So what do you do in this situation? Well, let me talk about the general rules first. The general rules are the federal tax lien must be paid off first before you can actually convey your house, and that’s actually serving the purpose that it was invented for and that’s why Congress allows the IRS to file federal tax liens, it’s to keep people from conveying their interest in real property and forcing them to pay off the federal tax lien before they sell their house.
There are some exceptions to that general rule. The first is the Offer in Compromise. If you have an Offer in Compromise accepted and paid, then the IRS has 30 days after the payment of the Offer in Compromise to release the federal tax lien.
The second exception would be the collection statute of limitations. If it has expired, then the IRS, again, has 30 days from the date of the statute expiration date to release the tax lien. That really commonly does not happen automatically and so then you would have to issue a request to the IRS to release this enforceable lien, and they have 30 days from the date of that request to do so, as well.
There is another exception – if the lien is otherwise unenforceable. A situation that comes to mind is there is a date on the face of a federal tax lien; it’s in the third column from the left. It says “last re-filing date.” Now, if all of the last re-filing dates have passed and the lien was never re-filed, then that lien is unenforceable on its face.
Does that mean that you don’t owe the money any more, that you have no tax liability? No, it does not but it does mean that that tax lien is no longer enforceable. So you could probably get the IRS to release the tax lien in that instance and typically, they will not re-file because it would be against the law to re-file in that situation.
The tax lien can also be paid at the closing table if there is enough money to full pay the tax liability. Let me give you an example.
If you owed $50,000 to the IRS and you were getting $100,000 in proceeds from the sale of your house, then the tax lien could actually be full paid at the closing table.
There are two procedures that I also wanted to let you know about that might help you in these types of situations and they have to do with federal tax liens, as well.
The first situation is called a lien subordination, and the lien subordination is used when you need to refinance your home, but not sell it. Let’s say you’re just trying to change and term, you’re trying to get a lower interest rate or you’re trying to get a longer or shorter term, then the IRS will sometimes allow you to have their lien subordinated to the new mortgagor. The IRS usually wants some money out of that transaction. They’re not going to go through these procedural hoops just for their own edification and just because they’re nice; because they’re not particularly that nice. Remember, you owe them. If you have a tax lien, the odds are you owe them a significant liability and they want some money. Typically, that money that they want of the transaction does not have to be all that significant; I’ve got them down for as little as $1000 out of the deal.
For more detailed instructions on how to prepare and submit a lien subordination request, you’re going to want to look at IRS Publication 784.
The second procedure that might help you is called a Certificate of Discharge From Federal Tax Lien. This is used when selling your home but the proceeds from the sale that you’re going to get are not enough to full pay. So in that situation, there wouldn’t be enough for the IRS to have the lien paid in full at the closing table and so you need to go through this procedure with a Certificate of Discharge From Federal Tax Lien. Let me give you an example of that.
You owe the IRS $50,000 but the proceeds (your proceeds) from that sale are only going to be $25,000; so since they have a lien in place for $50,000 and they only stand to get $25,000, that would not be enough to full pay the tax lien and therefore, you would need to apply for a Certificate of Discharge From Federal Tax Lien.
For more detailed information on how to go through this process, you need to look at IRS Publication 783.
Both of these processes are actually more complicated than they need to be. The IRS gets involved in your closing, and I’ve had battles with the IRS where they were arguing the cost of termite services and minor repairs that needed to be done to the home before the closing could occur. So it can be a rather complicated situation, so it might be a good idea to get professional help if you need to go through any of these two procedures.