IRS lien foreclosures don’t offer same protections as seizures

The Internal Revenue Service mainly uses lien foreclosures when it’s going after the primary residences of people with overdue tax debts, but taxpayers don’t get the same legal protections as they would enjoy under the seizure process, according to a new report.

The report, released last week by the Treasury Inspector General for Tax Administration, found that in fiscal year 2020, the IRS used lien foreclosure suits more often than seizures when pursuing taxpayers’ principal residences, even though lien foreclosures don’t provide the same legal protections as seizures. For seizures, the IRS has to comply with the legal provisions written into Sections 6330 through 6344 of the Tax Code, which require a thorough exploration of collection alternatives before a levy action can be taken and additional appeal rights. In contrast, for lien foreclosure suits, Section 7403 offers relatively little discretion for a court to consider any issue other than determining the merits of all claims to and liens upon the property. Unlike the sale of real property at a seizure sale, a taxpayer has no right to redeem the property after the court orders the foreclosure of the federal tax lien.

“Therefore, it is important that the IRS pursue a seizure rather than a suit to foreclose, whenever possible, to ensure that taxpayers are afforded all available administrative and legal protections,” said the report.

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A lien foreclosure is a specific type of judicial enforcement tool that the IRS can use in some circumstances to collect delinquent taxes. When determining whether to recommend a suit to foreclose on property with a federal tax lien, IRS employees are required to follow the policies and procedures in the Internal Revenue Manual. “According to those procedures, a suit to foreclose should be pursued only when there are no reasonable administrative remedies, such as levies (includes seizure), installment agreements, or offers in compromise, and when there are no taxpayer hardship issues,” said the report. “Due to the expense and time associated with bringing a suit to foreclose against a taxpayer, it is not generally considered unless the total tax liability is greater than a particular threshold and the IRS has exhausted all applicable and effective administrative remedies.”

However, the report acknowledged there are circumstances in which a suit can be recommended when the tax liability is below the particular dollar threshold. For example, a suit may be referred if the liabilities are related to liabilities previously recommended in an ongoing suit. The Justice Department may ask for a foreclosure referral in response to a title issue. Other scenarios in which a lien foreclosure might be appropriate include issues related to ownership, encumbrances on the property, clouded title, or collection statute concerns. The ultimate decision on whether to use administrative or judicial collection processes depends on the facts of the specific case.

TIGTA reviewed 96 lien foreclosure cases from between Oct. 1, 2018, and Sept. 30, 2020, that were still in litigation as of Jan. 12, 2021, along with 35 suit recommendations that were in declined status during this same time frame. It found that revenue officers generally followed the right procedures and internal controls. Nevertheless, TIGTA did spot some instances in which procedures and internal controls were not followed or were not clear. For example, TIGTA found some cases where revenue officers were asked to make revisions on suit packages, but improper or untimely actions kept the IRS from filing suit. TIGTA also discovered cases in which suit packages were missing the required forms or case actions were not done on a timely basis. While the IRS has developed a system to track lien foreclosure cases internally, once the cases are sent to the Department of Justice for litigation, TIGTA found, there’s no way to track and measure the outcome or the related costs and revenues collected on lien foreclosure cases.

TIGTA made five recommendations in the report, including recommending that the IRS work with the Treasury Department’s Office of Tax Policy to consider a legislative proposal to amend the law so taxpayers can get the same rights and protections whether the IRS is conducting a federal tax lien foreclosure or a seizure on their property. TIGTA also recommended the IRS make several updates to its Internal Revenue Manual to ensure field collection managers and employees take timely and proper case actions when weighing whether to recommend a suit to foreclose on a taxpayer’s property. The IRS agreed with four of the five recommendations but disagreed with TIGTA’s recommendation to work with the Treasury to consider a legislative proposal.

“Every collection device has its own advantages and disadvantages to tax administration,” wrote Darren Guillot, commissioner of the IRS’s Small Business/Self-Employed collection unit, in response to the report. “When it becomes necessary to compel collection, the IRS is expected to use the appropriate collection device based on the facts of the individual case.”

TIGTA, for its part, insisted it continues to believe that similar legal protections are needed for both processes.