A tax lien is like a mortgage. It is a document filed at your local county recorder’s office securing the debt you owe to the IRS. When you go to sell your real estate, the tax lien must be satisfied before you ever get your money and title is transferred to the new owner.
Do not think that the IRS will not file a tax lien against you. It files more than 1 million tax liens every year. Since tax liens make your property harder to refinance, and possibly even more difficult to sell, it behooves you to get rid of these liens.
1. Wait: The statute of limitations for collecting taxes through a tax lien is 10 years. That means that if the IRS filed a tax lien against you in 2006 and you neither sold your house, refinanced, nor paid the tax, the IRS must remove its lien by 2016.
2. Have the lien subordinated: You can always borrow money against your property’s equity to pay off the lien, except that no lender will loan money to you if you have a tax lien. It’s a classic Catch-22.
What you can do is get the IRS to subordinate its lien to the new lender. This means that the IRS allows the new lender to take primary position for funds upon any future sale and the IRS agrees to take second position. By getting the first position, the lender will then lend the money. However, the only way that the IRS will agree to this is if it gets some of the money owed upon the closing of the refinance.
3. Have the lien removed from some of your real estate: A tax lien attaches to all of your realty. The problem is, again, selling property is difficult with a lien attached to it. The IRS may agree to release a lien against one of your properties and keep the lien as to others.
The catch? The IRS must get some of the proceeds from the sale.
4. Settle: The last option is to get the IRS to settle its claim with you for less than you owe and release its liens in exchange for payment in full of the agreed-upon lesser amount. This is the best option. Called an “Offer in Compromise,” this possibility is discussed in detail later in this chapter.