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 is 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 home 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. (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 IRS assesses your liability
• the IRS sends you a notice and demands payment, and
• you fail to fully pay the debt in time.

The lien amount will include the past-due taxes plus interest, penalties, and costs.

Federal Income Tax Liens and Foreclosure

In order for the federal tax lien to have priority against certain other liens on your home (such as 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. (Learn more about different types of liens and when a lien can attach to your home in Nolo’s article 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. However, 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 since it looks bad in the media. (Learn more in Nolo’s FAQ Can the IRS take my house if I owe back taxes?)

Usually the IRS will simply leave the lien on the home until you sell or refinance.

What Happens If You Sell or Refinance the Home

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.

What Happens to IRS Lien If the Mortgage Lender Forecloses

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 mortgage 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. (To learn the ins and outs of the foreclosure process, and foreclosure procedures in your state, visit our Foreclosure Center.)

IRS May Redeem After a Foreclosure

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 is 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.)

What You Can Do About a Federal Tax Lien

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:

• an installment agreement to pay your taxes in monthly installments over a period of up to six years, or
• an offer-in-compromise, which is when the IRS allows you to pay less than what it claims you owe. (Learn more about IRS Installment Payment Plans, offers-in-compromise, and other options if you can’t pay your tax bill.)

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.