Question for Attorneys: Federal Tax Liens & Foreclosures
Lynlee Kane on 11 18, 2008
Could someone with Foreclosure sale experience answer the question below? Or, at least discuss the possible outcome?
Scenario:
A homeowner has a Federal Tax lien against the property. The homeowner is delinquent on their mortgage and it goes to Foreclosure. At the Foreclosure sale, the property then goes back to the lender because there were no bidders for the home.
1) Is the Lender required to pay off the Federal Tax lien at Foreclosure or resale of the home?
2) If the Lender pays off the Federal Tax lien, what recourse does the Lender have against the borrower?
3) If the Lender pays off the Federal Tax lien, has the delinquent borrower just handed off their tax burden to the Lender and walked away with no liability?
Thanks!
About the Author: Lynlee Kane
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First, the typical “Craig disclaimer” about providing not legal advice. You’d need your own attorney if you have an issue like this. I happen to know a very good tax attorney–one I sent most my tax issues to back when I was practicing. Email me if you need his contact information.
Second, the priority of federal tax liens is not first priority, like state real estate tax liens. Except for complex exceptions probably not applicable here, IRS liens are subject to the first in time rules, and I’d suspect that they are inferior to just about any mortgage lien likely to be on a property (someone would have had to have made a serious mistake in making the loan for it to be otherwise). So assuming the lien date is after the mortgage recording date, most likely it is inferior.
Third, the federal tax lien, if it is inferior will be foreclosed along with the other junior liens. I’m not certina of the rules with non-judicial foreclosures, but I think the IRS has a right of redemption that the other creditors lack. So let’s say a $500,000 property sold at auction for $50,000, the IRS could probably redeem from the sale, where other creditors would be out of luck.
Fourth, no the lender isn’t likely to have liability for the lien. About the only time that happens that I’m familiar with is where a lender loans net payroll to an employer, but not an amount sufficient to pay withholding taxes. This would merely be a lien against the property. If for some reason they paid off the lien (maybe to aid a foreclosure process), they’d probably be subrogated to the IRS’s position (again-probably–I’m not certain of that) and be able to either add it to their debt as part of the foreclosure, or collect it directly.
Fifth, if this was a missed lien at the time the loan was made, not all hope is lost. There are certain rules as to how and where liens need to be filed, and mistakes are sometimes made. Also, the lender would presumably have a title policy that would cover the claim.
Isn’t a tax lien the governments way of attaching to an asset in an attempt to collect monies owed? If they don’t get paid at the time of foreclosure, the debt still exists and they can attach to any other assets you might have, including your pay check.
I do believe a federal (IRS) lien (lien isn’t the correct word) is actually filed against a person with a social security number. This person will not be able to buy real estate without first clearing their debt with the IRS. On Prelims, title companies always search on the Buyer and Seller as well as the property itself.
I’m not sure what happens in bankruptcy, but I seriously doubt doubt they let you off the hook.
An existing tax lien on a purchase would be treated similarly to a judgment. When you get a preliminary commitment on a piece of property they always indicate that it depends on who the buyer is, and then they run the name of the buyer once known.
If a bankruptcy is involved too, then it would depend on whether the debt was discharged or not, which can be very difficult to determine. I’d suspect a title company would typically either want the lien released or a court order determining the debt was discharged.
My parents passed away and left 4 children property. There is going to be a federal tax lien b/c of my brother assessed. can we sell the property and his part pay his lien, or will we all be punished?
Amy,
Will your brother sign to have it sold? Will he agree to have the amount he owes taken from his share? If you are all 4 owners, you will need all owners to sign to sell it, and all 4 owners to sign the final statement showing how the money is to be divided.
Sounds like you need an attorney, as you might need a court order to compel the sale if you brother does not voluntarily agree.
IRS tax liens have the same ranking as other imcumberances recorded against a piece of real estate. However in the case of a superior lien foreclosing they do have a right to redeem that other lien holders don’t enjoy.
Hello, My name is Drew, and I had just bought a forcloused home in Maryland. I was told that I would be able to close on the 22nd of january 2010 ( I was told this by my relitor and broker one month before the move in date. Now its Febuary and I have no place to live, my renters “jumped ship” because I told them not to pay there next months rent and cancell your lease. The reason I was told was because someone at my lenders office forgot to mention or research that there was a tax lien on the property, now I have no where to go, and this is costing me a lot of money just to stay afloat. What are my leagal rights here, if any ? Thank you.
If the sale failed due to the fault of the seller and you had entered a real estate contract with them, you may have a breach of contract claim. But if it is simply a matter of your lender not wanting to give you a mortgage on the house because of the tax lien, you may not have much of a claim against the lender.
Talk to an attorney about this – many will do a free consultation.