What Do I Do When I Have a Tax Lien and I’m Trying to Sell My Home?

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DARRIN T. MISH: Good morning! This is the IRS Solution Attorney, Darrin T. Mish.

KATRINA MADEWELL: And I’m your co-host Katrina Madewell, welcome to the show.

DARRIN T. MISH: How are you doing today?

KATRINA MADEWELL: I’m doing good. It’s not raining.

DARRIN T. MISH: It’s a Thursday. It’s not raining. There are no trees blocking my drive so I can’t get out in the morning. That’s all good.

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KATRINA MADEWELL: We talked about that 20 extra miles this morning.

DARRIN T. MISH: Country life. There’s good things and bad things. One of the bad things is if you can’t get out of your property, you’re on your own. There’s no one to call.

KATRINA MADEWELL: You have enough land, you can put a helicopter on there if you wanted. Then you could get to the station in 10 minutes.

PAT GEORGE: He has enough land he could build an airport.

KATRINA MADEWELL: He could.

DARRIN T. MISH: The problem with the helicopter, and it has crossed my mind, is they’re kind of pricey. Do you think you can write that off?

KATRINA MADEWELL: Plus, you must know to fly it. That’s a better question for you.

DARRIN T. MISH: I think you could write it off. Sure.

KATRINA MADEWELL: Oh my gosh.

DARRIN T. MISH: Is there a helipad on the roof of the studio?

PAT GEORGE: No, but we have a big parking lot.

DARRIN T. MISH: Can you imagine?

PAT GEORGE: There’s a field right across there.

KATRINA MADEWELL: You could take some trees out.

DARRIN T. MISH: If you’re a helicopter pilot and you can give us any idea what the cost to run a helicopter is, give us a call at 888-404-1010.

KATRINA MADEWELL: How much room we need to land it, too.

DARRIN T. MISH: Kind of know.

KATRINA MADEWELL: You’re just going to wing it.

DARRIN T. MISH: If you can tell us how much land we need to land it.

PAT GEORGE: you’re not going to wing it with a helicopter.

DARRIN T. MISH: How long would it take to go about 40 miles as the crow flies? Those are the questions we need answering today.

KATRINA MADEWELL: I’m sure someone will call and answer that.

DARRIN T. MISH: The topic of the show is…

KATRINA MADEWELL: I do know. I had some friends that would drive the small planes, like the Cessna’s and they would say even if you own your plane and it’s paid off, just the cost of the required inspections from the FAA is enough to make most people not want to own a plane.

DARRIN T. MISH: I have no doubt. Up in Wesley Chapel, there’s a little airport that there are hangars behind the people’s houses. That’s neat, but you must have a lot of money I think to have one of those little planes.

KATRINA MADEWELL: There are people that live there that don’t even have airplanes.

DARRIN T. MISH: They must be into aviation. There’s a restaurant over there.

PAT GEORGE: You want a helicopter, and you can’t even get a tractor yet.

KATRINA MADEWELL: That’s another whole story. It has to have cruise control, or he won’t be ready to pick it up.

DARRIN T. MISH: I’m not happy with the tractor dealership now. We’re not going to talk about them because we don’t want to be spreading negative vibes.

The topic of today’s show is what do I do when I have a tax lien, and I want to sell my house? I thought that would be a cool topic for today.

KATRINA MADEWELL: You thought I would have fun with that one.

DARRIN T. MISH: Since I sit right next to a real estate agent extraordinaire, Katrina Madewell.

KATRINA MADEWELL: That’s a compliment from you, thank you.

DARRIN T. MISH: What do you know about this topic?

The general rules are the federal tax lien must be paid off first before you can sell your house.

KATRINA MADEWELL: Where do you want to start? If you have a tax lien, you’re not going to be selling your house without paying the tax lien, how’s that?

DARRIN T. MISH: Let’s talk about what a tax lien is.

KATRINA MADEWELL: Or buying a house.

DARRIN T. MISH: Yeah, it will be challenging to do either. A tax lien is when you owe the IRS money, and the IRS is finally kind of had it with you, they file a federal tax lien. Typically, in Florida, it would be in the clerk’s office for the county you live in. Where the official records are filed. So, where the deeds and mortgage and judgments are filed. They’ll file a lien against you. Typically, it’s going to prevent you from buying or selling real property without it being satisfied in some way.

In a lot of ways, it’s like a judgment, don’t you think?

KATRINA MADEWELL: Yeah. They’re going to find it. People often wonder why they have provided their social security number to the title? That’s why. The title is checking if you have any liens or judgments or anything like this. When it comes up, we want to make sure it’s you and not someone with a similar name. Which happens.

DARRIN T. MISH: There are social security numbers on the Federal tax liens. They used to be out in the clear, but now they redacted it at least so people in Asia can’t just find the data over the internet and steal your identity.

Those liens are filed to protect the IRS’ interest. If you had $100,000 tax lien and you’re selling a house that you own free and clear, and it’s worth $200,000, the lien is there to make sure they get paid.

KATRINA MADEWELL: They must put the world on notice. That’s would they would tell you if you were taking a title course. Probably similar in law school. It’s putting the world on notice.

