Removing IRS Liens from Tax Lien Investments – Should You Worry?

Removing IRS Liens from Tax Lien Investments – Should You Worry?

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.

STOP!  If you’ve found this page because you’re looking for a TAX LIEN ATTORNEY to solve an IRS issue or Federal or State Tax problem, then click here for a directory of local attorneys in your state that can help you SOLVE your IRS/Government Lien Issue.

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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

Tax Lien Investing Book Review

Tax Lien Investing Book Review

A subscriber to my blog recently asked me what books are out there to help her get started investing in tax liens.  My answer should have been “my book, of course”. But, I’m not there yet.  I’m about a 1/4 of the way through with a goal of completing it by October 1st, 2011.  It will be “the source” for those just learning about how to invest in tax liens and those who have much more experience looking for strategies and ideas to manage their portfolio.

For now, I recommend the book The Complete Guide to Investing in Real Estate Tax Liens & Deeds: How to Earn High Rates of Return – Safely by Jamaine Burrell over the other books and e-books you can find online.   Although the author does not have that much direct experience investing in tax liens, she paired up with a seasoned investor and brings in-depth knowledge about investing in tax liens across a broad spectrum of topics.  I use it more as a reference book when researching specifics about a state or topic such as random selection bidding auctions.

It does not, however, discuss strategies for selecting properties to bid on nor does it share experiences of managing the foreclosure or quiet title process.  It’s a book that won’t convince you to get into the tax lien market, but it will be a useful guide once you’ve decided that your ready to buy tax liens and need a straight-forward guide to the terms and processes involved.

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Really?  No Holding Costs to Invest in Tax Lien Certificates?

Really? No Holding Costs to Invest in Tax Lien Certificates?

One of the great things about tax lien investing is that there really are no holding costs to your investment until your ready to file and get the deed to the property. In fact, you are the one that gets to sit back and get paid for a change. The only additional funds you will need to put toward your tax lien certificates when you invest in tax liens is to purchase additional subsequent liens that are only offered to you.  Moreover, those subsequent investments earn the full statutory rate – 18 to 24% in some states!
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Preparing for the 2012 Florida Tax Lien Auction

Preparing for the 2012 Florida Tax Lien Auction

It’s never too early to start to prepare for the biggest tax lien auction in the U.S. — Florida.  The 2012 Florida tax lien auction is the largest by volume with almost $2 Billion in tax liens available for tax lien investors to purchase.  It’s also the easiest state to buy liens in, for anyone.  Most of the counties are online through a couple online tax auction houses.
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Due Diligence for Tax Lien Investing

Due Diligence for Tax Lien Investing

One of my readers recently emailed with a request for a due diligence checklist that I use when looking at investing in tax liens or tax certificates.  While I don’t have a checklist, per-se, I do run thru a mental checklist of items on each and every property.  The due diligence on the underlying real estate in tax lien investing is the same for any real estate investment—it focuses on value and market risk.  Furthermore, it varies tremendously on the type of real estate.  Does that former industrial warehouse have un-remediated storage tanks?  Is that retail office-condo fully completed or just a shell? However, the tax lien investor needs to add a few more items to their due diligence which I’ll cover in this post.

Is this a valid lien?

    One of my first checks right before the auction is to go online to the tax collector’s website and review the tax bills for the certificates I’m about to purchase.  (more…)