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.
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 can attach to your property, including your real estate, personal property, and financial assets. The lien arises after:
To get a lien, the IRS will file a public document called a "Notice of Federal Tax Lien" in the county records. The lien amount will include past-due taxes, interest, penalties, and costs.
You have the right to appeal if the IRS advises you about its intent to file a Notice of Federal Tax Lien.
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 2019 and an IRS tax lien for $55,000 recorded in November 2021. 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.
Once a federal tax lien is on the home, the IRS may foreclose. 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.
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.
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.
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.
A federal tax lien on your home's title will likely limit your ability to get additional credit. 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:
Learn more at the IRS' webpage Understanding 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.