DARRIN T. MISH: It puts the world on notice that there’s unresolved liability that they have a claim against and they want you to take care of it.

KATRINA MADEWELL: The other thing we’ve seen is they a lot of time can file a lis pendens. Which means something is going on with the property. It’s not always foreclosure.

DARRIN T. MISH: I’ve never seen the IRS a lis pendens. A lot of times people are afraid the IRS if they have a lien that they’ll seize their primary residence. We’ve talked about this on the show. That’s rare.

KATRINA MADEWELL: They probably have to file that lis pendens to seize it.

DARRIN T. MISH: I don’t think so. I have seen a few of these. It’s never happened to one of my clients because I’ve ever taken the case if somebody’s called me at this point. If I had been representing a client, they’ve never had their primary residence seized. I’ve had some people over the years call me when that seizure process has already been instituted and ongoing, and I bow out because it’s kind of too late at that point. What the IRS has to do in that case, if they do want to seize your primary residence, it has to go through management, all the way up the chain and they file a lawsuit in a district court, and a district court has to approve the seizure of that primary residence.

KATRINA MADEWELL: All right, but in Florida, it would be rare. Especially if you had a homestead exemption on that property, it would be rare.

DARRIN T. MISH: I don’t think it matters because of the supremacy clause. The homestead exemption because it’s a state law, does not apply to the Feds.

KATRINA MADEWELL: That would make sense.

DARRIN T. MISH: Everyone else, for sure, it does apply, but the Feds…

KATRINA MADEWELL: Is going to trump anything state created.

DARRIN T. MISH: My experience shows the IRS is not typically interested in seizing a primary residence unless there’s been extreme abuse going on. This is not my typical case where somebody hasn’t filed tax returns in ten years and owes $200,000 that’s not the extreme abuse I’m talking about.

KATRINA MADEWELL: Wouldn’t it be embezzlement, money laundering, that sort of stuff? Like you bought your house with drug money?

DARRIN T. MISH: Yeah, that would be a pretty rare too, I could see that happening. It’s typically a tax protestor who has poked their finger into the eye of the IRS for years and years, and they have assets.

I saw one once where it was a family farm, a couple of acres; I think it was in Polk County. They were tax protestors, and I think the land was paid for, it was valuable. And they just kept poking the IRS, and finally, someone at the IRS decided, ok, I guess I’m going to do the work. Then they just lowered the boom on them.

KATRINA MADEWELL: Playing devil’s advocate, if that was the scenario, why wouldn’t they just put the property in a trust or someone else’s name? Why wouldn’t they do that?

DARRIN T. MISH: You can’t do that after the fact.

KATRINA MADEWELL: No, not after the fact, but if you’re a tax protestor and you have free and clear assets, why would you not?

DARRIN T. MISH: They probably bought the house 50 years ago, and they started engaging in the tax protestor activity 20 years ago, so they didn’t get around to it. Even if they had, the IRS is going to go ahead and pierce all those trusts and nominee situations. I’m not saying that it’s right or proper or legal, but that’s what the IRS is going to do then they’ll put the taxpayer on their heels, and the taxpayer will have to fight to get that undone. Does that make sense?

KATRINA MADEWELL: Yeah.

DARRIN T. MISH: The taxpayer is going to be fighting the might and the money of the United States government. I don’t know anybody that has the money to do that. I don’t think Warren Buffet could fight the US government if the US government decided it wanted to fight.

KATRINA MADEWELL: You’d have to be a crazy attorney that wants to work for free.

DARRIN T. MISH: I resemble one of those remarks, but not both.

KATRINA MADEWELL: You’d either have to pay an attorney out the wazoo or be an attorney and represent yourself which I don’t know how smart that would be.

DARRIN T. MISH: I can’t tell you how many times I’ve been offered the case of I want you, Mish, to go and fight and prove that income taxes are illegal and we can go all the way to the supreme court.

KATRINA MADEWELL: You’re a lover, not a fighter.

DARRIN T. MISH: There’s no financial incentive behind that because they don’t want to pay me, they just want me to do it. That would take the rest of my life.

KATRINA MADEWELL: Who would want to do that anyway?

DARRIN T. MISH: I think it’s a cool idea.

KATRINA MADEWELL: Maybe when you’re retired.

DARRIN T. MISH: If I could get paid to do it I might try to do it. But if the offer is, hey you can fight for the rest of your life and not be able to support the rest of your family; I think I’m going to pass on that opportunity.

KATRINA MADEWELL: I imagine there are times where people have been “La It Da” this whole time, had these tax liens hanging out there and now they’re in a position where they need or want to sell, and they discovered the tax lien would hinder the sale.

DARRIN T. MISH: Happens all the time.

KATRINA MADEWELL: From a real estate contract standpoint, we’ll talk about that in a minute.

DARRIN T. MISH: When we come back we can talk about the nitty gritty about what do you do if you want to sell your house and you have a tax lien. There are a few options. Some of them are good, some of them aren’t that great. It’s all fact-specific.

KATRINA MADEWELL: We’ll talk about what happens if you’re already under contract. If you list your property and you’re under contract, and the buyer says they want to buy your property for $500,000 and you have this cute little $250,000 tax lien. That’ll be fun.

