ARTICLE 18: Strategies for Investors to Handle IRS Liens on Potential Acquisitions
Strategies for Investors to Handle IRS Liens on Potential Acquisitions
An IRS (federal) tax lien is one of the most feared title clouds in real estate investing. A property owner owes back federal income taxes. The IRS automatically files a federal tax lien against all the property owner's assets. Now your potential acquisition has a federal lien that clouds title, prevents financing, and blocks sale.
Most investors see an IRS lien and walk away. The property trades at a steep discount because most buyers fear the IRS and assume the property is untouchable. But to the educated investor who understands IRS lien priority, removal strategies, and negotiation leverage, an IRS-encumbered property represents another profitable opportunity.
The key insight: The IRS doesn't want to keep the property. The IRS wants the tax debt paid. If you can acquire the property at a discount and negotiate with the IRS to subordinate their lien (or pay it off from sale proceeds), you unlock significant profit.
This comprehensive guide reveals how IRS liens work, priority rules, removal strategies (discharge, subordination, or payoff), how to investigate IRS liens and find negotiating leverage, and the exact playbook for acquiring and resolving IRS-encumbered properties profitably.
The Silent Deal-Killer: What Every Investor MUST Know About IRS Liens
An IRS tax lien is a federal claim on a property owner's assets to secure unpaid income taxes.
How IRS Liens Work
- Tax Debt Accrues: Property owner owes back federal income taxes (plus interest and penalties)
- IRS Assessment: IRS sends notices and demands for payment
- Lien Filing: If taxes remain unpaid 120+ days after IRS assessment, IRS automatically files a federal tax lien against all the taxpayer's property
- Federal Lien Recorded: The federal lien is recorded in federal court records and on UCC filings with the Secretary of State
- Priority Status: The federal lien generally takes priority over most other liens (except mortgage liens recorded before the federal lien)
IRS Lien Priority
This is critical: the IRS lien priority is determined by the date the lien is filed, not the date the tax debt accrued.
Example:
- 2010: Property owner buys property with $200,000 mortgage
- 2015: Property owner owes back taxes; IRS files federal lien
- 2025: Property is sold
The IRS lien is subordinate to the 2010 mortgage because the mortgage was recorded first. Sale proceeds go: (1) 2010 mortgage paid off, (2) IRS lien paid from remaining proceeds, (3) property owner gets what's left.
But if a second lien is recorded in 2016 (after the IRS lien), the IRS lien has priority over the second lien.
IRS Lien vs. IRS Levy
Important distinction:
- Lien: Claim against property. IRS takes priority in sales proceeds but doesn't take possession
- Levy: IRS takes possession and sells the property to satisfy the tax debt
Liens are negotiable. Levies are more aggressive but less common.
Your Pre-Acquisition Playbook: How to Uncover Hidden IRS Liens Before You Buy
Before you acquire a property, determine whether it has IRS liens.
Step 1: Federal Tax Lien Search
Request a federal tax lien search from:
- Federal courthouse (search federal judgment dockets)
- Secretary of State UCC filing search
- IRS public records (if property owner name is available)
Cost: $100-$300
This identifies any recorded IRS liens against the property or property owner.
Step 2: Title Company Search
Work with your title company to include federal tax lien search in the title report. Some standard title searches miss federal liens; make sure your search explicitly includes them.
Step 3: Interview Property Owner
Ask directly: "Are there any IRS tax liens against this property or the owner?"
Many property owners will disclose if they're aware of IRS liens. Their disclosure (or refusal to disclose) gives you information.
Step 4: Research Property Value vs. Debt
If an IRS lien exists, determine:
- Property value: $300,000
- Mortgage: $200,000
- IRS lien: $75,000 (estimated unpaid taxes)
- Owner's equity: $25,000
If the property sells, IRS gets paid from sale proceeds (after first mortgage). In this case, there's $25,000 equity for the owner and plenty to pay the IRS.
But if:
- Property value: $200,000
- Mortgage: $180,000
- IRS lien: $50,000
Now sale proceeds might not be sufficient to pay everything. This creates negotiation leverage—the IRS may be willing to subordinate or compromise because they won't get paid in full anyway.
