Can the IRS Take Your Home if You Owe Back Taxes?

Can the IRS Take Your Home if You Owe Back Taxes?

The Internal Revenue Service (IRS) has powerful tax collection tools at its disposal. This includes using a tax levy to seize property, which can include paychecks, bank accounts, and your home. In addition to using a tax levy, the IRS may also use a tax lien. Regardless of which collection method the IRS uses, it can put you at risk of losing your home. To prevent this from happening, it’s best to get a better understanding of how the IRS could try to take your home and what options you have to prevent it. 

Is the IRS Empowered to Engage in Property Seizures? 

Yes. One of the reasons why the IRS is so effective in collecting federal tax debts is because of its ability to seize and take property. The IRS can seize your home, business, vehicles, and other assets. 

This sounds scary, but the good news is that the IRS doesn’t often seize someone’s residence. In the United States, the IRS typically seizes only a few hundred homes each year due to unpaid taxes. But instead of seizing your home with an IRS tax levy, the IRS may place a lien on it instead.

Tax Levy vs. Tax Lien

Two of the IRS’s major tax collection tools are the tax levy and the tax lien. A tax levy tends to create more tax problems for the average taxpayer, as it allows the IRS to seize a taxpayer’s property due to unpaid taxes. The IRS can place a tax levy on almost any type of property that’s not specifically exempt. But tax levies are more commonly used to seize wages through the use of wage garnishment or taking cash out of a bank account with a bank levy.

Property That’s Exempt From Tax Levy

Section 6334 of the Internal Revenue Code lists the types of property that are exempt from an IRS tax levy. Some of these include:

• Clothing

• Furniture and personal property

• Any books or tools necessary for the taxpayer’s business or work

• Unemployment benefits

• Child support

One thing you’ll notice about these exemptions is that they don’t include a taxpayer’s primary residence. That said, a taxpayer’s home is normally one of the last pieces of property the IRS will seize when trying to collect back income taxes. Instead, the IRS prefers to use the tax levy to first go after liquid assets. Liquid assets are types of property that consist of cash or are easily converted into cash, like a tax refund or bank account.

Even though the IRS usually won’t seize a taxpayer’s home, the IRS’s ability to seize other assets can put the taxpayer at risk of losing their home. For example, if the IRS puts a tax levy on your bank account, you may not have the cash to make your monthly mortgage payments. Then, if you fall behind on your mortgage, you risk putting your home into foreclosure.

Seizing a Home With a Tax Levy

Before the IRS can seize your home with a tax levy, two conditions must be in place. First, your tax debt must be more than $5,000. Second, the IRS needs a court order from a federal judge authorizing the tax levy. Assuming both of these conditions exist, the IRS must post a notice of seizure in an easy-to-see part of the property. This often means placing the notice on the home’s front door. And if the IRS knows where you are, they’ll also need to hand-deliver a notice to you.

It’s important to note that things could be slightly different if the IRS is going after a home that’s jointly owned by a married couple. If the tax debt belongs to just one spouse, the IRS will generally be unable to seize the jointly owned property. However, seizure of a jointly held home is possible if the spouse without unpaid back taxes is legally liable for the tax debts of the other spouse.

Using a Tax Lien

If the IRS isn’t ready to seize property with a tax levy, it may choose to use a tax lien instead. A tax lien is different from a tax levy because it doesn’t involve the taking of property. Instead, it places a legal claim on the property to protect the IRS’s interest in it. An IRS lien can apply to almost any type of property but is normally most effective when placed on real estate. If the property eventually sells, some or all of the proceeds go to the IRS. If the taxpayer receives enough money from the sale to pay off the tax liability, the lien gets released.

Collection Due Process 

The IRS tax levy can have drastic consequences for you. That’s why tax law gives you collection due process (CDP) rights, which require the IRS to follow specific steps to collect a tax debt from you by using a levy. 

Step 1: The IRS sends tax bills.

In step one of the CDP, the IRS sends you several tax bills over a few months. During this stage of the IRS collection process, you’ll have several options to try to settle your tax debts:

• Installment agreement: The installment agreement creates a payment plan that allows you to pay back taxes with monthly payments.

• Offer in compromise (OIC): An OIC lets you settle your tax debt for less than the full amount. Not everyone will get an OIC just for asking. The IRS will only grant it if you meet certain conditions.

• Partial Payment Installment Agreement (PPIA): The PPIA is a little bit like the OIC and installment agreement in that you make monthly payments. But with a PPIA, you don’t have to pay back the full amount of your tax debt. As is the case with the OIC, the IRS has discretion in deciding if you qualify for a PPIA. 

Step 2: The IRS sends you a Final Notice of Intent to Levy.

Also known as a 1058 letter or LT11, this letter will explain your rights. This includes the right to a hearing with the IRS Appeals Office. During this appeal, you’ll have the opportunity to mount defenses to the tax levy. One potential defense is that the IRS’s levy won’t bring in enough money to pay off the tax debt.

Step 3: The IRS prepares for a property auction.

This includes the IRS providing all the necessary notices letting you and the general public know about the tax sale. This typically means posting in public locations and advertising in the local newspaper. The IRS will also calculate what it believes to be the fair market value of your home and give you a chance to challenge that determination.

Step 4: The property is auctioned to pay off the tax debt.

After the IRS sells the home for fair market value, the proceeds will go to paying off your tax debt and any costs the IRS incurred seizing and selling the property. Any money that’s left over will be given back to you. You will also have the right of redemption, which gives you the right to buy your home back after the auction.

Other Options for Stopping IRS Seizure

If the IRS has seized or is about to seize your home, you have two ways to delay the proceedings. One option is to file Form 911, which is the document you need to file a request with the Taxpayer Advocate Service for economic hardship. Usually, after you file this form and explain your economic hardship, the IRS must stop its seizure attempt. The IRS must then consider your request for help. If it denies your request, you can file an appeal, which will be heard by a tax court that’s located in the U.S. District Court where you live.

You can also file for bankruptcy. Even though bankruptcy can’t discharge all tax debts, filing bankruptcy will at least temporarily stop the IRS’s seizure of your home. This is because when you file bankruptcy, the court issues an automatic stay that requires all collections activities to stop. This gives you time to figure out how to manage your debt and make the best use of either Chapter 7 or Chapter 13 bankruptcy. You may qualify to file Chapter 7 bankruptcy for free using Upsolve’s online tool. You can also find a free consultation with a qualified bankruptcy attorney.

Let's Summarize... 

The IRS can take your home and sell it if you’re behind on your taxes. But before the IRS seizes your home, they’ll often use other tax debt collection tools. These include the federal tax lien, bank levy, or wage garnishment. Because of the time and money it takes to seize and sell a home with a tax levy, it’s usually a last resort for the IRS. Instead, the agency usually starts by using a levy to take liquid or cash assets.

In the rare instance that the IRS uses a tax levy to seize your house, the IRS must follow the collection due process procedures put into place to protect your rights. If you want to make full use of these due process tax rights, consider consulting with a tax attorney who can best explain your tax issues and help you decide what to do next.