Many times, individuals will find a buyer for their home, and they will even schedule a closing, only to discover that a Federal Tax Lien is going to prevent the transaction from going through. A Federal Tax Lien does not necessarily have to stop the sale though, and there are ways to ensure that the seller can transfer the property with clear title. It just requires some planning ahead of time.
When an individual owes delinquent taxes, the IRS will typically file a Federal Tax Lien to protect the government’s interest in any property that the taxpayer owns. Unlike most liens, which attach to a specific piece of property, a Federal Tax Lien attaches to all property owned by the taxpayer. With certain exceptions, the IRS generally will not release a tax lien until the taxes are paid in full.
When property is sold, the mortgage holder (if there is one) will usually have priority over the IRS, because they most likely will have filed their lien before the IRS filed its. As a result, the mortgage holder will get paid first out of the proceeds of the sale. Once that is done, if the remaining funds are sufficient to pay the IRS in full, then the IRS can get paid at closing, and the lien will be released, allowing the buyer to take the property free and clear.
If, however, there are not enough proceeds from the sale to pay the IRS in full, the only way for the buyer to take title free and clear is for the seller to first apply to have the property discharged from the Federal Tax Lien. When property is discharged from a Federal Tax Lien, the lien remains in place, but it no longer attaches to the property in question.
The application for discharge must be submitted at least 45 days before the scheduled closing, to allow sufficient time for review and determination. However, it is recommended to submit the application even further in advance, just to be sure the process is complete in time for closing.
If you are trying to close a sale of property subject to a Federal Tax Lien, you should consult with an attorney or CPA who is experienced in dealing with lien discharges. Failing to do so could delay or prevent the sale.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.