One of the largest sources of stress for a taxpayer with significant federal tax debts is whether the IRS can take his or her house. For many taxpayers, the family residence is the most important source of their wealth. In addition, it is not just their house, but their home—a source of happiness and joy and family community. The prospect of losing a home therefore not only threatens financial loss, but it is often emotionally taxing as well.
Technically, as it happens, the IRS is allowed under the law to take a taxpayer’s home to satisfy tax debts. However, it is relatively difficult for the IRS to do so. As a result, the IRS tends to be quite restrictive in seeking to take residences to pay tax debts.
There are two main avenues by which the IRS can pursue a principal residence to collect tax debts: court approval and foreclosure lawsuit.
The first method is to seek court approval under 26 U.S.C. 6334(e)(1). This section sets forth rules requiring the IRS to obtain court approval before it undertakes a seizure, and it requires that the taxpayer receive notice and an opportunity to object. This is a fairly unusual procedure, and the IRS does not often undertake it.
The alternative is for the IRS to seek to foreclose the federal tax lien through a foreclosure lawsuit under local law. The IRS would certainly undertake this option if there were competing interests in the home, such as a mortgage or other financial encumbrance. Only by initiating a foreclosure and naming all the other claimants as parties can the IRS ensure that it obtains good title. Though the details of this issue are beyond the scope of this blog, an IRS tax lien is generally subject to the rules relating to the priority of other interests in property, including mortgages, and so the IRS needs to initiate a foreclosure action to ensure that it can obtain or convey title to property free and clear of other claimants.
As a practical matter, however, the IRS generally views the seizure of a principal residence as a last resort. The IRS is aware that such actions have strong negative consequences to its perception by the public, and it can create a cascade of additional problems, such as leaving taxpayers or their children and dependents scrambling for housing. While the IRS may choose to pursue this option if, for example, a taxpayer has been totally uncooperative or has a disproportionately valuable home, it is unlikely the IRS would do so in standard circumstances. Moreover, as previously mentioned, it is virtually impossible that the IRS could do so without giving a taxpayer a lot of notice and it would only occur at the end of a long process of collection. As a result, we generally advise taxpayers that they can sleep easily at night knowing that they will not normally be knocked out of their homes by surprise, even if they owe significant tax debts, but that they should still find a way to resolve their tax debts with the IRS.
That does not mean, of course, that the IRS cannot contain the value of the home as part of the collection process. Offers in compromise or other payments arrangements always require the taxpayer to account for the equity in the home, often by obtaining financing from a bank. In addition, the IRS can always file a lien and simply wait for the taxpayer to seek to refinance or sell the home and get paid at that time. Thus, the fact that the IRS will not frequently evict a taxpayer from a home does not mean that there will not be a need to reckon with the value of the home as asset available to the IRS as part of an overall resolution.
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