No one is immune to financial struggles. And when these struggles mean that you can't afford to pay your federal income taxes, the IRS might file a Notice of Federal Tax Lien against your home.
This can be a huge problem for you. This action, known by most people as a tax lien, gives the government a legal claim against your property, including your home, personal property and financial assets, should you owe taxes. The filing of such a lien is automatic if you owe $10,000 or more in taxes.
The government, then, will have the right to tap any income you make by selling your home. Say you owe $8,000 in taxes and sell your home for $200,000. The government's tax lien means that it will cover the taxes you owe by dipping into the profits you made by selling your home.
The good news? A federal tax lien is not as bad as a tax levy. When the government files a tax levy against your property, it actually takes that property -- including your home -- from you to pay back what you owe.
Even if the government doesn't take any money from you after filing a tax lien, this action can still hurt. That's because it will cause your three-digit credit score to plummet, by more than 100 points. Once you pay your lien in full, the negative mark will fall off your credit report seven years from the date it was filed. If you don't pay? Technically, that lien can remain on your credit report, and drag down your credit score, forever.
Ok, but what do I do if I receive a notice?
So, if you receive a notice of federal tax lien, what do you do? First, don't ignore it. Second, handling this feat is best done with the assistance of a professional who knows both real estate and debt - like a bankruptcy attorney who owns a title company. This is the best move to get an answer for your specific situation, but here are a few options generally available to homeowners.
First, contact the IRS as soon as you receive your notice. Make sure you understand how much you owe. Make sure, too, that the notice wasn't filed in error.
If you want to remove a tax lien:
- The best move is to pay the IRS what you owe. Once you do this, the IRS will remove the lien. Of course, you might not be able to afford this. You might, though, be able to afford a payment plan that allows you to pay back your tax lien over time. If this is an option for you, it's definitely worth exploring.
- You might apply, too, for a certificate of discharge. This removes a tax lien from a property. Not all consumers, though, will qualify for this. It's best to meet with an experienced attorney to learn the fundamentals of this option.
- Subordination might help, too. This legal move puts other creditors ahead of the IRS when you sell your home. This way, other credits will get their money before the IRS gets it. This doesn't remove the tax lien, but it does make it easier to sell your home. Your mortgage lender might not approve your home sale if it won't get all the money it's owed because the IRS is taking its money first. But if the IRS agrees to let the bank collect its money first, the bank will be more likely to approve a sale.
- Bankruptcy can be an option too. While you can't get rid of all tax debt in bankruptcy, it helps you take control over any other debt you might have. It also gives you breathing room to figure out some other options.
Dealing with a tax lien is stressful. Your best move is to contact an attorney who can help you discuss your options. This legal professional can help you find the solution that causes you the least financial harm.