IRS Tax Liens vs. Mortgage—Which Takes Precedence?

The Internal Revenue Service (IRS) is legally authorized to place a lien against all assets owned by a taxpayer, including his real estate properties, if he fails to pay his overdue taxes within 10 days upon receipt of formal notice of debt. Although the IRS has the right to claim any of the debtor’s assets, however, it does not take precedence over previously recorded liens.

If the IRS files a lien on your home, it still cannot undermine your mortgage lender’s right to recover your unpaid balances through foreclosure. The IRS may seize and foreclose your home but it has to pay your mortgage lender the remaining amount you owe. To protect its future interest on your property, the IRS must first send you a “Notice and Demand for Payment”. If you take no action within 10 days, it will file a “Notice of Federal Tax Lien” on your public records to make their tax claim over your house known to other creditors. Consequently, IRS liens will take priority over subsequent liens filed by your other creditors.

IRS liens can make it difficult for you to apply for a new mortgage should you wish to save your home. Thus, you’re less likely to refinance your existing mortgage unless the IRS frees you from its lien. One remedy is to apply for subordination with the help of a lawyer. Here, the IRS allows you to prioritize your mortgages first, thereby helping improve your credit rating and making application for financing easier.


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