Can the IRS Take My Home if I Don't Pay Up?
The quick and dirty answer is yes. The more realistic answer is the IRS can take your house, but probably won't. Taxpayers who owe the IRS back taxes face some strong collection laws. The IRS is permitted access to just about everything that the taxpayer owns, now or in the future. It is easy for the IRS to take the money in your bank accounts, to go after your Social Security benefits, and clean out your retirement plans. The taxpayer runs the risk of losing all of these sources of income and more. But the most dreaded fear is the loss of a home.
The IRS Doesn't Want Your House
Can the IRS seize your home and toss you in the street? Under Section 6334 of the Internal Revenue Code the answer is yes they can. This does not mean that they ever will, only that the law permits them to do so. It may be of little comfort to taxpayers with huge debts, but the IRS cannot take a home if the tax debt is less than $5,000.
The larger hurdle for the IRS -- and one that usually slows them down considerably is this -- before the IRS can seize a taxpayer's personal residence they must apply to a neutral magistrate for permission to do so. This requirement limits the ability of the IRS to act unilaterally.
While the tax man can take your bank accounts and retirement without asking a court for permission, the law requires them to ask in the case of a house. This gives the taxpayer the opportunity to work with the IRS to resolve the outstanding tax debt. The IRS does not want your house, it only wants the money. If you work out a plan to pay the money, the IRS will not take your house.
IRS Home Seizure: Equity Matters
Before the IRS will consider taking a personal residence, it must determine whether there is sufficient equity in the home to justify such a drastic measure. The IRS uses the "quick sale value," 80 percent of the full fair market value, to make this determination.
For example, if your home is worth $250,000 and the mortgage on the home is $252,000, there is no equity in the home and the IRS will show no interest in seizing it to satisfy your tax debt. But what if you owe $225,000 and the QSV is $240,000? In theory, the IRS could take the house and use the $15,000 remainder to apply to your debt. However, it is unlikely they will do so for such a small amount.
The IRS is aware that taking a personal residence is a serious act, and will, for the most part, do so only in rare situations and only after making numerous attempts to resolve the liability through other, friendlier methods.
A tax debtor does not have many options to choose from when trying to resolve tax debt. The first and most impracticable one is to pay off the debt in full. If there is enough equity in the home to merit an IRS seizure, the taxpayer should look into borrowing against that equity and paying the debt. It's one way to save the house.
The second option is the installment agreement. The problem there is that the IRS will want you to pay the debt within 60 months, often calling for a monthly payment far in excess of what you can afford.
The final choice is an offer in compromise. Under this solution, you offer the IRS an amount less than what you owe, but what you can reasonably afford to pay over time. If the IRS accepts your offer, they will stop all collection actions and you will be expected to pay the amount of your offer religiously. No more backtracking and excuses. The offer in compromise will cost somewhere between $2,000 and $3,500 to a licensed attorney or CPA. From the time you hire an attorney to prepare it for you, expect a delay of several months while the documents are collected, prepared and submitted.