DARRIN T. MISH: It’s going to be a problem.

KATRINA MADEWELL: If you want to call in with a question, we’re live in the studio, 888-404-1010. Darrin’s off-air number is 888-GET-MISH.

DARRIN T. MISH: 888-438-6474.

KATRINA MADEWELL: Or getirshelp.com. We’ll be back.

(commercial break)

DARRIN T. MISH: Welcome back to the IRS Solution Attorney Show. I am the IRS Solution Attorney, Darrin T. Mish.

KATRINA MADEWELL: I’m your co-host, Katrina Madewell. Thanks for sticking with us during the break.

I think Pat George wants to pop in here for just a minute.

PAT GEORGE: We must thank one of our callers. Do-whop just called and said we have an accident on the interstate northbound 275 in Pinellas County. A couple of lanes blocked right around 54th Ave North and a big back up if you’re trying to come up from the Skyway and head toward the Howard Franklin on 275.

KATRINA MADEWELL: Thanks, Do-Wop, he’s one of our regular listeners. He listens to MoneyTalk all the time, doesn’t he?

PAT GEORGE: Yes, he loves 1010 MoneyTalk.

DARRIN T. MISH: Very cool, thanks for listening, Do-Wop.

KATRINA MADEWELL: And for the traffic tip.

DARRIN T. MISH: We were talking about so we get down to brass tacks, your house is under contract.

KATRINA MADEWELL: You have two contracts at that point. You have a contract with your listing broker and a contractor with the buyer to buy it.

DARRIN T. MISH: What have you seen in that situation?

KATRINA MADEWELL: If they haven’t figured that out in advance, at that point it’s still a legal binding contract to the buyer.

DARRIN T. MISH: Ouch.

KATRINA MADEWELL: The fact that they have a lien that could change their net or make them write a check has no bearing on the sale.

DARRIN T. MISH: One of the things we learn in law school in the first semester of the first year is land is unique. It’s one of the few times when you can sue for something called specific performance in a contract. In other words, most of the time the law doesn’t care who is the breaching party in the contract, you just measure damages based upon how much money it costs the non-breaching party. Real estate contracts are different. What Katrina is saying here is if you have a tax lien and you were under contract to sell that property you then later determine that it’s not financially advantageous to you to sell, then the buyer could sue you at that point for specific performance and force you to do it. I can tell you if I was in that situation as a buyer, I’m a pretty nice guy, I’m not a litigious guy at all, if I had my heart set on that deal in that house I would sue for specific performance.

KATRINA MADEWELL: Plus, you have money tied up into it. You’ve paid for inspections, appraisal, lost time, you might have missed another property you could have made an offer on because you were tied up with this one.

DARRIN T. MISH: The whole point is not so much the inspections and all that stuff, maybe it’s $5,000 or $7,000, it’s not about that.

KATRINA MADEWELL: We don’t see a whole lot of specific performance, and I think that’s because it determines the dollar amount. There were times, for example, my brother-in-law when he bought a property when the market was going crazy and the waterfront was a big thing, he bought property on the river, and the seller got another higher offer from someone else. At that point, it’s binding. You can’t just say, oh I want to take this offer. He threatened the seller for failure to perform. All the real estate contracts that we use as agents are going to arbitration and mediation clauses built in which means you must do mediation and arbitration before you can sue somebody. But they can still be sued for failure to perform.

DARRIN T. MISH: You’re going to win in arbitration in that case anyway. It’s probably good because arbitration will be faster and cheaper and if it’s binding it’s going to be binding on the seller in that case too.

KATRINA MADEWELL: Here’s the thing. If you think you might have a tax lien or if you have this thing where you have not paid taxes or…you know if you owe taxes, if you’re going to enter into a binding contract, simply add in a third-party approval addendum. This can be added into your listing contract or buyer contract.

In the past, this was brought into play because of short sales. They’re going under contract, and they technically can’t sell it until they get this third-party approval. Meaning the bank has to agree to sell it for that lesser amount. The same could hold true in that same provision would also work in this instance.

DARRIN T. MISH: That’s good advice. Let’s talk about the general rule if you have a tax lien and then some exceptions to that rule. The general rule is the federal tax lien must be paid off before you can sell your house. In the context of what we’re talking about, you have a $500,000 house, let’s say it’s free and clear and you owe a $250,000 tax lien, the first $250,000 is going to the IRS to pay the tax lien. There are some exceptions to that rule.

KATRINA MADEWELL: Do you have customers that come to you and they’re in this instance?

DARRIN T. MISH: I have over the years had people…I’ve had a few that were under contract, but usually it’s more like I want to sell and I’ve been advised that I can’t until I get this resolved. Let’s talk about some of the options or alternatives.

You may be able to file an offer in compromise.

KATRINA MADEWELL: That’s good advice. It’s way better than being under contract trying to do it.

