IRS liens can be bombshells in cases where clients are banking on the money in their property to pay for debts and to bankroll their future. There’s nothing like calculating a few hundred thousand dollars in equity, only to learn there is an outstanding jumbo IRS lien that is going to absorb most or all of it.
Here are a few things to know about them so that you and your clients are prepared to deal with them should they arise:
Where to Find Them
IRS liens do not typically show up on basic property reports and searches, such as a Property Profile. Rather, they appear on a more invasive Preliminary Title Report (“Prelim”). In most real estate transactions, prelims are not run until either after the listing agreement has been signed or once a property is under contract with buyers. This is pretty late in the game to learn that there is a substantial reduction in - or possibly $0 - equity.
It is recommended to run a prelim as early as possible in a case. Title companies usually charge for them if they are not affiliated with a listing contract. If your clients do not wish to pay for a prelim, then at the very least they should insist that the Realtor run the prelim as soon as they’ve been referred the case.
(Note: As a CDRE™, I place an order for a prelim immediately upon notification of a new case.)
How to Deal with Them
The IRS, as we all know, expects to be paid. However, if the amount of the lien plus the costs of the sale exceed the available equity, the IRS will most likely discharge the lien and allow the sale to go through. The remaining balance will probably still be due.
For example, a house is valued at $400,000. After figuring the mortgage balance and costs of the sale, there is $75,000 in equity. A $100,000 IRS lien is discovered which puts the sale underwater by $25,000.
The IRS should be contacted (either the client can contact them or they can have a professional assist - either a tax professional or some title companies and Realtors facilitate this), and appropriate forms should be submitted, including an Estimated ALTA Settlement Statement, proving there is not enough equity to cover the full payoff of the IRS lien.
Once processed and approved, the IRS will issue an updated demand and notice for a partial payoff of the balance that comes from the equity.
Sometimes, the IRS will allow the parties to enter into a payment arrangement.
Early Detection is the Key
The IRS does not move quickly especially with the pandemic impact. These lien releases can take weeks or months (assume months) to complete, and that can have a major impact on the salability of the property. It can also make a buy-out refinance moot.
For more information, you and your clients can visit the IRS website on this issue: “What if there is a federal tax lien on my home?”
Should you have any questions about this or any other real estate related issue in your case, please do not hesitate to contact me