Buying From a Seller With IRS Problems: Purchaser Protections, Title Searches, and Closing Conditions

Buyers usually think of an IRS lien as the seller's problem. It is, until the deed records. After that, if the lien was handled wrong, it is yours.

The rule is simple. A federal tax lien attaches to the taxpayer's property and stays attached when the property changes hands, unless the buyer is protected by statute or the IRS releases or discharges it. You do not become personally liable for the seller's tax. But the property you just paid for can still be seized to collect it.

The silent lien and the recorded notice

Under IRC 6321, the lien arises automatically when a tax is assessed and goes unpaid after notice and demand. At that point nobody outside the IRS and the taxpayer knows about it.

IRC 6323(a) is the buyer's main shield. It says the lien is not valid against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until the IRS files a notice that meets the requirements of 6323(f). For real estate, that notice is filed in the office the state designates for the county where the property sits. In Florida, that is the county official records maintained by the Clerk of Court.

So the timeline decides almost everything. If you became a purchaser before the notice was filed, you generally take free of the lien. If the notice was filed first, you take subject to it.

Who counts as a purchaser

IRC 6323(h)(6) defines a purchaser as a person who, for adequate and full consideration in money or money's worth, acquires an interest in property that is valid under local law against later purchasers without actual notice. Two pieces of that definition matter to buyers.

First, consideration. A gift or a nominal-price transfer is not a purchase. Buying a parcel from a relative for ten dollars gives you no protection from the relative's tax lien, filed or not.

Second, the local law test. Your interest must be good against later purchasers under Florida law. Florida's recording statutes generally protect recorded interests against later purchasers who lack notice. A deed sitting in a drawer does not do that. Record promptly.

The same subsection adds that, for purposes of 6323(a), a written executory contract to purchase, an option to purchase, and certain leases are treated as interests in property. A signed purchase contract may therefore give a buyer some protection against a lien noticed after signing, but only if the contract interest itself satisfies the local law test. That is a question to raise with your closing attorney before you rely on it.

Interests that beat even a filed lien

IRC 6323(b) lists interests that prevail over the federal tax lien even when notice was filed first. For real estate, the important one is 6323(b)(6). It protects liens for real property taxes of general application based on value, special assessments imposed to pay for public improvements, and charges for utilities or public services furnished by a governmental unit, if local law gives those liens priority over earlier security interests.

For buyers, that means the county tax collector is paid first at closing even with an IRS notice on record. It does not mean the buyer is protected from the IRS lien itself.

IRC 6323(b)(7) also protects a mechanic's lien on an owner-occupied residence of four units or fewer, if the contract price for the repair or improvement is not more than $5,000. That dollar amount is adjusted for inflation under 6323(i)(4) for liens filed after 1998, so check the figure for the year the notice was filed.

What to search before you sign

A standard title search in Sarasota or Manatee County will pick up recorded notices of federal tax lien against the seller's name. Make sure it also covers:

• Every name the seller has used. Maiden names, prior married names, business names, and trusts.
• Every owner of record. If the property is held by an LLC, search the LLC and, where the facts suggest it, the members. The IRS sometimes files nominee or alter ego liens naming an entity as holding property for the real taxpayer.
• Prior owners in the chain, if any prior transfer was for little or no consideration.
• Refiled notices. Under IRC 6323(g), notices must be refiled during a window around the tenth anniversary of assessment to keep their filing date. A search that stops at ten years can miss a refiled notice.

Then order an update right before closing. Liens can be filed in the gap between the commitment date and the recording date. Title insurers manage that gap. You should know it exists.

What to require in the contract

If the search shows a federal tax lien, the contract should make clearing it the seller's job and a condition of your obligation to close:

1. The seller must deliver either a certificate of release under IRC 6325(a) or a certificate of discharge under IRC 6325(b), recorded or recordable at closing.
2. The closing date must allow at least 45 days for the IRS to process a discharge application, which is the lead time Publication 783 requests.
3. The seller must cooperate with the appraisal and documents the IRS requires on Form 14135.
4. If the IRS conditions the discharge on a payment, the closing agent pays it from the seller's proceeds as directed in the IRS conditional commitment letter.
5. You get your deposit back if the certificate is not delivered by a set date.

The seller's side of this process is covered in selling a home with a federal tax lien. If other creditors are fighting the IRS over priority, the closing may use a 6325(b)(3) escrow so you can take clean title while they argue.

Buying at a foreclosure sale

Foreclosure purchases raise a different issue. In a Florida judicial foreclosure where the United States was properly joined, a junior federal tax lien can be cut off, but the United States keeps a right to redeem the property for 120 days after the sale, or longer if state law allows, under 28 U.S.C. 2410(c). If the United States was not joined and its notice was on record when the case began, IRC 7425(a) says the judgment and sale are made subject to the federal lien. Read the foreclosure and redemption guide before bidding.

Red flags that call for a closer look

• A seller who wants to close fast and skip title insurance
• A price well below market from someone you know has IRS trouble
• A deed into the seller's LLC or a relative shortly before the sale
• A request to pay part of the price outside closing

Each of these can signal an attempt to move property ahead of a lien filing, which the IRS can challenge as a fraudulent conveyance or treat as a nominee arrangement. A buyer caught in the middle spends money defending a purchase that looked like a bargain.

You are buying the property and everything recorded against it. Read the record, and make the seller clean it up first.