DARRIN T. MISH: Yeah. The first thing would be, one of the things we talk about on the show all the time, which is to do an 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 to release the federal tax lien, and it works well. Here’s the problem with an offer in compromise. They take a long time. People thing, oh this is going to take a week. No, not at all. It’s going to probably take longer than a week to prepare the package and then it’s going to take somewhere, I can tell you from my personal experience, from six months on the short end for a super easy offer where you’re obviously broke and had no assets, and you’re a W-2 wage earner, all the way to about 18 months if it’s a more complicated case. Incidentally, the IRS only has two years from the submission of the offer to rule upon the offer. If it just gets lost for two years, then you win. Which is great, but I’ve never seen it happen and I’m plugged into thousands of guys that do what I do, and no one has ever seen it happen. Good for them, they’re not blowing the dates.

KATRINA MADEWELL: Let’s think about this. You want to sell your house. When you decide to sell your house, you’re ready. There are some people that will take more time to plan and prepare over a period, but I haven’t seen anybody really that calls more than a year out. There have been people that have been in their home for a long time, and they’re like, hey, I’m going to figure out where to start. I’ve been here for 30 years I have a lot of stuff. But it’s not two years.

DARRIN T. MISH: Even more common in my case is the homeowner/taxpayer is having financial problems, and they need to sell, or they need to do a short sale because they’re facing foreclosure and they want me to take care of the tax problem. Sometimes I can and sometimes I can’t it just depend on the specifics of what’s going on.

Let’s talk about the second exception.

KATRINA MADEWELL: If they’re doing a short sale, that might be a good thing. If you’re working on the case. Because the bank will allow that. That’s going to be what they consider an allowable expense when they’re looking at short sales. They’re not going to say this is just some buffer expense on this settlement statement. They’ll say no, this is legit. If it’s a tax lien, it’s going to attach to the property.

DARRIN T. MISH: We’re going to talk about what’s called a certificate of discharge from Federal tax lien a little later in the show. That would be what would happen if you’re doing a short sale is the IRS has to get involved in the deal. They have to look at the closing documents, and they have to sign off, basically bless the fact that they’re not going to get any money from the sale. Kind of a nightmare.

KATRINA MADEWELL: What I’m saying is if you have to pay them, it might be a good time to settle that if you have a short sale.

DARRIN T. MISH: You’re never going to have to pay them because the first mortgagor is always going to be in first place above the tax lien. Not always but 99.9% of the time, the first mortgagor is going to be in the first position and the tax lien is going to be in the second position because it’s a purchase money mortgage.

KATRINA MADEWELL: According to the lien line, from my recollection when I did real estate and title school, which was a long time ago, tax liens are superior to mortgage liens.

DARRIN T. MISH: Not a purchase money mortgage. We’re in what’s called a race state in Florida which means the rule is whatever income encumbrance is filed first is first in line. You’re probably thinking of property tax liens are superior to everything.

KATRINA MADEWELL: That must be it.

DARRIN T. MISH: Everything is inferior to a property tax lien. But a fed3eral tax lien is just whenever it was filed, in Florida, if you’re listening in a different state, don’t take this advice because not all states are a race. Race means it’s a race to the clerk’s office to get the thing filed. But most states are.

Check the statute of limitation.

The next thing we’re going to talk about, this came up in a case that I worked with you, Katrina is the statute of limitations. The statute of limitations is ten years from the assessment of the tax. What this means in layman’s terms is ten years from the date the IRS declares you owe the tax, ten years and a day it expires, and you no longer owe the money. That’s going to be the topic of our IRS train wreck of the week today is a case where that happened.

KATRINA MADEWELL: That sweet little couple. I still remember them. I remember her after we told her this was settled and taken care of and she was going to get to buy the house; she was just like, “Oh, thank you, Jesus! I thought I was going to have to divorce him.” It was so cute.

DARRIN T. MISH: One of the great things about what I get to do for a living is it’s such an insurmountable problem to people because they don’t know what’s going on, they don’t do this for a living, and it is complicated. I was talking to a good friend of mine yesterday, non-filer for a long time. Ten or fifteen years. He completely spun out about it. He can hardly function in life because he’s so worried and scared about the situation. What I did for him is what I do for most people. I chunked it down. I was like, ok, let’s try not to eat this elephant all at once. We’re going to chunk it down, and we’re going to do this, this, and this and when you do those things we’re going to reconvene, and I’m going to give you the next things to do. None of these things will be difficult if we just do them all in a row.

KATRINA MADEWELL: Just a couple little steps at a time.

DARRIN T. MISH: That’s the thing you have to do. That’s good advice for any problem you have in your life; you have to figure out a strategy, chunk it down and go at it.

KATRINA MADEWELL: Darrin, is that all tax liens? After ten years? Or is there a differentiation between different liens?

DARRIN T. MISH: That is the rule for all federal tax liens. They have ten years. But there could be things that stop that ten years from running and extend that time. The IRS has an opportunity to refile that tax lien if that happens.

KATRINA MADEWELL: How often does that happen?

DARRIN T. MISH: Quite a bit.

KATRINA MADEWELL: Restarting your ten-year clock?

DARRIN T. MISH: They don’t restart the clock, if it was paused for a year, they add a year.

KATRINA MADEWELL: You’re listening to the IRS Solution Attorney show. Today’s show is about what to do if you have a tax lien and you want to sell your house. We’ll be back in just a minute.

