through a member institution of the National Tax Lien Association.
Need help from an IRS audit attorney to discuss options relating to the IRS forgiveness program? Don't navigate complex tax lien procedures alone.
Get Free Tax Consultation