It's rare for the IRS to sell a home to recover delinquent income taxes.
If you're a homeowner and fail to pay your federal income taxes, the Internal Revenue Service (IRS) can get a lien on your real estate. Once the lien attaches to the property, the IRS could eventually decide to foreclose on your home to collect the debt.
But the IRS rarely chooses to foreclose. 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.
How the IRS Gets a Federal Income Tax Lien
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.
If you don't pay your federal income taxes, a federal tax lien arises by law automatically, which attaches to your property, including your real estate, personal property, and financial assets. (Internal Revenue Code § 6321.)
The lien arises after:
- the IRS assesses your liability
- the IRS sends you a notice and demands payment, and
- you fail to pay the debt in time fully.
Notice of Federal Tax Lien
An IRS lien isn't public information—at least not initially. But the IRS may file a public document called a "Notice of Federal Tax Lien" in the county records. The IRS won't check first to find out if you actually own real estate before recording the lien notice. Even if you don't own a home currently, you might in the future.
The lien amount will include past-due taxes, interest, penalties, and costs. Just like a recorded mortgage or deed of trust alerts anyone who searches the public records that you owe on your home, a Notice of Federal Tax Lien shows that you owe the IRS money.
You have the right to appeal if the IRS advises you about its intent to file a Notice of Federal Tax Lien.
Do Federal Tax Liens Have Priority Over Mortgages?
Usually, federal tax liens and many other kinds of liens, like mortgages, follow a general rule called "first in time, first in right." Under this rule, liens are ranked based on their recording date.
Example. Say your home has a first mortgage for $350,000 recorded in January 2020 and an IRS tax lien for $55,000 recorded in November 2022. In this situation, the first mortgage lien is superior to the tax lien. The mortgage lien has "priority."
But if you owned the property free and clear of mortgages and the IRS records a lien, that lien would be in first position. Any subsequent mortgages would be in second position (and so on) unless you used the mortgage loan to pay off the IRS lien.
Can the IRS Take Your House If You Don't Pay Your Taxes?
Once a federal tax lien is on the home, the IRS may foreclose if you owe more than $5,000. (Internal Revenue Code § 6334.) But it probably won't.
The IRS would consider foreclosing only if your home has enough equity to pay off any superior liens, such as a previously-recorded mortgage, and the IRS debt. Even then, the IRS usually doesn't kick homeowners out of their primary residence. This practice looks bad in the media.
Typically, the IRS will simply leave the lien on the home until you sell or refinance.
What Happens to an IRS Lien If You Sell or Refinance Your Home?
If you sell your home and have enough equity, the federal tax lien typically gets paid off with the sales proceeds at closing.
In a refinance, you can either refinance for an amount sufficient to pay off the lien, if possible, or ask that the IRS subordinate its lien (see below) to the lender's lien to allow for the refinancing of a mortgage.
What Happens to an IRS Lien If the Mortgage Lender Forecloses?
Again, 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. So, if the lender forecloses, the federal tax lien on the home—but not the debt itself—will probably be wiped out in the foreclosure unless the foreclosure sale brings in enough money to pay the IRS.
The IRS debt can still attach to other property you own. An IRS lien attaches to all your assets, like real estate, securities, and vehicles, as well as to assets you acquire in the future.
IRS May Redeem After a Foreclosure
When an IRS lien gets foreclosed (meaning, it's wiped out in a foreclosure), the IRS gets 120 days to "redeem" the home by paying the amount the property sold for at the foreclosure sale, plus interest and various other amounts. If the IRS redeems, it becomes the home's legal owner.
IRS redemptions don't happen very often. Unless the cost to redeem is less than the home's fair market value, the IRS doesn't have an incentive to redeem.
The IRS only redeems when it believes it could resell the property for more than the redemption cost and, typically, only if it already has a guaranteed buyer for the home.
How to Get Rid of a Federal Tax Lien
A federal tax lien on your home's title might limit your ability to get additional credit, like a second mortgage or home equity loan. So, you might want to take steps to get rid of the lien.
Paying your taxes is the best way to eliminate a federal tax lien. If you can't pay on time, various payment options can help you settle your tax debt over time.
Also, you have a few other options for dealing with an IRS lien, such as:
- Getting a discharge of lien from the property. A "discharge" removes the lien from specific property. To find out if you're eligible, see IRS Publication 783, Instructions on How to Apply for Certificate of Discharge From Federal Tax Lien.
- Subordinating the lien. Getting a subordination agreement won't remove the lien, but it reassigns priority, allowing other creditors to move ahead of the IRS. So, you might have an easier time getting a new mortgage or another secured loan. Read Publication 784, Instructions on How to Apply for a Certificate of Subordination of Federal Tax Lien, and check out the video Selling or Refinancing when there is an IRS Lien to find out if you qualify.
- Getting a withdrawal. With a "withdrawal," the IRS removes the public Notice of Federal Tax Lien, but you're still responsible for paying the amount due. Check out Form 12277, Application for the Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien (Internal Revenue Code Section 6323(j)), and the video Lien Notice Withdrawal to learn about eligibility.
Learn more at the IRS' webpage Understanding a Federal Tax Lien.
Getting Help With a Federal Tax Lien
Consult with a qualified tax attorney or CPA if you have any questions about dealing with your tax liability or federal tax liens.
To learn more about federal income taxes and IRS liens, go to www.irs.gov.
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