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Can You Buy a House If You Owe Back Taxes?

Owing back taxes can complicate the process of buying a home in several ways. A tax lien is a legal claim by the government against the property of an individual or business entity that has failed to pay tax debt. A lien attaches to all property and rights to property of the taxpayer. The filing of a tax lien can significantly harm a taxpayer’s credit score and is a public filing generally accessible to lenders. Lenders typically require proof of tax compliance before approving a mortgage. Unresolved tax debts can make it difficult to obtain a mortgage since it gives the government a legal claim to the property, which takes precedence over the lender’s claim.

Taxpayers should keep in mind that a tax lien differs substantially from a tax levy. A tax levy results in the actual taking of property to satisfy the tax debt. Unlike tax liens, tax levies are not a matter of public record and do not directly affect a taxpayer’s credit report. However, because levies involve the seizing of assets, they typically cause more problems for taxpayers than liens.

There are several ways to address back taxes to improve the chances of buying a home. Installment Agreements, Offers in Compromise, a Tax Lien Discharge, or Subordination are all avenues for taxpayers to pursue relief. When entering into an installment agreement with the IRS, for instance, the Service may agree to withdraw a tax lien if the taxpayer owes $25,000 or less, agrees to direct debit payments, and meets other specific criteria set by the Service. Withdrawal of the lien can help improve a taxpayer’s credit score and remove the public notice of the tax debt.

Taxpayers should also know that the IRS only accepts an OIC if it believes that the offered amount is the most it can expect to collect within a reasonable period. To qualify for an OIC, taxpayers must meet strict requirements and disclose a great deal of financial information. The IRS may then agree to withdraw a tax lien after an OIC has been accepted and paid. This typically requires a formal request from a taxpayer using IRS Form 12277. Hone Maxwell LLP has experience in negotiating the release of liens.

Disclaimer: Hone Maxwell LLP articles and blogs are not intended as legal advice. Additional facts, facts specific to your situation or future developments may affect subjects contained herein. Seek the advice of an attorney before acting or relying upon any information herein.

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