Can a Home With a Federal Tax Lien Be Sold?

/in /by

Like many people, you may believe that should the IRS file a lien against you it will be impossible to every market your house. Many times, even professionals are not fully aware of how the lien procedure operates. In fact, you can sell your home with a lien by the Feds against it so long as you follow the proper procedures. Any time the IRS records a lien against you it will attach to any equity you have in your house—behind the primary mortgage holder. However, should you want to sell your home, it is possible to request a document known as a Certificate of Discharge from the IRS in order to have the lien released to the extent you can sell the home—with the stipulation that they receive their payment in full.

In other words, suppose you have $80,000 equity built up, but the IRS has placed a $35,000 Federal lien against you. Once your home sells, the IRS will receive their $35,000 and you will receive the remainder. If the IRS receives their payment in full at the time you close the deal, they will discharge the lien.  There is one other scenario in which you might be able to sell your home despite the IRS tax lien. If your home was fully mortgaged, meaning you have zero equity but badly need to market the home, you could once again request an IRS Certificate of Discharge which would prompt the IRS to discharge the lien if: you can prove the transaction is on the up and up and is being sold for a reasonable price and that the house is mortgaged to the hilt—to a level that would give it no real value to the IRS. Be aware, however, that in this particular scenario the IRS will not completely release their Federal tax lien, only this one specific asset that they have determined holds no value for them so it can be marketed with a clean title.

Can the IRS Seize My Home?

Contrary to widespread opinion it is really not that simple for the Internal Revenue Service to take the home you currently reside in. In order for them to do so you must first owe the IRS a minimum of $5,000, they must go proceed through an impartial judge in your area and the equity in this asset must be sufficient to fully pay your lien—otherwise it is hardly to their advantage to seize your home. It is more likely that the IRS will take a portion of your monthly wages, or take the money from your bank accounts largely because there is no court order necessary.  In some cases the IRS may choose to clean out your retirement account as well.

What Can You Do If You Owe the IRS a Large Sum of Money?

If you are unable to pay the taxes you owe in a timely manner it is possible to set up an arrangement where you make a monthly payment to the IRS. Unfortunately, this is often difficult to set up since the IRS can be stubborn about the minimum monthly amount they will allow. You could also try an Offer in Compromise in order to settle your taxes however in most cases you will need an attorney to negotiate such an agreement. While in some cases you might be able to obtain an equity loan, most of the time a tax lien has affected your credit to the extent that getting such a loan can be difficult, if not impossible. Finally, you may choose to sell your house if the equity you have in it is sufficient to pay the IRS lien with some left over for you to purchase another home.

What If You are the Buyer?

What if you are the prospective buyer and you find out there is a tax lien on the house of your dreams? In truth, so long as you conduct the transaction using a reputable title company, you should be protected. During a title search, the lien will show up, and any lien against the property will need to be settled prior to a clean title being issued by the title company.  Title companies generally have attorneys they work with who can prepare the proper documentation, and if the seller will not net sufficient funds at closing to repay the lien, the title company could attempt to negotiate a deal with the IRS for less money than is owed. In the end, although it may require some extra work, it is possible to sell your home even with an IRS lien against it.

 

Are You Eligible for an IRS Offer in Compromise?

/in /by

If you find yourself in the unenviable position of owing more taxes than you can pay, then it is possible you may be eligible to settle your federal tax liabilities by submitting an offer in compromise to the IRS. The amount you will offer will be less than the full amount due, however in order for the IRS to consider your offer you will have to meet certain criteria. Primarily the taxpayer must show—to the satisfaction of the Internal Revenue Service—that he or she has no way of paying the taxes owed or does not actually owe the taxes claimed. After 1992, when Offers of Compromise were widely frowned upon, the IRS decided that collecting some money was preferable to collecting none. Rather than settle on an installment agreement which could drag out potentially for years, the IRS can decide to cut their losses and take what is theoretically collectible as soon as possible and with the least amount of financial burden to the government.