From Discharge to Subordination: Which IRS Lien Strategy Will Save Your Deal
Once you've identified an IRS lien, you have several options:
Option 1: IRS Lien Discharge
Request that the IRS officially discharge (remove) the lien from title. This is possible if:
- The tax debt is paid in full: Pay the IRS the full amount owed; lien is removed
- The lien is withdrawn: IRS agrees that collecting the lien would result in economic hardship; they withdraw the lien filing (but the debt still exists)
- The lien is released: Property sold, taxes paid from proceeds, remaining balance makes debt uncollectable; IRS releases the lien
Process:
- Contact IRS Collection Division
- Provide property details and owner name
- Request discharge if applicable
- IRS issues discharge certificate
- Record discharge with federal courthouse and Secretary of State
Cost: Varies; if you're paying the debt, cost is the tax amount owed
Timeline: 30-60 days if IRS agrees to discharge
Success rate: High if debt is paid or property is being sold
Option 2: IRS Lien Subordination
Request that the IRS agree to subordinate their lien to your new mortgage. This means:
- IRS lien still exists
- But your mortgage has priority
- IRS gets paid from remaining proceeds after your mortgage
Benefits: Allows you to refinance the property without IRS blocking the refinance
Process:
- Contact IRS Collection Division
- Propose subordination agreement
- IRS evaluates whether subordination serves their interest (usually yes, because it allows property to be refinanced and hopefully appreciate, generating more proceeds for IRS)
- IRS issues subordination agreement
- Subordination agreement is recorded
Cost: $0-$500 (IRS may charge filing fee)
Timeline: 30-90 days
Success rate: High if property has sufficient equity and IRS expects to collect from sale proceeds
Option 3: Negotiate Compromise or Installment Agreement
The IRS may agree to:
- Reduce the debt (Offer in Compromise): Pay a percentage of the owed tax; IRS forgives the rest
- Installment Agreement: Pay the debt over time (monthly payments)
Process:
- Contact IRS Collection Division
- Propose compromise or installment plan
- IRS evaluates taxpayer's ability to pay
- If approved, compromise agreement or installment agreement is signed
- Tax debt is satisfied through payments
Cost: Depends on compromise/installment terms
Timeline: 60-120 days for evaluation and approval
Success rate: 40-60% depending on taxpayer circumstances
Closing the Deal: Structuring the Purchase to Legally Remove the Tax Lien
Once you've developed a strategy for the IRS lien, structure your purchase to account for it.
Purchase Structure #1: Purchase with IRS Discharge
If the IRS will discharge the lien:
- Make offer contingent on IRS discharge
- Negotiate with IRS for discharge
- IRS discharges lien
- Close purchase with clear title
Purchase Structure #2: Purchase with IRS Subordination
If the IRS will subordinate but not discharge:
- Make offer contingent on subordination agreement
- Negotiate with IRS for subordination
- Include subordination agreement in closing documents
- Close purchase with IRS lien still on title (but subordinate to your mortgage)
- Refinance into your own mortgage (subordinated to IRS)
Purchase Structure #3: Purchase and Payoff from Sale Proceeds
If the property will be resold immediately:
- Purchase the property with IRS lien in place
- Resell the property
- Use sale proceeds to pay IRS lien
- IRS lien is satisfied and discharged
Purchase Structure #4: Negotiate Property Owner to Pay Debt
In some cases, negotiate with the property owner to pay the IRS debt as condition of sale:
- Seller pays IRS lien from sale proceeds
- You acquire property with clear title
Real-World Example: The $50,000 IRS Lien Negotiation
A property has:
- Fair market value: $300,000
- Mortgage: $220,000
- IRS lien: $60,000
Property sells for $300,000.
Proceeds distribution:
- Mortgage payoff: $220,000
- IRS lien: $60,000
- Owner: $20,000
If you acquire the property and resell at $300,000, the IRS gets paid in full from sale proceeds. IRS is likely to cooperate because they get paid.
But if you acquire at $270,000 (taking a discount for the title complication):
Proceeds distribution:
- Mortgage payoff: $220,000
- IRS lien: $50,000 (insufficient; only $50K available)
- Owner: $0
Now the IRS will get only $50,000 of their $60,000 claim. They may be willing to negotiate, subordinate, or compromise because they won't get paid in full.
Your leverage: By acquiring at a discount, you reduce the proceeds available to pay the IRS. This gives you negotiation leverage with the IRS.
The Bottom Line
IRS liens are frightening to most investors, but they're negotiable. The IRS wants tax payments, not property. By understanding IRS lien priority, discharge and subordination options, and the property's equity situation, you can often acquire IRS-encumbered properties at discounts and resolve the liens through negotiation or sale proceeds.
The next property you find with an IRS lien may be your most profitable acquisition of the year—if you know how to negotiate with the IRS.