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Delinquent Taxpayers Can Lose Property to Tax Lien Investors

In the last few weeks, this blog has discussed the criminal penalties and fines taxpayers can face if they file incorrect or fraudulent tax returns. However, it is important to recognize that taxpayers can commit misconduct that doesn't rise to the level of a criminal infraction and still face serious consequences.

For example, taxpayers who don't make required federal, state and local tax payments can have a tax lien imposed on their property. The lien can impose substantial hurdles when trying to sell the property or refinance a loan.

Taxpayers whose properties are subject to liens may also face action from tax lien investors.

Tax Liens Are an Emerging Investment Tool

As the recession drags on and stock market returns remain low, many investors are turning to tax liens as a way to make financial gains.

The longer taxpayers allow liens to remain unpaid, the more interest accrues. By the time the liens are sold to investors at auction, they are usually quite valuable. Then, the delinquent taxpayers often have only two options - either pay off the owed amounts or allow the investor to foreclose on the property.

Experts estimate that investors buy between $7 billion and $10 billion in delinquent tax liens each year. The most commonly sold are property tax liens. At last count, local governments in 28 states and Washington, D.C. sell tax liens to investors.

If a lien is imposed on your property, you're usually better off dealing with it as soon as possible. Talk to an experienced tax attorney who can help you understand your options.

Source: Bloomberg, "Tax Liens Promising 18% Returns May Be a Case of 'Buyer Beware,'" Elizabeth Ody, Feb. 7, 2012.

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