(commercial break)

DARRIN T. MISH: Welcome back to the IRS Solution Attorney Show. I’m the IRS Solution Attorney, Darrin T. Mish.

KATRINA MADEWELL: Yeppers he is. I’m your co-host Katrina Madewell, welcome back.

DARRIN T. MISH: The self-declared IRS Solution Attorney. That is what I do all day. I provide solutions to people who have problems with the IRS.

KATRINA MADEWELL: I am not an attorney, thank God. I’m just the side chick to the show.

DARRIN T. MISH: She did not stay at the Holiday Inn Express last night.

KATRINA MADEWELL: Where did that come from?

DARRIN T. MISH: We have to get to the meat of this. I know there are people listening that do want to hear about the topic. Let’s get down.

We were talking about the statute of limitations, and we talked about the fact that the statute of limitations can be stopped. The technical term is called tolled. So, the statute can be tolled that some things are going on. If you file an offer in compromise and it takes a year and a half, and it’s rejected, that statute is going to be tolled for the year and a half plus, I can’t remember if it’s 60 days or six months, but it’s going to be tolled for that time frame.

KATRINA MADEWELL: An equal good word would be paused.

There is another exception – if the lien is otherwise unenforceable.

DARRIN T. MISH: Yeah, it’s going to be paused and a little time is going to be added on for the administrative delay. Sometimes what happens is…there’s a column on the tax lien that says the last day for refiling. So, if you’re looking at a tax lien and you see the last day for refiling date, then if the lien isn’t refiled within 30 days of that last day for re-filing, then the lien is technically released by law. You could have a situation where the lien expires before the obligation expires just because the IRS wasn’t with the program and didn’t refile the lien. That happens sometimes. That’s going to be an example of where you’ll want a professional to step in, figure out if the lien is releasable without paying it because that would be better than paying it almost in every case.

In fact, your case, the amount in controversy was pretty small.

KATRINA MADEWELL: I don’t remember how much. It was a big deal to them.

DARRIN T. MISH: The liens are self-releasing on their face after those dates I was just talking about. What does that mean? Technically the lien is self-released after that date has elapsed. But nobody follows that. The IRS does, but they’re the only ones. So, your title company isn’t going to be down with that; nobody will be down with that. What happens is if you have to ask the IRS to release the lien. Nine times out of ten they will do it. Lately, they’ve been playing games with us. They want the taxpayer to pay the $6 recording fee. We’ve been having problems with them.

KATRINA MADEWELL: Oh, they sent ours back and told us to record them.

DARRIN T. MISH: Yep. That was Orange County, which was weird.

KATRINA MADEWELL: With a letter that said, by the way, including this letter, so they know it’s a release from us.

DARRIN T. MISH: It did. If you think about it, it’s a monumental task to know all of the recording procedures for every county in the United States.

KATRINA MADEWELL: I wonder how many people just try to generate this piece of paper that looks like a tax lien release and file it? Anyone can file anything at the clerk’s office.

DARRIN T. MISH: I had a client about a year ago that filed a release in Pasco county, and he went up to Pasco County, and he tries to record the release, and they were like beat it, buddy.

KATRINA MADEWELL: That’s what I mean.

DARRIN T. MISH: He was not a real sophisticated guy, and so he didn’t know what to do. We ultimately got it done.

KATRINA MADEWELL: They don’t want to pay the $6 to release it so they send it to you to record it and you go to the clerk’s office to record it, and they turn you away.

DARRIN T. MISH: Classic government not talking to each other. One is state and one is federal.

KATRINA MADEWELL: That was probably a mess behind the scenes at the IRS which is probably why they put that letter in there.

DARRIN T. MISH: Yeah, and they’re inconsistent about it, including that letter. Sometimes it’s there; sometimes it’s not. Let’s talk about a couple of other things before we run out of time.

Sometimes you’ll have a case where the lien has just expired and hasn’t been re-filed, so that would be good, you can get a release there. Sometimes you’ll see the lien, and it will be so old that we know that not only has the lien expired but the underlying obligation has expired too, which is the case you had.

What happens if you just want to refinance your home?

You may be possible use a lien subordination.

KATRINA MADEWELL: You’re going into lien subordination, but good luck with that.

DARRIN T. MISH: I’ve done a number of them, and they’re not easy.

KATRINA MADEWELL: They allow lien subordination?

DARRIN T. MISH: They do, there’s a whole process for it.

KATRINA MADEWELL: I don’t know if your lender would allow that.

DARRIN T. MISH: I’ve done a few with our mutual friend. I think I’ve done at least one with our mutual friend that does mortgages.

KATRINA MADEWELL: Sarah Crickey with the mortgage firm, she’s one of our show partners.

DARRIN T. MISH: She just interrupted our show by calling.

KATRINA MADEWELL: That was her.

DARRIN T. MISH: It was brilliant, it was wonderful.

KATRINA MADEWELL: If she were watching or listening she could call in and chime in on this subject.

DARRIN T. MISH: A lien subordination is a situation where you want to refinance your house. You’re not going to pull money out but you want to change rate or term is typically what happens. Let’s say you owe $100,000 on your house.

