Can the IRS Take Your Home?

If you’re going through tax issues, it’s completely normal to worry about losing your home to the Internal Revenue Service (IRS). The whole process of dealing with IRS agents and reading through complicated notices can be very stressful.

The short answer is yes, legally the IRS can take your home. But it’s important to remember that as a taxpayer, you have options. This article explains how the IRS goes about taking someone’s home, and what you can do to stop it from happening to you.

The IRS Can Seize Your Home for Back taxes, But Probably Won’t

If your tax return shows that you owe money to the IRS, you have tax debt. When someone doesn’t pay their taxes from a previous year, they will owe those taxes to the IRS the next year, and usually receive a tax bill. Unpaid taxes from a previous year are called back taxes. If you continue to not pay your taxes, the IRS will take steps called enforced collection actions to recover the unpaid taxes.

One of the things the IRS can do is take your personal property using a tax levy. A tax levy allows the IRS to take your wages, money in your bank account, and other personal property, including your home.

That being said, it’s very unlikely that the IRS will seize your home this way. In a nation of 330,000,000 people, homes are only seized about 300 times per year. 

In reality, if you have tax debt you run a much higher risk of losing your home from other problems caused by tax levies. This happens because the IRS usually uses their levies to take money out of your paychecks and from your bank accounts. This can cause you to miss mortgage payments, which can lead to your mortgage company foreclosing on your home.

Why the IRS Would Prefer a Lien to a Levy on Your Home

A federal tax lien, sometimes called an IRS lien, is a claim put against a property by the IRS. The lien protects the IRS’s interest in the property so that when it’s sold, the IRS gets paid for the amount of the lien. 

Generally, the IRS would rather use a tax lien to recover unpaid taxes from the sale of the home because they’re easier to use. They’re also better for taxpayers. When the IRS has a tax lien on a house, they will release the lien as soon as the house is sold as long as the proceeds from the sale are enough to pay for the tax debts. 

Although the tax debt is usually paid when the house is sold, it’s not the only way to remove a tax lien. If you’d like to pay your tax debt to remove the lien without selling your house, you may be able to refinance your mortgage to get the money you need to pay the debt. The IRS has a process that allows taxpayers to make this request. 

To do this, you have to ask the IRS to make their tax lien on the house “secondary” to the new refinanced mortgage. If the IRS agrees to do this, their lien becomes a subordinate lien. This just means that their lien is placed on the property after someone else. Here, that “someone else” would be the bank that agreed to refinance your home and give you a new mortgage.

Of course, in the request to the IRS, you would need to agree to use the extra money from the new mortgage to pay off your tax debt. The IRS will release the lien as soon as they get paid from the additional money provided by the new mortgage.

How the IRS Uses Tax Levies

A tax levy allows the IRS to garnish your wages, money in your bank account, and any other personal property that isn’t exempt under the Internal Revenue Code (IRC) § 6334. Assets exempt under this tax law include your unemployment benefits, child support, among others.

The IRS always prefers to use garnishments and tax levies to seize liquid assets first. Liquid assets are things you own that can easily be turned into cash. For example, your bank account, your wages, and any future tax refunds are liquid assets. 

Your primary residence isn’t exempt under IRC §6334, but it’s still at the bottom of the list of assets the IRS wants…

How the IRS Can Seize Your Home with Tax Levies

Before the IRS can seize your home using a tax levy, the following requirements must be met:

1. You must owe more than $5,000 in back taxes; and

2. the IRS must have a signed order from a federal district court judge or magistrate.

Even if these requirements are met, if only one spouse owes the IRS, the other may be able to stop the seizure if the home is jointly owned. Generally, whether this is possible depends on whether one spouse has tax liability for the other spouse’s tax debt.

Also, by executive order, until at least June 30, 2021, the nation has a foreclosure and eviction moratorium due to the COVID-19 pandemic for federally guaranteed mortgages. Moratoriums prevent foreclosures and evictions from moving forward. It isn't explicit that this would apply to an IRS seizure and sale, but it seems unlikely that the IRS will seize a primary residence while this order is in place.

If the IRS moves forward with seizing your home, they must post a notice of seizure prominently on the property—usually on the front door of your house. If the IRS knows where you are, they must also attempt to hand-deliver the notice to you.

