Can the IRS take your house if you owe back taxes? The Internal Revenue Service can seize a variety of assets to settle unpaid tax debt. But unlike other property, the IRS must obtain a court order to do so.
This article will help you understand a little more about:
- How the IRS collections process works
- What you should do if you have overdue taxes
- How to avoid legal seizure of your property
- What your options might be in case of property seizure
Let’s start with a brief overview of the IRS collections process.
How does the IRS collections process work?
It’s important to understand the IRS collections process involved. Specifically, you should understand how much control you have over your situation before the IRS seizes your primary residence.
On behalf of the federal government, the IRS follows specific collections procedures, based upon the Internal Revenue Code and Treasury regulations. Everything is laid out in the Internal Revenue Manual, specifically Part 5. Collecting Process.
Although we’ve written an in-depth article about the collections process, below is a brief overview.
1. Calculate tax liability
Usually, taxpayers do this when they file their income tax return. For taxpayers who do not file an income tax return, the IRS will eventually calculate your tax bill based upon the various forms that they receive. This might include:
- Compensation amounts from submitted W-2 statements and 1099-MISC from your employer
- Investment or other earnings as reported by Form 1099 regarding your financial accounts or retirement accounts
The important part thing to remember is that if you haven’t filed your income tax return and you owe federal income taxes, the IRS can hold you accountable for your unpaid taxes as well as interest and penalties.
Even if you can’t pay your tax bill in full, it’s a good idea to file your tax return on or before the tax filing deadline. Your tax situation only will get worse if you avoid filing.
2. First bill
After you’ve filed your tax return, if you still have outstanding taxes, the IRS will send you your first tax bill. This officially starts the collections process.
Generally, your bill will give you the option to pay your taxes in full, or invite you to discuss a payment arrangement if you cannot do so.
Installment agreement as a payment option
When you call the IRS about your payment options, you’ll be speaking directly with an IRS agent, also known as a revenue officer. A revenue officer’s job is to convince taxpayers to commit to paying:
- As much of their tax liability as possible
- As soon as possible
A convenient way to do this is to set up an installment agreement. This allows you to make monthly payments and work down your delinquent tax debt over time. This might be the best option for someone who:
- Has positive cash flow and can pay something, but
- Cannot pay the entire balance at once
You can set up an installment agreement to come from your bank account, or you can file IRS Form 2159 to set up a payroll deduction agreement.
The most important thing: While you’re making payments on an approved payment plan, the IRS collections actions stop. As long as you make your monthly payments, an IRS seizure cannot happen. So your home stays safe.
3. Second bill
If nothing happens after the first tax bill, the IRS will send a second one. There isn’t a lot of difference here, but these IRS notices serve a purpose.
That purpose is to fulfill the due process requirements before the federal government starts to escalate the collections process.
Again, if you take immediate action, such as paying your tax bill in full or setting up an installment plan, then you have control over how you pay down your outstanding debt. This is the best way to maintain control over your tax issues.
4. Notice of federal tax lien
If you do not take action after the first or second tax bill, then you can expect to receive a notice of federal tax lien.
Even at this point, the IRS isn’t taking any property. A tax lien is the government’s way of laying a claim on assets that you own, in case you try to sell them.
How does a tax lien work?
A common example of how a tax lien might work would be real estate, such as a vacation home. If you decide to sell a second home because money is tight, then a federal tax lien helps ensure that the federal government gets paid first.
After the costs of the sale (such as real estate commissions, settlement costs, etc.) the proceeds first settle any outstanding tax debt.
After that, then you receive any left over money.
- Financial assets, such as your bank accounts
- Real estate, such as your house or a rental property
- Personal property, such as your car, a boat, or valuables
An IRS lien on a primary residence is fairly common, even if the IRS does not intend to actually seize the house. A tax lien helps to ensure that the IRS receives money in case of a sale or a mortgage refinance.
But if an IRS tax lien doesn’t help convince the taxpayer to settle their tax bill, the IRS has no choice but to actually start seizing assets.
5. Federal tax levy
As a last resort, the IRS will send you a CP504 notice, also known as a Final Notice of Intent to Levy. At this point, the IRS might actually seize the house.
An IRS levy permits asset seizure of a lot of things just so the government can get paid. Additionally, the federal government can place a levy on sources of income, such as:
Even after seizing property, there are things that a homeowner can do to get their house back.
When can the IRS take your house?
The IRS can seize a taxpayer’s primary residence as a final resort in the collections process. This happens after:
- Calculation of outstanding tax liability
- IRS has sent at least 2 tax bills to the taxpayer
- IRS has issued a notice of federal tax lien, and
- The taxpayer has demonstrated:
- Lack of communication during the process
- Continued nonpayment of outstanding tax liability
- No indications of immediate economic hardship or willingness to pursue payment plan options
In other words, the IRS can only take your house if all other means of resolving past due taxes have failed. But if your house is underwater because your mortgage makes it impossible to get much money by selling at fair market value, then the IRS might look for something else, instead.
But unlike the process of taking your car or other personal property, the IRS cannot seize a primary residence without judicial approval.
Court order required for IRS seizure of a taxpayer’s primary residence
This is a matter of tax law, not just an IRS policy.
