TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Tuesday, November 2, 2010

TIGTA: IRS Needs to Better Protect Federal Tax Liens in Mortgage Foreclosures

TIGTA The Treasury Inspector General for Tax Administration today released Coordination and Procedures for Foreclosures Can Be Improved (2010-30-119):

The IRS was inconsistent in how it processed foreclosure cases and coordinated with local United States Attorneys' Offices (USAO). ...

When a taxpayer fails to pay taxes owed, the IRS may attach a claim to a taxpayer's real property -- a claim known as a Federal Tax Lien. The IRS files a Notice of Federal Tax Lien (NFTL) in appropriate local government offices, notifying interested parties that a lien exists on the property. When property has a Federal Tax Lien attached, the IRS may collect proceeds from a foreclosure sale to cover the taxes owed.

A foreclosure is either judicial or non-judicial. The USAO is responsible for protecting the Federal Government's interest in judicial foreclosure sales, while the IRS is responsible for protecting the Federal Government's interest in non-judicial foreclosure sales. Although the IRS does not have the primary responsibility to protect the Federal Government's interest in judicial foreclosure proceedings, it must coordinate such proceedings with the USAO.

TIGTA reviewed whether the IRS effectively and efficiently protects the Federal Government's interest during foreclosure proceedings when an NFTL has been filed. TIGTA found that the IRS could improve its coordination with the USAO for judicial foreclosures. TIGTA also found that the information the IRS provided to the public for submitting a timely notice of sale for non-judicial foreclosures was inconsistent with the Internal Revenue Code.

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The IRS does not "attach" a lien to a taxpayer's property. A federal tax lien arises and attaches to all property and rights to property as a matter of law when a taxpayer neglects or refuses to pay any federal tax. There is nothing the IRS can or cannot due to affect the lien's creation and attachment. Moreover, the IRS can collect deliquent taxes from a foreclosure sale regardless of whether a NFTL has been filed. The NFTL merely affects the lien's priority, not its viability. Either you or TIGTA do not understand the fundamentals of FTLs. Furthermore, TIGTA plainly does not understand the U.S. Attorney's offices. Generalizing about the operation of the USAOs is ridiculous. Each USAO is operated as the political fiefdom of the politically-appointed U.S. Attorney who runs it. The monitoring of judicial foreclosure cases by the USAOs runs the gamut from close attention in a few districts to complete inattention in many others. Millions, if not billions of dollars are lost each year because of misfeasance and nonfeasance by USAOs in the foreclosure process.

Posted by: Publius Novus | Nov 3, 2010 7:24:08 AM