Once the IRS files a federal tax lien, all other creditors or potential buyers have notice of the lien. If someone buys your home, they will be buying the home subject to the lien unless you are able to negotiate a lien discharge. If you attempt to refinance your home, you will run into difficulties because the lender will not want their lien to be in a junior position to the IRS tax lien.
The general rule for lien priority is “first in time, first in right”, so if your first mortgage was recorded prior to the recording of the IRS tax lien, the first mortgage lender retains their priority. However, if the loan were refinanced, the lender would lose priority and fall behind the IRS if the home was foreclosed upon and the funds were disbursed to lienholders.
The IRS could give up its priority—which is known as tax lien subordination—which would allow the new lender to take a senior position to the IRS lien. Unfortunately, the IRS is not going to make such a gesture out of goodwill alone. They are only going to subordinate their lien interest if you have something to offer them, which usually takes one of two forms.
First, you can offer them cash equal to the amount of their interest that they are subordinating. If you have a current mortgage loan of $240,000, and want to refinance the loan for $270,000, the IRS will lose lien priority on $30,000 worth of value if they agree to subordinate their lien. By giving them $30,000, they don’t lose out on any of this value, and you will be permitted to refinance your mortgage.
The second situation where the IRS may subordinate its lien is if you can show the IRS that subordinating the lien will improve your financial situation, and that improvement will directly result in an easier collection of the tax liability. This could involve refinancing a loan at a lower interest rate, which will save you money on interest payment. The money you save must then result in higher payments to the IRS, typically in form of an increased monthly payment on an IRS installment plan.
If the IRS agrees to subordinate its lien, the lien will remain on the property in a junior position to the new lien. You will still be responsible for the entirety of your delinquent tax debt, not including any amounts you pay to the IRS in return for their tax lien subordination. Consult with a tax lien discharge attorney for assistance selling or refinancing your home subject to an IRS tax lien.