According to Internal Revenue Code Section 6334(e)(1)(A), “A principal residence shall not be exempt from levy if a judge or magistrate of a district court of the United States approves (in writing) the levy of such residence.” IRC Section 6334(e)(1)(B) further clarifies that federal district court is the appropriate jurisdiction to enforce tax levies on a taxpayer’s principal residence.
Treasury Regulations 301.6334-1(d) further clarifies a principal residence as any real property used as a primary residence by the taxpayer, taxpayer’s spouse or former spouse, or taxpayer’s minor children.
So unlike other property seizures, the levy process for a primary residence must include judicial approval from a U.S. district court.
Finally, Section 6334(a)(13)(A) of the tax code exempts a primary residence from seizure unless the full amount of taxes owed is $5,000 or more.
How do I avoid having the IRS take my house?
Paying taxes in full is the best way to avoid IRS seizure of taxpayer assets.
Besides that, good communication, making tax payments when possible, and attempts to get into a payment arrangement are all ways to avoid asset seizure.
Here are some other options.
Contact the taxpayer advocate service (TAS)
The Taxpayer Advocate Service is a federal agency within the IRS that exists solely to represent taxpayer rights, and to ensure that the federal government respects those taxpayer rights.
If a revenue agent is cutting corners to get you to pay more money faster, the Taxpayer Advocate can step in and hold the IRS accountable. For free.
Contact a tax professional
You may learn more about your options by hiring a tax expert, such as a tax attorney. Not only can a tax attorney give you tax advice, but they can help give you legal advice and navigate tax cases through the court system. This might be an option if you do not agree with your tax liability, or you feel that your tax assessment was done improperly.
If you agree with your tax bill, then a tax professional can help you navigate the system. But you’ll spend a lot of money to do something that you might be able to do yourself. Money best spent on paying down your tax debt.
Most tax attorneys, CPAs, or enrolled agents will offer a free consultation to discuss your tax assessment and explore your options.
What can I do if the IRS has seized my house?
Even after an IRS seizure, you still have options as a taxpayer. Let’s see what happens to a taxpayer’s property after it’s been seized.
What happens after the IRS seizes your house
According to IRS Publication 594, the IRS will take the following steps prior to selling your property:
Step 1: Calculate a minimum bid price
The IRS agents will work with certain subject matter experts, known as property appraisal & liquidation specialists, or PALS, on determining the minimum amount that the IRS will accept for the sale of your seized property.
Step 2: Provide adequate notice
The IRS will provide the taxpayer a copy of the minimum bid price calculation, as well as an opportunity to challenge the fair market value determination.
After that, the IRS provides notice of the pending sale. Generally, this includes an announcement through local newspapers or flyers posted in public areas. You can also see public notices online.
Step 3: Provide waiting period before selling property
After the announcement of the upcoming sale, the IRS generally will wait for at least 10 days before selling property. During this period, a taxpayer can still satisfy their IRS debt to obtain a seizure release and stop the pending sale.
Even if the IRS actually sells your property, it can only keep the amount of the proceeds required to satisfy the outstanding debt. The IRS must allow taxpayers to collect any additional proceeds from the forced sale.
When the IRS might return seized property
There are several instances where the IRS might return seized property, even if the taxpayer still has outstanding tax debt.
According to IRS Publication 594, the IRS might release seized property in any of the following situations:
- The seizure was premature
- The seizure was not legal
- Returning the seized property will help resolve the outstanding tax debt
- The taxpayer enters into an Installment Agreement to satisfy the liability for which the levy was made,
- Unless the agreement does not allow for the return of previously levied upon property
- The IRS didn’t follow IRS procedures, or
- It’s in the taxpayer’s best interest and in the best interest of the government
Furthermore, the IRS is required to return seized property under the following circumstances:
- The taxpayer pays the amount owed
- The period for collection ended prior to the seizure being issued
- The seizure creates an economic hardship, meaning the IRS has determined the seizure prevents the taxpayer from meeting basic, reasonable living expenses, or
- The value of the property is more than the amount owed and releasing the seizure will not hinder the IRS’ ability to collect the amount owed.
But even if the IRS doesn’t return your property before selling it, there is still a way to get it back after it’s sold.
Return of seized property after it’s been sold
Even if the IRS has filed a tax lien against your house, actually seized the property, and sold the property at a public auction, you can get your house back.
IRC Section 6337 allows for any taxpayer to redeem the sold property within 180 days of the sale. However, the taxpayer must reimburse the buyer the full amount of the sale, plus interest. The prevailing annual interest rate is 20%, compounded daily.
If you find yourself in tax debt, it’s important to understand how serious it can be. While there are certain things that the IRS cannot take away from a homeowner, the IRS can and may seize your primary residence if you do not eventually pay your tax bill.
To avoid this, it’s paramount that you communicate quickly and frequently with the IRS. You may find that your accountant or tax attorney can help to a point, but only to the extent that you’re willing to work towards the goal of keeping your house. Finally, you can engage the Taxpayer Advocate Service to ensure that the IRS collections process is handled in a fair manner.
Still have doubts! Feel free to email me and tell me about your situation. If I can’t help you, I can probably help you find resources to get out of tax debt and get back on your feet!