The Implications of Tax Debt | Can You Buy a House If You Owe Taxes to the IRS?

June 7, 2023


How Does Owing the IRS Affect Buying a House?

Buying a home can be difficult and stressful, especially if you’re not in good standing with the IRS, owe tax debt, or have tax liens against your property.

Most folks understand how serious and consuming tax debts are, and some mistakenly think a new home is out of the question for them and their bulk tax bill, but that’s not necessarily the case.

If you’re wondering if it’s possible to get a home loan if you owe federal tax debts, don’t yet count yourself out of the loan application process and subsequent mortgage approval.

Let’s take a look at how many lenders handle home loans for applicants with IRS debt and how to increase the likelihood of receiving a home loan approval when you owe delinquent federal income taxes to the Internal Revenue Service.

Mortgage Lenders’ Due Diligence

Whether seeking FHA loans or conventional loans, most every approval and manual underwriting process includes several levels of investigation and due diligence on the part of mortgage lenders, even private lenders.

It has become standard procedure for mortgage lenders to check a mortgage loan applicant’s tax compliance as part of the due diligence process, in addition to other standard credit information. If you have unfiled taxes and/or owe back taxes, mortgage lenders will be quite reluctant to approve your financing package for a home loan. 

This does not necessarily mean you are not bankable, just that you need to do some housekeeping with the tax authorities to instill faith in lenders that their borrower’s monthly debt obligations are manageable and compliant. The process will take some time, but exactly how much time depends on the extent of the non-compliance issues.

Address Unfiled Taxes 

The first step the mortgage lender will require is that you file all necessary tax returns. Typically, filing the last six years will re-establish your filing compliance, no matter how long it has been since you last filed a return. Once the returns are filed and processed, there may be some delinquent IRS tax debt to handle. 

To deal with the tax debt, lenders will typically want to see that you have a formal installment agreement (a monthly payment installment plan) in place with the taxing authority and that you have successfully paid a few months of payments, such as three consecutive payments.

If you are only indebted to the Internal Revenue Service, then your entire tax debt may be a quick and easy fix, depending upon the amount. If there is unpaid state tax debt as well, then you will want to be strategic about how you approach the issue.

Before addressing the delinquent tax debt, the current year taxes need to be paid in properly through paycheck withholding or estimated tax payments. The tax system requires you to pay taxes as income is collected. If you receive a paycheck from your employer and the withholding amounts are proper, then you have already fulfilled this requirement.

It becomes a bit more challenging if you are self-employed and pay quarterly estimated tax deposits. If you are trying to catch up later in the year this becomes even more difficult, and you will need a solid strategy in place, such as a repayment plan. 

By getting the current year’s payments in compliance, you demonstrate to lenders and tax authorities that the problem is isolated to the past and your tax payment problem is no longer an issue, aka your monthly obligations are under control and sustainable, even with the purchase of a new home.

Once all of the required returns are filed and the current year’s payments are caught up you are now fully compliant but owe some money, which is an acceptable financial position. It’s similar to having credit card debt.

State Tax Debt vs Federal Tax Debt

In our recent experience, state taxing authorities are much less accommodating with terms for a repayment plan than the Internal Revenue Service. The quick and easy solution is to pay off the entire tax debt owed to the state in full, which is typically a lower amount anyway. If that is not possible, you will want to contact the state taxing authority to set up a monthly repayment plan. 

Once the state debt is taken care of, then it’s time to focus on IRS tax debt. 

What About a Federal Tax Lien?

Owing the Internal Revenue Service Can Lead to a Tax Lien

IRS has many options to deal with the delinquent debt other than a full repayment agreement, and some people have to deal with an IRS tax lien, as well. The drawback to an agreement with the IRS is that the process to get into a formal approved IRS installment agreement may take several months. Once a formal payment plan is in place and depending on the level of the debt, IRS may be willing to release a federal tax lien. The tax lien release is highly likely if your debt is less than $25,000. It’s still possible if the amount is higher, but it is a bit more complicated.

Now with all of your tax returns filed, the current year’s tax payments caught up, a formal payment plan in place with the tax authority, and federal tax liens released, you are in a much better position to approach the lender to get a mortgage.

Overcome Tax Liens, Unfiled Taxes, and Delinquent Tax Debt for Mortgage Approval

Just because you have tax compliance issues doesn’t mean you have to give up on buying your dream home. You still have options in order to get a mortgage. With some guidance and strategic planning, you can be sitting in your new home sooner than you think. 

Tax Crisis Rescue has helped hundreds of taxpayers work through issues like tax debt, having a federal tax lien filed against their property, and many a tax liability that made it impossible for them to get a mortgage.

We love to talk through tax problems with good, hard-working people who have gotten off track and need help getting back in compliance to prove they are capable of rebuilding their credit reports and making timely payments on a life necessity like housing. 

If you would like to discuss your specific situation, please schedule an appointment. It’s easy with our online calendar.

Liz Blum Mortgage Loan Officer

Tax Crisis Rescue is proud to serve taxpayers with trusted and experienced guidance in their endeavor to overcome IRS debt and pay the lowest possible amount of debt provided by law.

One of the components of the exceptional and reliable service we provide to clients is the strength of our professional relationships with experts across the various industries that affect and serve taxpayers. One such relationship we were happy to rely on for the information provided in this article is with Liz Blum, a Mortgage Loan Officer at First Horizon Bank.

Liz has over 20 years of mortgage lending experience, including extensive knowledge of various mortgage programs and the different mortgage guidelines that allow her to serve her clients well in the home financing process.

Liz’s extensive knowledge of mortgage lending options makes her an asset to all those she serves, especially citizens in Louisiana, from where Liz earned her degree in finance at Loyola University in New Orleans.

Learn more about Liz Blum and why we are proud to call her a friend and asset of Tax Crisis Rescue.