If you have a tax lien, you will have to either pay it off or work with the IRS to have them release it before you can complete a short sale.

Q: If my bank approves a short sell for my house but I have a federal tax lien for underpayment of taxes in ’08 and’09, can I sell the home and then separately continue to pay the IRS monthly payments? I have an agreement in place with them to make these payments to pay off the tax lien.

A: If you are able to get your bank to approve your home in a short sale, you are only half of the way to selling your home. Having an IRS tax lien on your home effectively stops your ability to sell the home unless the lien is paid off or released by the IRS.

Having said that, if you have no equity in the home, the IRS doesn’t have much reason to keep the lien on the home. But you’ll still have to work with the IRS to have them release the lien. You’ll still have to continue to make your payments to the IRS in accordance with the agreement you made with them but you could sell the house and move on.

Once you have an offer to purchase your home, you will need to contact your lender to begin the short sale process. At the same time, you’ll want to contact your local IRS office and obtain the documentation you will have to file with the IRS. The IRS will likely want to see the lender approve the short sale and may require similar documentation that your lender will request of you.

As you go through the process with your lender and the IRS, and if the IRS approves the release of the lien from your property, the IRS will give you a letter that will indicate that they agree to release the lien on the property with certain conditions. One of those conditions may be that you don’t receive any money from the sale of the home. If you are receiving some money from your lender relating to the short sale, you might have to turn that money over to the IRS.

Some lenders have the ability to give a short sale seller some “assistance” to make sure they don’t harm the house in the process of selling it and give a seller an incentive to move out of the home. When you receive a couple of thousand dollars from the sale of the home from the short sale lender, you might find that the IRS will want to get some money as well.

Just know that if you don’t work out the details with the IRS and get the letter from them agreeing to release the lien on your home, you won’t be able to close on your short sale, even if you have your lender’s approval for the sale.

You also need to remember that short sales can take quite a while to process with some lenders and you might find that it will take a bit of time getting the release letter from the IRS as well. So prepare yourself for all the documentation you will need to give your lender and the IRS. If you have already received an offer for the purchase of your home, you should start compiling all the documents you’ll need to give the lender now.

If you have access to a scanner, you might want to scan all the documents you’ll need into a file. Once you have them on your computer, you’ll have an easier time sending the documents to your lender and the IRS. Most big box lenders have electronic systems for handling short sales and you or the person that might be helping you with the short sale will need to upload all of these documents into that system.

You may or may not be able to send the IRS electronic documents, but if you have a good system to keep tabs on these documents, you’ll make the process of handling the paperwork easier.