Officer
The Internal Revenue Code allows the government to use federal and state courts to collect unpaid taxes and enforce liens. This collection power includes instituting foreclosure proceedings and obtaining administrative seizure of a taxpayer’s home or other property under certain circumstances.
The IRS is unlikely to pursue foreclosure actions against most taxpayers, especially if the property at issue is the taxpayer’s primary residence. This is a summary of what the government takes into consideration when enforcing tax liens on a taxpayer’s primary residence.
The Secret Lien
Legally, a general lien automatically exists in the government’s favor the moment even one dollar of unpaid tax is assessed. This lien, which is sometimes referred to as the “secret lien,” is effective the date a tax becomes final and attaches to all property the taxpayer owns now or in the future. Although the government and taxpayer will likely know about the tax liability, the lien is usually a secret from the perspective of third parties. The concept of a lien attaching to property is very important because attachment is the legal mechanism that gives a creditor enforceable rights against a debtor’s property.
Although the secret lien is incredibly broad in what property it covers, it is not enough for the government to protect its interests in many cases because it does not by itself establish any sort of priority over other creditors. Priority is the legal concept as to who gets paid first when there are limited assets left to satisfy all creditor claims. Creditors with priority in an asset get paid before claims of unsecured creditors are considered. Creditors normally establish priority with respect to a particular piece of property by recording a lien in official public records. Earlier-recorded filings have priority over later-recorded filings on the same property.
Notice of Federal Tax Lien
Because the secret lien isn’t recorded anywhere, if a taxpayer runs up additional debts after not paying their taxes, subsequent creditors may have the same priority or better priority relative to the government. Consequently, when $10,000 or more is owed by a taxpayer, the government will normally file a Notice of Federal Tax Lien (the “Notice”) to establish priority ahead of later creditors. When this Notice is filed, the lien is no longer a secret, as the rest of the world – including credit reporting agencies – is put on notice that the taxpayer has unpaid taxes. The Notice is filed with the state registry of deeds or a federal district court depending on the state, and is then indexed in the local land records against any real property the taxpayer may own.
A Notice of Federal Tax Lien acts as an anchor on the taxpayer’s property and increases the government’s potential rights if an administrative seizure or foreclosure proceeding is initiated.
Foreclosure of Principal Residence Is Unlikely
Even though the government may use its lien power to seize or foreclose on the taxpayer’s property, there are many practical reasons why the IRS will not resort to this action, especially because the criteria for seizure or foreclosure are even more stringent for the taxpayer’s primary residence.
First, the IRS’s own administrative procedures require that other collections options be considered prior to taking a home. These options include installment agreement offers and offers in compromise. Even when the IRS determines internally that a suit to seize or foreclose the home is appropriate, it is required to notify the taxpayer and all occupants in the home of their intent and again open the line of communication to discuss other payment options. As is the case with all collections alternatives, the IRS considers economic hardship in these negotiations. If there is no resolution at this stage, the IRS will proceed but also notify the taxpayer of their right to seek assistance from the independent Taxpayer Advocate Service.
Assuming these procedures all take place, the IRS will then need to go to the Department of Justice to request action be taken in court. Compared to the IRS’s authority to levy a taxpayer’s bank account, pursuing either an administrative seizure or a foreclosure is significantly more challenging because it requires formal judicial approval. A foreclosure or administrative seizure against a personal residence is not authorized as a collection option unless the IRS can demonstrate there are no other reasonable alternatives for collection, or there is a conclusion that the taxpayer has “refused or neglected to pay.” The taxpayer is, of course, given an opportunity to rebut the IRS’s claims in these proceedings.
A second barrier to the IRS’ pursuit of foreclosure or seizure actions on a primary residence is economic. As noted above, the filing of a Notice of Federal Tax Lien establishes priority for the government, but this priority only puts the government in front of subsequent creditors and unsecured lenders. The IRS simply won’t foreclose or seize property if there is no money left after the payment of superior claims. The IRS will not initiate a suit where it is not going to get any sort of payoff.
Lastly, federal income tax liens are only enforceable to the extent the underlying unpaid tax may be legally collected. The government is subject to a ten-year statute of limitations on collections actions following the assessment of tax. Although this ten-year period can be extended based on various workout options, at some point it will expire. If the collections statute of limitations expires, any liens in place on the taxpayer’s property automatically become unenforceable. A large portion of tax liens expire for this reason before the IRS fully recovers what is owed.
Note that when the collections statute of limitations is about to expire, taxpayers who have been off the IRS’s radar will again come into focus. Taxpayers with significant liability and home equity who are reaching the end of their statute of limitations period sometimes need to worry about late-stage enforcement for this reason.
When Foreclosure of Principal Residence Is Possible
Because of all the considerations discussed, taxpayers normally should not expect to face foreclosure or seizure of their primary residence. It is a course of action the government does not resort to lightly. There are certain cases in which the IRS and DOJ will be more inclined to pursue this avenue, however.
Taxpayers have greater risk of being subjected to a seizure or foreclosure of their home if they have a large amount of unpaid liability. Unfortunately, there are no publicly available magic numbers to indicate when the IRS is going to consider a particular sum an enforcement priority, but most court cases concerning federal tax foreclosure actions cite liabilities well into the six- and seven-figure ranges.
The IRS’s role in ensuring the integrity of the tax system is also relevant. The DOJ, in particular, will prioritize civil fraud and criminal cases for potential seizure or foreclosure in order to deter bad actors and encourage voluntary compliance from the public. Somewhere below taxpayers who have been convicted of criminal offenses or civil fraud are taxpayers the IRS characterizes as “won’t payers.” These are taxpayers who have the means to negotiate at least partial payment of their tax liability, but for whatever reason either do not do so or do not negotiate with the government in good faith. “Won’t payers” run the risk of being subjected to enhanced IRS collection actions.
Final Thoughts
I wish to note that the presence of a Notice of Federal Tax Lien recorded on a taxpayer’s primary residence absolutely does not mean the IRS intends to foreclose. The government files a Notice of Federal Tax Lien as part of its standard operating procedures to protect its interests as a creditor. The Notice filing process is a largely automated.
The IRS’s own internal documentation indicates that administrative seizures and suits to foreclose are extreme remedies and should only be pursued when there are both no other reasonable collection alternatives and when no material hardship will be felt by the taxpayer and their family. A tax collection matter should, therefore, never reach this stage.
Where taxpayers have real risk in this situation is where they either do not respond to multiple notices of the IRS’s intent or are not able to navigate the alternative collection processes offered. Taxpayers who are facing potential threats for foreclosure or seizure from the IRS should nonetheless contact competent tax counsel immediately.
While it is unlikely the IRS will take your home, it is extremely unwise to ignore the IRS or to act in bad faith when negotiating workout options.
