How Gov't Liens Affect BuyersVarious government and civil tax liens have a way of popping up just before COE, and without proper planning, usually derail escrow closings and cost us all commissions (now and from future repeat biz and referrals).

And government liens do not have any statute of limitations.

Recently I had a client with a civil judgment for a car repossessed (during the  “S & L Crisis” in 1988).

The creditor filed the lien, then renewed it in 1998, 2008, and lastly in 2018.

Although it is rare for a creditor to dog a borrower for that long, it can (and did) happen; as long as the creditor continues to renew the judgment (in the same court), the corresponding lien can be extended indefinitely as the judge explained to my borrower open court.

And the seller is usually “less than forthcoming” when it comes to disclosing these issues, as a standard property profile doesn’t reveal obscure issues and are easily missed’.

“Only a full preliminary title report does that,” Field added.

“Agents should order a full preliminary title report the moment they get the listing, as there is no cost (to either the agent or the seller) charged by many title companies,” Field said.

“Let the Games Begin”

The chaos begins with the buyer not disclosing the judgments and/or lien(s) on page 4 of the loan application.

At a later date, the lien(s) show up on a title report, credit report, or during a database search (the very last step before funding), commonly known as “Cavirs”. 

If an undisclosed lien does “pop up,” there are only 2 solutions:

1) Buyers and the lienholder must agree to ‘terms of a repayment plan” (which takes up to 30 days to implement)!

A buyer must then have a 3 month (minimum) payment history, which usually delays or kills COE.

2) If there is not time to begin a repayment plan before contingency deadlines, the lien has to be “paid in full,” further draining a buyer’s liquid cash (i.e.down payment).

Government liens result from specific actions such as:

1) Nonpayment of child support (county)

2) Nonpayment of court fines, restitution, and incarceration fees (county/state/federal)

3) Nonpayment of medical bills to county facilities  

4) Employers not paying their business or employee withholding (quarterly) taxes to the EDD

In addition to overdue taxes, there are tax penalties for:

1) Underpayment of taxes/ late filings

2) Filing a frivolous tax return or no tax return at all

3) Early liquidation of retirement accounts

4) Not paying what is owed.

Non-Filing Penalty

Taxpayers not filing a Form 1040 or an extension (Form 4868) by April 15; the penalty for not filing starts accruing the next day. 

The assessment: 5%, monthly of the total balance of any tax due.

Taxpayers can file an extension until Oct.15th but have to meet the October deadline, or the non-filing penalty will begin.

The IRS considers not filing a tax return (at all) the most serious offense; the non-filing penalty can be as high as 25% of the total unpaid tax amount.

The statute of limitations for not filing a Federal tax return is 3 yrs, but can be doubled for fraud; the California statute is 4 yrs.

Nonpayment Penalty

Even if a taxpayer files a return (or an extension) by April 15 but doesn’t pay what (estimate) of what is due is, they face the nonpayment penalty for both federal and state taxes.

The penalty is 0.5% of the due tax due. The nonpayment penalty can grow until it reaches 25% of the unpaid tax bill.

Under Payment Penalty

U.S. taxes are collected on a pay-as-you-earn system, and the IRS wants its portion when the taxpayer receives the money.

Failure to do so may result in an underpayment penalty. 

For example, Independent contractors (1099) are responsible for covering taxes – from earnings with estimated quarterly tax payments.

Related Post: Working with Self Employed Buyers!

The same timely taxpaying applies to other income, such as prize winnings, investment earnings & stock options an income source.

Avoiding the Underpayment Penalty

Taxpayers facing a tax penalty for the 1st time can apply for a one-time abatement request” by pointing out past taxes have been paid on time and a promise to be compliant in the future.

But even if the IRS grants penalty relief, interest charges on unpaid taxes still apply. For the general nonpayment/non-filing penalties, the current rate is 4%.