How do banks handle IRS Debt?

It depends on if the IRS has placed a lien or if you are in a repayment plan. If there is no lien, then it is treated as any other debt and the monthly payment will be factored into your DTI.

IRS liens, just like any other lien, have to be paid at closing so that the lien can be released. Typically, you will request a payoff to

determine how much is due to pay in full and the payoff amount gets included into the payoffs at closing.