Most cases of Offer in Compromise are based on the taxpayer’s inability to pay the taxes in full. Any time the IRS takes a look at a taxpayer’s financial condition and determines they will likely never be able to collect the full amount then the taxpayer can negotiate an offer that reflects the amount of equity in the taxpayer’s assets plus the amount the IRS believes they would be able to collect from future income. While there are certain cases in which the taxpayer feels the IRS has billed them an erroneous amount, unfortunately these are rare. Still, an Offer in Compromise can be used if the taxpayer couldn’t defend himself against an IRS bill yet has discovered additional evidence which proves the amount claimed is not correct. Finally, should the IRS believe a settlement would promote effective administration of taxes, they can require the taxpayer to explain any exceptional circumstances, showing either that paying the taxes in full would create a financial hardship or that such payment would constitute an unfair situation.

Pros and Cons of Accepting an Offer in Compromise

Of course there is usually a downside as well as an upside to most situations, and agreeing to an Offer in Compromise is no exception.  The benefits of accepting an Offer in Compromise include the fact that the IRS will hold off on attempting to collect money from you while they are considering your offer. Secondly, once an offer is accepted and completed, any tax liens against you will be released. Finally, an Offer in Compromise ensures the taxpayer can avoid bankruptcy, even reducing taxes that would not have been considered dischargeable in any case during a bankruptcy petition.  The downside of accepting an Offer in Compromise include the fact that the taxpayer must fully disclose all their financial information to the government—something few of us would like to do. Some tax benefits may be waived once the Offer is accepted, and a federal Offer in Compromise does nothing to resolve any other debts or taxes due to your state.

How Much Can You Reduce Your Tax Liability?

As stated, the IRS will first determine the worth of the taxpayer’s resources less other money owed which has priority over the Federal tax lien on a discounted basis, then will add in a determination of the taxpayer’s ability to make future payments.  In evaluating the taxpayer’s future income prospects, the taxpayer’s education, profession, trade, age, experience, health and past and present income will all be considered to make a determination. One formula the IRS may use to determine your future income is to subtract the necessary monthly living expenses from your monthly income over 4-5 years. These figures added together will equal what the IRS will be willing to accept for the amount you owe. Remember, that once you have entered into an Offer in Compromise Agreement with the IRS you absolutely must remain current on all tax obligations for a period of five years or you risk having your agreement revoked. It can be to your advantage to have a tax attorney help you navigate this type of agreement so you can be sure  your interests are being protected.

 

The IRS Announces Favorable Offer-in-Compromise Program Changes

/in /by

June 1, 2012 – The Internal Revenue Service announced taxpayer favorable changes to its “Fresh Start” initiative.  More flexible options were made to the Offer-in-Compromise (OIC) program that should help “some of the most financially distressed taxpayers to clear up their tax problems and in many cases more quickly than in the past.” See IR-2012-53, May 21, 2012.

The IRS announcement focuses on the financial analysis used qualify taxpayers for the OIC program, and helps more taxpayers to clear up their tax issues in on or two years, as opposed to four or five, common under the old OIC program standards.

Changes to the OIC program announced by the IRS include:

“Revising the calculation for the taxpayer’s future income;

Allowing taxpayers to repay their student loans;

Allowing taxpayers to pay state and local delinquent taxes;

Expanding the Allowable Living Expense allowance category and amount.”

The repayment periods seem to be the most significant change to the OIC program.  “When the IRS calculates a taxpayer’s reasonable collection potential, it will now look at only one year of future income for offers paid in five or fewer months, down from four years, and two years of future income for offers paid in six to 24 months, down from five years. All offers must be fully paid within 24 months of the date the offer is accepted. The Form 656-B, Offer in Compromise Booklet, and Form 656, Offer in Compromise, has been revised to reflect the changes.”

To see how these and other changes to the Offer-in-Compromise program can assist if you are struggling with back taxes to the IRS, please contact the Law Office of Paul Grego.

See:  IR-2012-53, May 21, 2012, and http://www.irs.gov/newsroom/article/0,,id=257542,00.html