KATRINA MADEWELL: You’re at 7%, and you want to go to 4%.

DARRIN T. MISH: And you owe $50,000 to the IRS. You’re at 7% or 9%, and you want to go to 4%. Or you want to go from a 30 year to a 15 year or a ten year; then there is a way to do that. You’re going to go ahead and apply for a lien subordination from the IRS. The IRS is again going to inject themselves into your deal. They’re going to verify that you’re not getting any money out and everything is above board, and there are no inappropriate expenses being paid.

Funny story. The very first one of these I did years ago, about 18 years ago, and the deal was going down in Nashville, TN just to make things more interesting. The client, I didn’t know any better, the client was going to pay me out of closing. I went along with that, shouldn’t have. I think my fee was in the thousands and I had around 40-60 hours in this deal to make sure it happened. When the IRS got down to brass tacks, they allowed me $500 as my fee. So, I learned a lesson. Don’t do that.

KATRINA MADEWELL: Pay for your education one way or the other, don’t ya?

DARRIN T. MISH: It’s either the easy way or the hard way, and that was the hard way.

KATRINA MADEWELL: Subordination, going back to that because that’s a weird word. It’s a jargon word in the real estate industry but not one most people would use. Going back to that lien line, if you have that first mortgage, then you have the tax lien hanging out behind it, if you pay off that first mortgage by way of refinancing, the tax lien would technically move into first lien position.

DARRIN T. MISH: I agree with that.

KATRINA MADEWELL: Subordination means the IRS is going to allow a lien to move ahead of them so that your first mortgage can go back where your other mortgage was.

DARRIN T. MISH: Restated slightly is if first mortgage was in number one position, federal tax lien was in number two position and then if you were going to get rid of the first mortgage in one position by paying it off in the refinance, then you would have federal tax lien, and then you’d have the refinance loan, and nobody’s ever going to do that because it would be exceedingly bad business. I saw Countrywide do it in the past.

KATRINA MADEWELL: We see it more common on the second mortgage. So, if someone has a home equity line of credit, even if there’s nothing on it. Want to leave it open and refinance, they don’t understand that it would take extra time to do a subordination with that lender because otherwise, they’d move into first. They’re not going to lend you the same terms.

DARRIN T. MISH: What’s in it for the IRS to do this?

KATRINA MADEWELL: Why does it go away after ten years?

DARRIN T. MISH: It goes away after ten years because Congress put a statute in that says it goes away after ten years. I guess Congress didn’t want this to be a lifetime sentence. Back before the 80’s the statute of limitations time was only six years.

KATRINA MADEWELL: So, they made it longer?

DARRIN T. MISH: They went from six to ten. It’s interesting; most people don’t know there’s any statute of limitations, so they think if they have tax debt, it’s a lifetime sentence. Sort of like student loans.

KATRINA MADEWELL: That might be another story in itself.

DARRIN T. MISH: Which is not categorically a lifetime sentence, but pretty close. There’s a ten-year statute of limitations. Here’s what’s in it for the IRS. Usually, they’re going to want some crumbs. They’re not doing this out of the goodness of their heart. They’re usually going to want $500 or $1000 out of the deal.

KATRINA MADEWELL: Is that their fee to subordinate it?

DARRIN T. MISH: Yeah, it’s kind of like the tax to get it done.

KATRINA MADEWELL: We’re going to give you a subordination tax.

DARRIN T. MISH: They’re going to take a little bit out of the closing. It usually doesn’t hurt too hard. If you want to learn more about lien subordinations, you can go check out IRS Publication 785. There’s now a form number for lien subordinations, I don’t know it off the top of my head, but Publication 785 will tell you about it. It used to be harder. Back when I got $500 for that deal I told you about, it was very difficult. It’s quite a bit easier.

KATRINA MADEWELL: It’s a learning experience. I’m sure you took so many things away from that.

DARRIN T. MISH: I did. I learned how to charge for those cases.

KATRINA MADEWELL: Other than that, I’m sure you learned a lot in that process.

DARRIN T. MISH: That’s why they call it the practice of law or the practice of medicine.

KATRINA MADEWELL: Because you’re practicing on someone?

DARRIN T. MISH: It sounds bad, but you learn from experience. I don’t know about you, but I don’t want to go to a doctor that is a year out of med school. He might have learned all the latest things and all the technological updates, I think I would rather go with the guy with 20-40 years of experience.

KATRINA MADEWELL: Hence, real estate practice. For your friend that just got their license.

DARRIN T. MISH: I can tell you in law what happens in the course of your career there’s going to be lots of hurdles and obstacles and things that go wrong. They’re not necessarily the lawyer’s fault; it’s just the facts of the case. Or if a case is ongoing. Let’s say you’re in a criminal matter and you had a witness that testifies completely different than you were expecting; you have to go with the flow. You have to learn how to adjust quickly, and nobody can tell you’re adjusting. You can’t smack your forehead and go jeez I can’t believe that happened. You have to stand there like you knew it was going to happen. It’s all theater.