The IRS Will Auction Your Home After Seizure

After the IRS has seized your home, they’ll sell your home for fair market value at an auction. Before the auction, they’ll publish the date and time of the auction in the legal notices section of the local newspaper. The IRS will also post the auction information on a bulletin board at the local IRS office or the nearest federal courthouse.

Just because the home sells at an auction, it doesn't mean you have to move right away. To remove you from the home, the new owner has to file an eviction lawsuit against you in the local state court. Current COVID-19 federal or state eviction moratoriums could apply. The moratorium can give you more time to plan your next steps before being evicted.

Right of Redemption

You also have the right to buy your home back after the auction. This is called the right of redemption.

To buy your home back this way, you have to pay the auction purchaser the full bid price plus 20% annual interest within 180 days of the sale using either cash or certified funds. Certified funds are funds that are guaranteed to clear or be paid for by the company certifying them.

Even though home seizure is generally uncommon, not all real estate is the same. Unlike primary residences, second homes and vacation homes are much more likely to be seized by the IRS.

Is There a Way to Stop the IRS From Taking My House?

As a taxpayer, you have collection due process (CDP) rights. These rights require the IRS to follow certain procedures. Through this process, you might be able to stop the IRS from taking your home.

First, through the CDP, the IRS must notify you that they will seize your property by sending a 1058 letter, or “Final Notice of Intent to Levy.” This letter must notify you of your right to a hearing with the IRS Appeals Office before that levy can occur. The CDP hearing is an opportunity for you to make arguments against seizing your home. 

At this hearing, you can try to convince the revenue officer handling the case for the IRS that the house wouldn't bring enough money to cover the mortgages and the cost of the sale. Then, you can try to get “currently not collectible” (CNC) status. The IRS can give you this status if paying taxes would cause “significant hardship.”

Obtaining CNC status is important because the IRS wouldn't be after your house if there was anything else of value. 

CNC status isn’t permanent. The IRS will review it periodically. So, it’ll only buy some time if your mortgage balance is decreasing and/or the property value is appreciating (going up). If your home is a mobile home on rented land, CNC may be a permanent solution.

There are also other ways to get tax relief to stop the IRS from seizing your home…

Settle with the IRS

You can offer to settle your tax debt with the IRS in the following ways: 

• Offer in Compromise (OIC): An OIC allows you to pay some of your taxes, but not the full amount. Whether you qualify depends on the circumstances of your case.

• Partial Payment Installment Agreement (PPIA): A PPIA with the IRS allows you to pay back the IRS every month. Through a PPIA, you will not have to pay back the full amount. Just like with OICs, you have to meet certain requirements to qualify for a PPIA.

• Installment Agreement: An installment agreement with the IRS allows you to pay your back taxes to the IRS through monthly payments. 

File a Form 911 with the Taxpayer Advocate’s Office

You also can file a Form 911 with the Taxpayer Advocate’s Office to request assistance with economic hardship. You would have to claim that losing your home would cause hardship justifying assistance. Usually, the IRS must stop while the Taxpayer Advocate is considering the case. 

In addition to filing a Form 911, you can contact your congressperson as a last resort. Even though the Taxpayer Advocate was created to keep Congress out of the process, if you’ve tried everything else, you may as well try your congressperson.

If the Taxpayer’s Advocate Office denies your request for assistance, you can file an appeal. The appeals will go to a special federal court called a tax court which is located in the U.S. District Court where you live.

File for Bankruptcy

Filing for bankruptcy can help you keep your home. How depends on the type of bankruptcy you file. 

How can a Chapter 7 Bankruptcy Help? Chapter 7 bankruptcy can help stop a home seizure by your tax debt through discharge of certain income tax. However, Chapter 7 discharges only old tax debts and won’t eliminate  federal tax liens that were placed on the property before you filed for bankruptcy.

How can a Chapter 13 Bankruptcy Help? Chapter 13 bankruptcy allows you to set up installment payment plans for your debt. More importantly, filing under Chapter 13 will protect your home from the IRS while you make payments.

Let’s Summarize…

Although tax problems can lead to property seizures, it’s highly unlikely the IRS will take your home, especially if the COVID-19 moratoriums apply to IRS home seizures. 

And even if the IRS decides to take it, you have collection due process rights. To stop the seizure, you have options with the IRS, including settling with the IRS or filing a Form 911. And if it’s the right choice for you, you can file for bankruptcy, which can also help you keep your home.