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Back Taxes and Tax Debt

Can you get a mortgage if you owe back taxes to the IRS?

Jo Willetts, EA

Director, Tax Resources

Updated on: June 27, 2022

In short, yes. Having tax debt, also called back taxes, won’t keep you from qualifying for a mortgage.

The long answer is that whether you will get the mortgage has less to do with the IRS, and more to do with your lender's guidelines. The type of mortgage you want will also considerably affect the way that back taxes could affect your eligibility. Here's what you should keep in mind if you owe back taxes but would like to go through with your home buying plans.

Getting a mortgage with an IRS tax lien

If you owe a large amount of back taxes and haven’t set up an agreement with the IRS to pay, defer payment, or settle the taxes, the IRS can eventually pursue collection actions like issuing levies and liens. A tax lien in particular can hurt your chances of buying or selling a home. When the IRS files a tax lien, it means the IRS is letting all other creditors know that it has a debt to collect from you first.

If you have an IRS lien on your income or assets, you’ll have a hard time getting approved for a mortgage. Tax liens do not show up on credit reports, but they are likely to come up when your lender does a search for any liens. Lenders can see unpaid taxes as an indicator that the mortgage will also go into arrears. While a tax lien will not disqualify you from getting an FHA loan, it may disqualify you from standard private mortgages, or drastically increase your interest rate. You also can’t apply for a Fannie Mae loan if you have a federal tax lien.

If you owe back taxes to your state, you can also have liens or lien equivalents from your state tax agency. Many states have short deadlines to pay before they file a lien or lien equivalent, so state tax debt can quickly affect your ability to borrow.

The long answer is that whether you will get the mortgage has less to do with the IRS, and more to do with your lender's guidelines. The type of mortgage you want will also considerably affect the way that back taxes could affect your eligibility. Here's what you should keep in mind if you owe back taxes but would like to go through with your home buying plans.

Getting a mortgage with an IRS tax lien

If you owe a large amount of back taxes and haven’t set up an agreement with the IRS to pay, defer payment, or settle the taxes, the IRS can eventually pursue collection actions like issuing levies and liens. A tax lien in particular can hurt your chances of buying or selling a home. When the IRS files a tax lien, it means the IRS is letting all other creditors know that it has a debt to collect from you first.

If you have an IRS lien on your income or assets, you’ll have a hard time getting approved for a mortgage. Tax liens do not show up on credit reports, but they are likely to come up when your lender does a search for any liens. Lenders can see unpaid taxes as an indicator that the mortgage will also go into arrears. While a tax lien will not disqualify you from getting an FHA loan, it may disqualify you from standard private mortgages, or drastically increase your interest rate. You also can’t apply for a Fannie Mae loan if you have a federal tax lien.

If you owe back taxes to your state, you can also have liens or lien equivalents from your state tax agency. Many states have short deadlines to pay before they file a lien or lien equivalent, so state tax debt can quickly affect your ability to borrow.

Avoiding an IRS lien

There are several ways to avoid an IRS tax lien. First, the IRS doesn’t generally file a tax lien. unless you owe more than $10,000 and you’re not in a qualifying agreement. There are two types of qualifying agreements for your tax bill that, if executed on time, can avoid a tax lien:

  • Extension-to-pay agreement: You can get up to 180 days to pay your tax debt. During this time, the IRS will not file a tax lien.
  • Streamlined installment agreement: If you owe less than $50,000 and can pay your tax bill within 72 months (or the IRS collection statute of limitations expires, whichever is shorter), the IRS will not file a tax lien if you set up the payment plan before the IRS files a lien.

Note: If the IRS hasn’t assigned you a field collection employee (called a revenue officer), the rules above may not apply. A revenue officer can’t offer the 180-day extension-to-pay agreement. Also, revenue officers are quick to file a tax lien–which may mean that your streamlined installment plan needs to be set up quickly before the IRS files a lien.

Generally, if you owe more than $50,000, or owe more than $10,000 and you’re not in one of the two agreements listed above, the IRS must decide whether to file a tax lien. If the IRS files a lien and you pay or settle your debt (called an offer in compromise), the IRS will release the lien.

The moral of the story: Know your options and get into an agreement quickly to avoid liens. Doing so will put you in a better position if you need to borrow.

If you have questions on how a lien will affect your ability to borrow, contact Jackson Hewitt Tax Resolution, who will work with the IRS to help resolve your tax issues.

About the Author

Jo Willetts, Director of Tax Resources at Jackson Hewitt, has more than 25 years of experience in the tax industry. As an Enrolled Agent, Jo has attained the highest level of certification for a tax professional. She began her career at Jackson Hewitt as a Tax Pro, working her way up to General Manager of a franchise store. In her current role, Jo provides expert knowledge company-wide to ensure that tax information distributed through all Jackson Hewitt channels is current and accurate.

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