Principal Residences as Collection Target: TIGTA Criticizes IRS Practice

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In  The IRS Primarily Uses Lien Foreclosures When Pursuing Principal Residences, Which Do Not Provide the Same Legal Protections as the Seizure Process TIGTA released a report detailing how IRS uses judicial lien foreclosure suits rather than administrative collection tools when it targets a taxpayer’s principal residence to satisfy an assessed liability. The report is noteworthy for its highlighting the relatively rare times IRS chooses to pursue a taxpayer’s residence, and how in the times that it does do so, IRS tends to avoid the statutory requirement to obtain court approval for seizures of principal residence by bringing a suit seeking to foreclose on a lien. The report also suggests that when the IRS is pursuing a residence, the IRS decision to bring a foreclosure suit rather than a seizure may be related to statute of limitations issues arising from its having too many collection cases and not enough revenue officers to work cases.

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Background on Differing Collection Paths

The report reviewed the relatively infrequent scenario when IRS sought to collect on an assessment by targeting a taxpayer’s principal residence. When seeking to collect on an assessed liability, IRS has a variety of tools at its disposal to attempt to collect, including administrative seizure or judicial actions, such as suits to foreclose on a lien.

Overall IRS chooses to pursue principal residences infrequently. As the below figure notes, in the one-year period ending June 30, 2020 there were only a total of 24 lien referrals to DOJ and seizures conducted.

There are differing procedures and statutory rules with respect to the administrative versus judicial collection path. For example, a noteworthy difference is that for administrative collection actions with respect to a principal residence, in addition to the general provisions relating notice and collection due process, under Section 6334(e)(1), the IRS must obtain written approval from a federal district court judge before conducting the seizure of a principal residence.

As TIGTA notes, when the government is required to get court approval and seeks to seize a principal residence, taxpayers have “the opportunity to bring additional arguments against the seizure of the principal residence, such as showing cause as to why the residence should not be seized and demonstrating that the underlying tax liability has been satisfied, that the taxpayer has other assets from which the liability can be satisfied, or that the IRS did not follow applicable laws or procedures.”

The process for IRS to get court approval for administrative seizure is not quick, and with backlogs TIGTA notes it may take a year to get the necessary judicial blessing. 

One other difference between administrative seizure and judicial foreclosure is, after seizure and sale, but not after a foreclosure sale, a taxpayer has the opportunity to redeem the property.

To be sure, IRS does have a number of procedural requirements associated with foreclosure suits. The report details the differing approach that IRS takes with taxpayers when it chooses to bring a foreclosure suit, and notes the following steps revenue officers are instructed to take when they are considering pursuing a residence via the judicial collection path:

  • Attempt to contact the taxpayer by either a telephone call or a field call and advise the taxpayer that seizure or lien foreclosure is the next planned action.
  • Give the taxpayer an opportunity to resolve the tax liability voluntarily and provide and explain Publication 1, Your Rights as a Taxpayer, and Publication 594, The IRS Collection Process.
  • Advise the taxpayer about the Taxpayer Advocate and provide Form 911, Request for Taxpayer Advocate Service Assistance.
  • Provide the taxpayer with the name and location of the immediate supervisor if the taxpayer requests a managerial review.
  • Attempt to identify the occupants of the principal residence.

Why Would The Government Choose to Bring a Suit?

There may be important reasons to use a foreclosure suit rather than a levy, including situations where there is a question about the property’s legal title that necessitates a judge sorting out the property’s ownership and if there is not much time left on the SOL on collection.  As to SOL issues, that can be crucial, as the collection statute continues to run until a court approves the seizure and IRS serves Notice of Seizure to the taxpayer. When the government seeks to foreclose a lien it will simultaneously file suit to reduce tax liability claims to judgment, thus making the lawsuit path as in effect the main way to proceed if there is not much time left on the SOL.

The data reflect that the SOL issue is the principal driver behind the IRS decision to use the foreclosure path rather than its administrative collection powers. For example, almost 80% of the principal residence cases assigned to DOJ for a foreclosure suit had an imminent collection statute issue, and many of the cases had been reassigned to differing revenue officers or sat in the collection queue for years.

To address the differing protections associated with administrative versus judicial collection action, TIGTA recommended that the IRS should work with Treasury to propose a legislative amendment that would “amend the law (I.R.C. § 7403) so that taxpayers are afforded the same rights and protections whether the IRS is conducting a Federal tax lien foreclosure or a seizure on their property”. The current TIGTA recommendation echoes a 2012 the National Taxpayer Advocate legislative recommendation to Section 7403 that would require an IRS employee to determine that that the taxpayer has no other property sufficient to pay the amount due and ensure that the foreclosure sale would not create a hardship.

IRS opposed the TIGTA (and TAS) recommendation principally because it feels that current protections associated with judicial foreclosure suits were sufficient, and also because the number of taxpayers is relatively small:

Every collection device has its own advantages and disadvantages to tax administration, but each ensures that taxpayers’ rights are protected. While the mechanisms for ensuring that taxpayer rights are protected may be different, they are not less. In lien foreclosure cases, the IRS provides certain administrative protections, but Congress ensured that taxpayer rights are fully protected by empowering a neutral third party, a district court, and broad equitable powers to review the merits of all claims before it may order a sale. United States v. Rodgers, 461 US 677 (1983). Based on our data, such a legislative change potentially benefits only a small population of taxpayers.

Conclusion

As with my discussion last week in Partial Pay Installment Agreements In the Dark, today’s post signifies TIGTA attempting to take a taxpayer rights perspective to IRS collection action. In acknowledging IRS’s opposition to its recommendation, TIGTA refreshingly states that “even if this change may only benefit a small population of taxpayers, it is important that those taxpayer’s rights are protected.”  

Kudos to TIGTA for embracing taxpayer rights and considering IRS actions in light of the potential risk to rights Congress has identified as worthy of agency consideration.

Avatar photo About Leslie Book

Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law.

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