If you are a homeowner and you fail to pay your federal income taxes, the Internal Revenue Service (IRS) can get a lien on your home. Once this happens, the IRS could eventually decide to foreclose on your home in order to collect the debt, although the IRS rarely does this. It's more likely that the IRS will get paid when you sell or refinance the home, or if your mortgage lender forecloses because you default on the loan payments.
Generally, you must file a federal income tax return if you are a U.S. citizen or resident alien and your taxable income is above a certain level. (Learn more about income taxes in Nolo’s Personal Income Taxes area.)
If you don’t pay your federal income taxes, a federal tax lien can attach to your property including your real estate, personal property, and financial assets. The lien arises after:
The lien amount will include the past-due taxes plus interest, penalties, and costs.
In order for the federal tax lien to have priority against certain other liens on your home—like a mortgage lien, judgment lien, or HOA lien—the IRS must file a public document called a Notice of Federal Tax Lien in the county records. (To learn more about different types of liens and when a lien can attach to your home, read Types of Property Liens.)
What is lien priority? Lien priority determines the order in which creditors get paid following a foreclosure. The priority of the IRS lien is based on the lien’s recording date. For example, if the IRS records its lien before a judgment creditor records its lien, the IRS lien has priority over the judgment lien. (Learn more about lien priority.)
Once there is a federal tax lien on the home, the IRS may foreclose. But it probably won’t. The IRS would consider foreclosing only if there is enough equity in your home to pay off any superior liens, such as a mortgage, as well as cover the IRS debt. Even then, the IRS generally doesn’t kick homeowners out of their primary residences because it looks bad in the media.
Usually the IRS will simply leave the lien on the home until you sell or refinance.
If you have equity in your home, the federal tax lien is typically paid out of the sales proceeds at the time of closing. If sales proceeds won’t cover the lien amount, you can ask the IRS to discharge the lien to allow the sale to go through.
In a refinance, you can either refinance for an amount that is sufficient to pay off the lien (if possible) or ask that the IRS subordinate its lien (make it secondary) to the lender’s lien to allow for the refinancing of the mortgage.
In cases where the mortgage lender recorded its lien (the mortgage) before the IRS records a Notice of Federal Tax Lien, the mortgage has priority. This means that if the lender forecloses, the federal tax lien on the home—but not the debt itself—will be wiped out in the foreclosure. If there are any excess proceeds after the foreclosure sale, the IRS may seek to recover that money and apply it to the outstanding debt.
When an IRS lien is foreclosed, the IRS gets 120 days to “redeem” the home by paying the amount the home sold for at the foreclosure sale, plus interest and various other amounts. If the IRS redeems, it becomes the legal owner of the home.
IRS redemptions don’t happen very often. Unless the cost to redeem is less than the fair market value of the home, there's no incentive for the IRS to redeem. The IRS only redeems in situations where it believes the property could be resold for more than cost of redemption and typically only if it already has a guaranteed buyer for the home.
Of course, you can avoid a federal tax lien by filing and paying your taxes on time. If this isn't possible and you receive a notice that the IRS has filed a federal tax lien, you can request a review of your case called a “Collection Due Process” hearing. (Your request for a hearing about a federal tax lien filing must be postmarked by the date indicated in the lien notice).
At the hearing you may request a payment option such as:
You should consult with a qualified tax attorney and/or CPA if you have any questions about how to deal with your tax liability or about federal tax liens. To find out more about federal income taxes and IRS liens, go to www.irs.gov.