Losing your house to the IRS may be your worst fear. And it’s true that the IRS can seize and sell a home to pay a back tax debt. But it is harder – and less likely – than you what you may have read or believe.
To begin with, the Department of Justice seizes and sells houses for unpaid taxes, not the IRS. To sell a house, the IRS makes a referral over to the Department of Justice; the IRS does not sell houses on its own. Unless you have heard from the Department of Justice Tax Division, your house is not in the process of being sold. And rest assured, the Department of Justice does not get involved in many unpaid tax cases – the IRS is usually pretty picky and choosy about what cases they send to the Department of Justice.
How many houses do you think the Department of Justice forecloses on every year because of a tax problem? 25,000? 10,000? 5,000? 1,500?
If you thought those numbers seem too high, you are correct. In 2013, for example, the IRS Data Book reports that there were 547 seizures of real property (houses) and personal property (cars) made. That’s out of over 11 million tax accounts in the IRS’ inventory. 547 out of 11,000,000. Chances are, the IRS is not interested in your house.
The IRS is not a maniacal house-seizing machine that relishes the thought of putting people out on the street. Referring a case to the Department of Justice to deprive a taxpayer of his house is usually the last, not the first, thing the IRS wants to do.
One reason why the IRS and Department of Justice seize and sell so few homes is the No Equity Rule. Simply put, tax laws prevent the government from selling a house in a tax case unless there is equity in it. The sale must result in money recovered. Equity is defined as the difference between what your house is worth, and how much you owe the bank on it. To determine equity, the IRS will usually reduce the value of your house by a minimum of 20%. For example, if your house is worth $150,000 and you owe $130,000 on it, the IRS is not interested in taking it – after reducing the value by 20%, there is no equity available, which kills any potential IRS seizure and sale.
The IRS generally needs a substantial amount of equity to justify taking a measure as extreme as taking your personal residence. That means the IRS is generally not referring the $10,000 or $25,000 equity case to the Department of Justice. If they did, there would have been far more than 547 seizures. Again, the IRS tends to be a little bit picky about house foreclosures.
In addition to needing substantial equity, the IRS also tends to seize houses only in large dollar unpaid tax cases. Although there are no absolute guidelines, I can tell you, based on experience, that the seizures that I have seen have been on six figure tax debts and six figure equity ($100,000 and over, and it is usually significantly more than that).
In other words, the IRS is usually looking for a large tax liability and a house with large equity.
But even if you have a large IRS debt and large home equity, the IRS tends to want to take a house only in egregious situations, meaning there has to be lack of communication, compliance and effort to find a better solution on your part. We can control effectively communicating your circumstances with the IRS and formulating better options than home seizure.
IRS policy is that seizure action is usually the last option in the collection process, that taxpayer rights must be respected, and many factors must be considered before acting. See IRS Policy Statement 5-34, Internal Revenue Manual 126.96.36.199. This policy statement has been on the IRS’ books since 1999.
An IRS Revenue Officer may not tell you about their policy to tread lightly on most personal residence seizures. Indeed, they may have to be reminded of their own policy by us.
The IRS will take your circumstances into consideration. Retirement age? Health considerations? The IRS is not interested in creating additional hardship for you unless you push them to do so. There are defenses to stop such intrusive action, like taking a taxpayer’s house, and IRS policy is to consider those circumstances.
Even if the IRS has already set the house seizure process in motion on you, you still have rights. The IRS cannot just show up one day and take your house, unannounced. They have to send you a Final Notice of Intent to Levy, which gives you the right to dispute the seizure both administratively with the IRS, and if that’s unsuccessful, to sue the IRS in Tax Court for an independent court review of the seizure. All this happens before the IRS can sell your house.
After the seizure notice and appeal process, the IRS will forward your case to the Department of Justice’s Tax Division to file a lawsuit against you to permit the sale. The IRS cannot sell your house without first getting a court judgment approving the sale. Court approval is required by law – Internal Revenue Code 6334(e) requires a U.S. District Court judge to approve an IRS sale of a personal residence before it can be sold.
To get the required legal approval to sell your home, the Department of Justice will file what is essentially a foreclosure complaint against you in District Court. In response, you have the right to file an answer to the DOJ foreclosure and defend your house from sale in court.
The IRS does not take houses unannounced, by surprise, and under cover of the night. There is a court process that must be exhausted first. Even if the factors are right for an IRS home seizure, you have rights. First, to take the IRS to Tax Court to dispute the sale, and if unsuccessful, to defend your house against a Department of Justice foreclosure complaint. You also have defenses – the IRS cannot make a no equity seizure, and its own policy is house seizures occur only as a last option. And for practical purposes, the IRS is only taking the house seizure route in egregious, high dollar, high equity cases, that have a failure to cooperate and communicate hardship factors.