KATRINA MADEWELL: In our business, we call that turbulence. Anytime I have a consultation with a new buyer or seller, I show them this list, and I joke about it and say this is our short list of 88 types of turbulence and things that can go wrong when you buy, sell, or borrow money. And they look at me like you’re telling me all these things that can go wrong? Yeah, because if any of these things happen, I still know how to fly your airplane. We’re able to get past this turbulence, but it’s there.

DARRIN T. MISH: I love that. You’ve never shared that with me. I’m writing it down. That is beautiful. That’s what happens. All kinds of things can happen.

KATRINA MADEWELL: I can make it 188.

DARRIN T. MISH: You can even have client cause turbulence.

KATRINA MADEWELL: Oh, yes, it’s on the list. I’ll send it to you.

DARRIN T. MISH: If your client is similar to my client, if they don’t provide you documentation and isn’t responsive and ignores you and blows you off, that’s going to cause severe turbulence.

KATRINA MADEWELL: We did a show on that once. I had a guest that didn’t come in, and I had to create a show on the fly for Tampa HomeTalk. I think we did that based on turbulence. Didn’t we do that, pat? I had you pick some stuff out of there?

PAT GEORGE: Was that severe turbulence? Or severe flatulence?

KATRINA MADEWELL: He’s not even listening. He doesn’t know what the heck we’re talking about.

PAT GEORGE: You’re talking about severe flatulence.

KATRINA MADEWELL: No, we’re not.

DARRIN T. MISH: Thanks for blowing up my show with that word, I appreciate that. Let’s talk about a different situation, get Pat off the air really quick.

KATRINA MADEWELL: Seriously?

PAT GEORGE: Now I’ll get both of you off the air.

DARRIN T. MISH: That’s what happens when you diss the producer.

KATRINA MADEWELL: We still have a minute.

DARRIN T. MISH: When we come back we’re going to talk about what I eluded to earlier certificate of discharge of property from federal tax lien. A little bit different situation than the lien subordination. They’re similar procedures but a bit different.

KATRINA MADEWELL: If you’re watching on Facebook or you’re listening live, and you or someone you know has a tax issue, Darrin works everywhere in all 50 states.

DARRIN T. MISH: All 50 states.

KATRINA MADEWELL: Get him at 888-GET-MISH.

DARRIN T. MISH: In fact, I’ve represented clients on every continent except Antarctica. I have a competitor who just had some promotional sunglasses, and he had a picture taken at McMurdo in Antarctica of the sunglasses. So, the pressure is on.

KATRINA MADEWELL: You’re going to have to make a trip to Antarctica so that you can find a guy that didn’t pay his taxes. The IRS Solution Attorney Show. We’ll be back in a minute.

(commercial break)

DARRIN T. MISH: Welcome back to the IRS Solution Attorney Show. I am the IRS Solution Attorney, Darrin T. Mish.

KATRINA MADEWELL: Either he’s getting bored or has to think about it. I’m your co-host Katrina Madewell, welcome back.

DARRIN T. MISH: I learned a lesson today from Pat. I was telling him he sounded a little low energy today. He said no, I’m not low energy; I am just mixing it up. I’m trying to mix it up just a little bit.

KATRINA MADEWELL: Are you saving your energy for something else?

PAT GEORGE: For the weekend.

DARRIN T. MISH: Tequila.

KATRINA MADEWELL: Exactly.

Certificate of Discharge From Federal Tax Lien

DARRIN T. MISH: We don’t have a lot of time. Let’s talk about a certificate of discharge from federal tax lien and when that comes up.

KATRINA MADEWELL: And we had a questioner from our listener that we have to get to.

DARRIN T. MISH: I’m going to go fast. The certificate of discharge of property from federal tax lien happens when you just want to sell but when you sell there are not enough proceeds to full pay the tax lien. Does that make sense? Let’s say you’re going to sell and you’re only going to get $25,000 from the sale, and the tax lien is $50,000. What happens? You go to IRS publication 783, and you’re going to look at the certificate of discharge from federal tax lien procedures. What’s going to happen is the IRS is going to get involved in your closing, they’ll make sure they’re being treated fairly that they’re going to get the $25,000 and you’re going to be able to sell your house. You won’t get any proceeds. But there are people that don’t mind.

KATRINA MADEWELL: Is it going to wipe out your tax debt?

DARRIN T. MISH: No, it won’t wipe out your tax debt. But if you owed $50,000 and they get $25,000 from the sale, now you’re only going to owe $25,000. There are people where that’s the right thing to do.

KATRINA MADEWELL: I would wait to see if I could settle it.

DARRIN T. MISH: In fact, Sarah and I are trying to work with this woman who really, she just needs to sell the house because she can’t refinance, the debt ratio is messed up and the lien’s too much really, she just needs to sell the house and get out from under it. I don’t know if she’s going to do that. It’s an emotional thing to do.

KATRINA MADEWELL: Yeah, it is. Sometimes it’s better to hit the reset button.

DARRIN T. MISH: Sometimes it’s better to get out of a bad situation than stay in it too long. Let’s get that question.

KATRINA MADEWELL: The question from one of our listeners, thank you, Carl,, very good question right on time for this show. He says I have a friend who just had a tax lien filed against his rental property. Will he still be able to rent it out?

