What to Do If You Have a Tax Lien On Your House
The government doesn't play around with taxpayers who skip out on what they owe. When you ignore your federal, state, or property tax bills — and you don't make any attempts to pay the balance — the government can place a tax lien on your house.
A tax lien is a legal claim on property for failure to pay taxes owed. It gives the tax authority (also known as the lienholder) first rights to your property over other creditors.
A lien differs from a levy in that the government doesn't seize your house or other property. Keep in mind that a lien can become a levy at some point if you never pay your taxes or never make arrangements to satisfy the debt. The tax authority decides when to impose a levy. You'll receive written notice of the levy at least 30 days before it takes place.
A lien is a serious matter because it can negatively affect your credit. Unpaid tax liens can remain on credit reports indefinitely, whereas paid tax liens can remain for up to seven years from the date filed.
Of course, the best way to handle a tax lien is to avoid one in the first place. But if the damage is done, here's how to put this ugly mark behind you.
1. Dispute a filing error
It's not uncommon for mistakes to appear on credit reports. In fact, according to recent data from the Consumer Finance Protection Bureau, 76 percent of the 185,700 credit-reporting complaints they've received since 2011 are related to errors — including state or federal tax liens that mistakenly appeared on credit reports.
If you check your credit report and find a lien reported in error, don't ignore this mistake. This can lower your credit score. Contact the IRS or your state tax office to file a dispute. If a review of your account proves that you don't owe the debt, the government withdraws the tax lien (as if it never happened). A withdrawal also removes the lien from your credit report.
Thankfully, the number of tax liens reported in error should be dropping. In response to criticisms by the CFPB, the top consumer reporting agencies — Experian, Equifax, and TransUnion — issued a new provision. As of July 1, 2017, tax lien and civil judgment data will only be included on credit reports if they contain three pieces of information: the person's name, address, and Social Security number or date of birth. This information must be current according to court records as of the last 90 days.
The association representing the credit bureaus expects half of the consumers with tax liens on their credit reports will see them removed.
2. Pay your tax bill in full
Parting with your hard-earned money isn't easy, but paying your tax bill in full is one of the fastest ways to get the government off your back and move on with your life.
Typically, the government releases tax liens within 30 days of full payment of an outstanding debt (including penalties and interest). A release removes the lien from the property.
Unfortunately, paid tax liens can still remain on your credit report for up to seven years. However, under the IRS's Fresh Start Program, after paying your balance in full, you can submit a request to have a federal tax lien withdrawn from your credit report before the seven-year mark. Some states also give taxpayers the option of requesting an early withdrawal of a state tax lien from their credit report once they've paid their debt in full.
3. Set up an installment plan
If you can't pay what you owe in full, set up an installment plan with the government. This lets you pay off your tax debt over time. The tax authority releases the lien once you've set up a payment plan.
In the case of federal debt, the IRS allows individual taxpayers to set up monthly direct debit payments on debt amounts up to $50,000 for up to six years. Go to IRS.gov and apply for installment payments through the online payment system. If you owe more than $50,000, or require longer repayment terms, request installment payments by completing and mailing Collection Information Statement Form 433-A or Form 433-F.
Taxpayers who owe less than $25,000 and who've made at least three consecutive direct debit installment payments also can request to have the lien withdrawn from their credit report. However, defaulting on an installment agreement can trigger a new tax lien.
Some states also allow installment plans to repay a tax debt, though the criteria for these plans varies by state.
4. Sell the property
If you don't have money to pay an outstanding tax debt in full, and you can't afford an installment plan, another option is selling the property and satisfying the debt with proceeds from the sale. However, this method only works if the sale price is high enough to pay off the lien and any existing mortgages on the property. If the sale won't generate enough proceeds to pay off attached liens, you can't sell the property. If you're able to sell the home, the company handling your escrow account forwards payment to the lienholder after closing.
Keep in mind that you'll need to contact the lienholder before closing to request a lien release. In the case of federal taxes, this involves requesting a Certificate of Discharge from the IRS. If the request is approved, this document releases (or removes) the lien from the asset being sold (though it stays in place in every other way), and allows the property to transfer to the new owner lien-free.
5. Refinance the property
Then again, maybe you don't want to sell your home. There's also the option of refinancing and borrowing cash from your home equity to satisfy a state or federal tax lien on the property. Since refinancing replaces an existing mortgage with a new loan, mortgage lenders will not approve your loan application unless they have first lien position on the title. This puts the lender in priority position to benefit from liquidation if the property goes into default. For this to happen, you'll have to request a lien subordination from the IRS or your state tax office before applying for the loan.
Subordination doesn't eliminate a tax lien — rather, the lien becomes secondary to a lender's lien on the property. And with the lender's security interest first, you're more likely to acquire a new mortgage.
Be aware that your ability to refinance depends on how the tax lien impacted your credit. A tax lien will reduce your credit score, and to refinance, you'll have to meet a lender's income and credit score requirements. You need a minimum credit score of 620 for a conventional loan and a minimum credit score between 500 and 580 for an FHA loan.
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