equity is key.
by eric l. green
tax rep network
“i know i can’t sell the property because the irs has a lien for $80,000 it filed two years ago and there is not enough equity, and i don’t have the money to pay them.”
more: tax: explaining the bad news about canceled debt to clients | offers in compromise aren’t for everyone
exclusively for pro members. log in here or 2022世界杯足球排名 today.
ever heard this? we do, on almost a weekly basis. there is a lot to unpack there, but to cut to the chase:
- the amount owed on the notice of federal tax lien is not the actual balance, as penalty and interest may have accrued and payments against it may have been made, or refunds/levied funds may have been applied. to know what is owed we will need to get a current balance from the irs.
- the irs will allow the house to be sold out from under its tax lien so long as the taxpayer can show that it (the irs) will receive its interest, whatever that happens to be.
the goal of the federal tax lien is not to put the screws to the taxpayer and lock up assets until full payment is made. the federal tax lien is simply meant to protect the government’s interest in the taxpayer’s assets. the irs does not need to file anything for the lien to exist; the lien comes into existence automatically by statute when demand for payment is made by the irs and payment is not forthcoming. however, nobody knows about the lien except for the irs and the taxpayer, and even the taxpayer usually does not know it exists. hence the irs may choose to file a notice of federal tax lien.
a notice of federal tax lien is meant to give third-party creditors notice that the irs is owed money and therefore has an interest in the taxpayer’s assets. the lien protects its interest in those assets to make sure the taxpayer cannot transfer them away without the irs obtaining value for its interest. so, what is the irs’s interest in the taxpayer’s assets?
the irs is said to “step into the shoes” of the taxpayer, meaning the irs’s interest is equal to that of the taxpayer, limited to what it is owed. for instance, if a taxpayer owed the irs $100,000, and he owned a piece of real estate worth $400,000 that was encumbered by a mortgage to the bank of $350,000, then the irs’s interest in the property would be $50,000, the equity that belonged to the taxpayer and to which its lien attached. the irs would agree to a sale of the property that saw it receive 100 percent of its interest, meaning the $50,000 of equity.
now say the same taxpayer’s property was worth $400,000 but they owed the bank $450,000. if the taxpayer sought to do a short sale and get out of the property, the irs – after confirming all the details and that it was a legitimate sale – would agree to release its lien and let the buyer take good title, despite the fact that it (the irs) would not receive anything. the taxpayer had no equity, so the irs’s interest in the property is zero.
to answer the opening question, yes, taxpayers can sell property out from under a federal tax lien using irs form 14135 and providing support to show that the sale is a legitimate sale for market value. so long as the irs will receive its interest (and that the taxpayer is not walking off with value the irs should otherwise have received), the sale should be approved and the property released from the tax lien.