DARRIN T. MISH: Absolutely. It won’t make any difference at all. The lien isn’t going to prevent him from renting or using the property in any way he wants. Theoretically, if the IRS wanted to seize that property, they could. It would be easier than seizing the primary residence. It’s easier to seize the rental because they don’t have to go through the judicial proceedings, they can just do it. There are ways to appeal. It’s not super-fast, but it’s not super slow either. Typically, they’re not going to seize the rental. They don’t want your stuff. They want the money, or they want you to do an offer, or they want you to do a bankruptcy, or they want you to deal with it. They want you to get into an installment agreement.

The modern IRS is not that interested in taking your stuff. Back before 1998, the IRS was interested in taking your stuff, and they did it all the time. They did it punitively. They did it to teach you a lesson. After 1998 there was a bunch of reforms that went into place and punitive seizures are against the law. They can’t just seize something if it’s uneconomical.

KATRINA MADEWELL: Talking about the IRS intercepting that rent money, we saw this a lot back in the day when the housing market was collapsing, and if you took that to court, we’ve seen it happen, they would say your contract with your bank is different than your landlord/tenant contract. So, a homeowner could not be paying their mortgage but still be collecting rent, and the tenant couldn’t do anything about it. The banks have since put a clause in the mortgage that says if you’re in default they can swoop in and take the rent payments.

DARRIN T. MISH: The IRS could levy the rent payments. It’s different from the lien process. The IRS could either levy the bank account, or they could issue a levy notice to the renter that says don’t pay the landlord anymore, pay us. What happens in that situation? Typically, when you have a levy like that, what happens? Nobody pays anybody. That’s what happens. The renter goes woo hoo, free rent and they don’t pay the landlord, the landlord thinks the tenant is paying the government, the government doesn’t get paid, the government is so big they don’t notice.

KATRINA MADEWELL: Then you have to evict the tenant.

DARRIN T. MISH: It’s a nightmare

IRS TRAIN WRECK OF THE WEEK

KATRINA MADEWELL: That train came in hard and fast today!

DARRIN T. MISH: This is the segment of the show called the IRS Train Wreck of the Week. This is the segment where we talk about somebody who came into the office, and they had just a big problem, and we ended up working with them, and it had a happy ending.

This case is right on time for today. A lady came in with her fiancé, and they wanted to get married. As they’re telling me that, I think that’s wonderful. I’m not sure why you’re here, but God bless. What happened is she had some outstanding tax liabilities. It was $379,324.

KATRINA MADEWELL: Was she younger?

DARRIN T. MISH: She was middle-aged and been married a few times before. The fiancé was not interested in getting married until the tax situation was resolved. She’s telling me this story and one of the things going through my head is these are older tax debts. The statute of limitations has to be getting close. What we did was we got Power of Attorney, we got her transcripts and were able to identify that the statute of limitations was going to expire in six or eight months. What did we do? She was already in uncollectible status with the IRS which meant they weren’t going to bug her. So, we just simply waited until that time elapsed and then we reached out to the IRS, we asked the IRS to release all the tax liens which they did because they have to, by law. I got the job of telling them that they can get married.

She ended up walking away from $379,324. There are people that are listening who are thinking that’s not fair. Let me tell you what was going on here. The IRS prepared those returns for her. This was an artificially…they were a substitute for returns.

KATRINA MADEWELL: So, she didn’t file. I was going to ask you.

DARRIN T. MISH: This was just completely blown out of proportion, not a real number that had then doubled over the years with interest and penalties. People can think it’s not fair, but it wasn’t fair what the IRS had done either.

KATRINA MADEWELL: So, she just didn’t file?

DARRIN T. MISH: She didn’t file. I forgot this part of the story. We had to catch her up. We had to file the last six years of returns. She was pretty low income at that point; she had refunds coming back, the refunds went back to the $379,000. Now she’s completely straight. All she has to do going forward is file a return with her W-2 with her new husband, and they can live happily ever after.

KATRINA MADEWELL: Was she self-employed at that time?

DARRIN T. MISH: She was self-employed. So, what they did was they took the gross amount of the 1099’s, and they multiplied it by the tax rate, and it equaled a big fat number and a bunch of interest and penalties, and it got out of hand. She did what a lot of people do. She went into ostrich mode. She stuck her head in the sand. In this case, to her credit, it worked out pretty good for her. Think about how much of her life she gave up. She had her head in the sand for around 15 years.

KATRINA MADEWELL: At least get advice so you know where you stand with it and you can put together some plan. You have an idea at least what’s coming.

DARRIN T. MISH: I don’t want to give the impression that every case turns out wonderful. Not every case does. That’s the truth.

KATRINA MADEWELL: But that’s our train wreck.

DARRIN T. MISH: That is a true story. More cases work out good than bad.

KATRINA MADEWELL: This is the IRS Solution Attorney Show. If you or someone you know in any state has a tax issue, especially a big tax issue, Darrin is your guy. You can get him at 888-GET-MISH.

DARRIN T. MISH: 888-438-6474. Visit the website at getirshelp.com.

KATRINA MADEWELL: They’ll thank you that you made the biggest problem of their life go away after you’re introduced to Darrin. Thanks for listening to this week. We’re glad to have you.

 

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