Quick Answer
A federal tax lien is the United States government's legal claim against a taxpayer's property after applicable federal tax requirements are met. The IRS may file a Notice of Federal Tax Lien publicly, which can affect the taxpayer's ability to sell or refinance real estate until the lien is resolved.
Federal tax liens operate differently from other types of tax liens. They have their own priority rules, release procedures, and special processes for dealing with real estate transactions.
What a Federal Tax Lien Affects
When a Notice of Federal Tax Lien is filed, it may affect:
- The proceeds from the sale of the taxpayer's real estate
- The taxpayer's ability to refinance existing loans
- The priority of other creditors' claims against the property
- The timeline for closing, because IRS processes can take time
- The requirements the title insurer will impose before issuing coverage
Can a House With a Federal Tax Lien Be Sold?
Potentially, yes. However, resolving a federal tax lien requires dealing with the IRS, which has its own procedures. Options include:
- Payment: The lien is paid in full from the sale proceeds, and the IRS issues a release.
- IRS payoff: The IRS provides a payoff amount that includes tax, penalties, and interest through a specific date.
- Release: The IRS releases the lien after payment or under certain conditions.
- Discharge: The IRS may discharge its lien from the specific property being sold, while the lien remains attached to other assets.
- Subordination: The IRS agrees to subordinate its lien to another creditor, such as a new lender, allowing refinancing.
These options are not the same, and each has different requirements and timelines. The best advice is to contact 1st Option Title as early as possible when a federal tax lien is involved.
CAN THIS STOP CLOSING?
A federal tax lien can delay closing because IRS procedures take time. The IRS must process payoff requests, and obtaining a discharge or release can require weeks. Starting the process early is critical. Open title with 1st Option Title as soon as you know a federal tax lien exists.
FAQs
Does a federal tax lien attach to all of a taxpayer's property?
Generally, a federal tax lien attaches to all property and rights to property belonging to the taxpayer. However, recording the Notice of Federal Tax Lien establishes priority against certain other creditors.
Can an IRS lien be negotiated?
In some cases, the IRS may accept an Offer in Compromise or enter into an installment agreement, but these are separate processes from the real estate closing. Consult a tax professional for IRS-specific guidance.
Does title insurance cover federal tax liens?
A federal tax lien that is properly filed and discovered during the title search is generally an exception on the title commitment until resolved. However, a federal tax lien that is not properly filed or not discovered may be treated differently under the title policy.