May 3, 2018

IRS Refuses to Enforce Lien, Leaving Taxpayer Without Recourse

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If the IRS has a superior lien on real estate, it should enforce its lien and apply the sales proceeds to reduce the taxpayer’s unpaid taxes. But what if there is a junior lien that acquires the real estate first? Can the IRS work out a deal with the junior lien holder and divert a portion of the sales proceeds to that party rather than to satisfy the taxpayer’s unpaid taxes? The court recently addressed this in Hunter v. United States, No. 17-13494 (E.D. Mich. 2018).

The Facts & Procedural History

The facts and procedural history for the case are as follows:

The taxpayer failed to pay his Federal taxes for the 2006-2011 tax years. The IRS filed lien notices in 2013 and 2015 for the unpaid taxes. The taxpayer defaulted on his mortgage, and in 2017, the bank executed a non-judicial foreclosure sale on his real estate. The lender sent the IRS notice of the sale, but sent it to the wrong address. A third party mortgage company purchased the real estate at the foreclosure sale.

The government then brought suit against the new mortgage company and the taxpayer to enforce its tax liens on the real estate. Later in 2017, the government reached a settlement with the new mortgage company whereby the real estate would be sold and 50 percent of the net profits from the sale would be paid to the IRS. These funds were to be applied to the taxpayer’s balance. The taxpayer asked the court to order the government to enforce its liens on the real estate, given that the government had superior title over the new mortgage company.

Taxpayer Must Own the Property

The government generally cannot be sued. There are some exceptions, one of which is 28 U.S.C. § 2410(a)(1). Section 2410(a)(1) provides a means for bringing an action to quiet title to real estate. It allows a private lien-holder the right to enforce their rights to property that is held or claimed by the government. To be able to take advantage of this type of suit, the individual must have ownership of the real estate in question.

The facts in this case were such that the taxpayer did not currently own the property. He argued that he had a rescission right for the foreclosure sale which would allow him to reclaim title to the real estate. This right had lapsed after the settlement but before the time the taxpayer brought suit.

Given this fact, the court concluded that it did not have jurisdiction under the limited exception in 28 U.S.C. § 2410(a)(1).

The Takeaway

The taxpayer in this case lost his property and half of the net sales proceeds were not applied to reduce his tax liability. This result does not seem fair, given that the taxpayer was not party to the negotiations between the government and the new mortgage company. It is also not the taxpayers fault or doing that caused the original mortgage company to send the notice to the wrong IRS address. If anything, the take away from this case is that a taxpayer has to enforce his rights while he owns the real estate or he may lose the right to dispute any purported settlement the new buyer works out with the government.

COMMENTS (2)
  • […] If the IRS has a superior lien on real estate, it should enforce its lien and apply the sales proceeds to reduce the taxpayer’s unpaid taxes. But what if there is a junior lien that acquires the real estate first? … read more –> IRS Refuses to Enforce Lien, Leaving Taxpayer Without Recourse […]

  • […] If the IRS has a superior lien on real estate, it should enforce its lien and apply the sales proceeds to reduce the taxpayer’s unpaid taxes. But what if there is a junior lien that acquires the real estate first? … read more –> IRS Refuses to Enforce Lien, Leaving Taxpayer Without Recourse […]