I get a lot of questions and worry about Federal and IRS liens that could be on properties that our readers are purchasing at tax lien and tax deed sales. Or, I’ll get an email from a tax certificate holder who finds out that there is a large IRS lien on a property and think they’ve lost their investment.
I’ve found that IRS tax liens do not have to be as much of a concern as we make them out to be. And, I’ll discuss why shortly.
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If you’re looking to hire a tax lien attorney to help you with your investment (tax lien certificate, tax deed, quiet title), then keep reading below!
But first, let’s talk about IRS liens:
- If a property owner fails to pay federal taxes and the IRS finds out about it, they will place a lien against the owner. This lien automatically attaches to any properties that the owner holds in their name.
- How does a property owner remove an IRS lien from their real estate? Three ways: they can pay it off, they can let it expire after 10 years, or they can negotiate with the IRS (you’ve seen the late night commercials, but I’ll show you how it works below).
- The IRS lien remains on the property unless one of the three ways discussed above happens. If you are issued a tax deed in a non-judicial foreclosure state, you’ll still have this IRS lien on your property.
- IRS tax liens as with most state and federal liens, have priority over tax lien certificates. They must be dealt with or will have to be paid off if you are issued a deed.
However, in practice, these liens are typically wiped out thru a judicial process.
JUDICIAL FORECLOSURE STATES
If you’re investing in a judicial foreclosure state such as DC, MD or NJ, your attorney will follow a process that will remove IRS liens entirely if your foreclosure is successful. How will your attorney make this happen?
Per federal statutes, the lien holder must notify the IRS that they are foreclosing on a lien with a federal lien on it. Specifically, your attorney will send out a notice early on in the process (called a 25-day notice since the IRS has 25 days to respond) that seeks the IRS consent to take the property free of their IRS lien(s). Then, when the foreclosure is complete, your attorney will send another notice (called a 120-day notice since, again, they have 120 days to respond) that tells the IRS the foreclosure is final and they can redeem the property (aka “pay you off”), if they choose, within 120 days.
These statutes from the IRS can be found on their website (http://www.irs.gov/irm/part5/irm_05-012-004.html)
The IRS almost never takes actions on these properties. I’ve only heard of it once or twice and that was because the lien was a very large amount and the property had lots of value. If they do respond because there are tons of equity in the property, then that property will most likely redeem anyway by the homeowner or a mortgage company.
NON-JUDICIAL FORECLOSURE STATES
Non-judicial tax lien states (states that just issue you a deed with no legal foreclosure such as SC, AL, and FL) require an additional legal action called a quiet title action for removing IRS liens. I speak a lot about that here and here, but you’ll need to hire an attorney to file this and they will perform the same noticing.
I’ve also found that many of these liens were actually filed way in the past. Check your title work and you’ll probably find that the IRS lien was filed close or after their 10-year expiration period. You may be able to just wait it out until you reach this anniversary.
NEGOTIATING WITH THE IRS
In the rare case that the IRS lien wasn’t eliminated during your quiet title or judicial foreclosure, you can still negotiate to reduce the debt to ‘cents on the dollar’.
No, I don’t suggest you call those late night 800 numbers. You can do this just as easy yourself.
You’ll need to prove to the IRS that there is not sufficient equity in the property to payoff the lien if it is sold. The specifics can be found in IRS Code 6325 and involves filing a form found under Publication 783. Basically, you’ll need to provide a valuation of the property plus title work showing any outstanding liens superior to the IRS lien. You’ll submit the entire application to the regional IRS office who will review the details and come up with a settlement amount if it’s found that the IRS can’t be made whole.
Keep in mind, any settlement amount that the IRS gives you to discharge the debt is just the beginning of a negotiation. You can definitely argue your case to get your initial offer amount lowered. Just be able to provide facts–appraisals, real estate agent opinion of values, repair costs–that support your numbers. I’ve only been thru process once. It took about four months and I managed to get the lien discharged off the property for a number that still allowed me to make a profit on the property.
From the IRS perspective, if they don’t settle with you, they may be left with selling the property at a federal tax sale where the property will normally go for a bottom-of-the-barrel price at auction.
As alluded to earlier, IRS liens shouldn’t be a huge worry when you’re doing your due diligence before a tax auction or upon taking a tax deed. My focus is always on the property itself ensuring it is viable and I’ll get a redemption out of it as I’ve discussed elsewhere in my blog and in my e-books