Fighting a tax lien on your jointly-owned property
By Scaringi & Scaringi P.C.
Marriage, siblings, estates and family ownership can all lead to unwanted trouble from the IRS if property is owned jointly.
Should one of those joint owners be indebted to the IRS, the tax agency can attach liens to a debtor’s current and future property. Should you be unlucky enough to hold joint ownership rights in real estate with someone who owes money to the IRS, their lien can become your own personal nightmare. At its worst, it can bar you from selling or borrowing against real estate you once owned free and clear.
Tax liens follow the individual, and can do so for decades, if the IRS takes steps to avoid statute of limitations issues. The lien can attach to property the debtor currently owns, and may own in the future, such as with a spouse, with a sibling or through an inheritance.
An ounce of prevention
Many legal clients find themselves unwittingly marrying into tax trouble.
Under the law, the lien only covers the portion of the property owned by the debtor. Realistically, however, the lien is an absolute barrier to selling jointly owned real estate until the lien is resolved. It can also hamper borrowing against the property.
The best way to deal with this situation is to avoid it altogether. Do your due diligence and find out as much as you can about your fiance’s financial history. Once you are married and buy real estate, your spouse’s past can soon become your painful present. If you do marry into tax trouble, an attorney can help you do careful planning from the start to protect yourself, and you should encourage your spouse to resolve the tax debt immediately.
When preparing a will or planning an estate, you and your attorney should also be aware of your beneficiaries’ finances. If you leave a house to your two children and one of them owes money to the IRS, a tax lien could tie up that real estate for the other child as well.
When prevention fails, there are several ways to break free of tax liens.
Discharging property from a federal tax lien
IRS liens, like most other claims, are subject to statutes of limitations. If the IRS failed to take necessary legal steps to preserve the judgment against your property, the lien could simply lapse without any payment at all. It can be dangerous to plan for this, though, as the IRS has options to revive and extend the statute of limitations.
Even if the IRS has a valid lien against the tax debtor, a lien does not encumber the innocent co-owner’s share of the property. A good lawyer can help negotiate the discharge of the lien from the property, possibly even for less than the full tax debt. This prevents an IRS foreclosure, and ensures that the innocent spouse or family member’s full share of the property is protected.
Short of simply paying off the full debt, various negotiating tactics can remove the lien.
If it can be argued that the property has no value, the IRS may back off and allow the lien to be released.
A second strategy revolves around negotiating with the IRS to remove the lien by accepting a lesser amount than what’s owed. The IRS may take this route if it can be demonstrated through simple math that the value of the debtor’s portion of the real estate cannot cover the full debt.
In cases where the debtor has no other assets or income, the agency has been known to take a lesser sum if that’s all its property lien will yield.
In the reverse case where the debtor has plenty of other assets to cover the tax debt, the IRS may agree to release the jointly owned property and pursue other assets instead.
Lastly, the escrow strategy attempts to navigate the Catch-22 dilemma inherent in an IRS lien: the property cannot be sold until the IRS lifts its lien. Yet, the agency cannot get its money until the property is sold. If the IRS approves an escrow agreement for a fair market value sale, it will release the lien and allow the sale to go through.
Dealing with the IRS
Applying for this kind of tax lien discharge is the most common strategy for joint ownership issues, but every application is different and must be carefully crafted. A skilled tax attorney will help you find the strategy that is most appropriate to your circumstances, comply with all of the IRS’s requirements, and negotiate the lien release on the most favorable terms possible for you. Otherwise, there is no guarantee the IRS will accept the deal.
A skilled tax attorney will help you deal with the IRS so you don’t have to.