Can the IRS take my house if I owe back taxes?
Short answer: Yes, you can lose your home to the IRS. Are you likely to lose it? No. Let’s take a look at why.
First, it is not a simple process, the IRS Revenue Officer assigned to your case cannot decide to do this on their own. A seizure of your personal residence requires that the Revenue Officer get the approval of the area director first (either Field Area or Advisory/Insolvency), unless collection of the tax is in jeopardy. Seizing your home is also against IRS Policy. See Statement 5-34, Internal Revenue Manual (IRM) 220.127.116.11.8. Second, a Court order is required. Finally, you have the right 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.
The Seizure Process
There are two options for enforcing collection against the principal residence of a taxpayer or residence which is owned by the taxpayer but occupied by the taxpayer’s spouse, former spouse, or minor child. These two options cannot be used concurrently. One is a proceeding to obtain a court order allowing administrative seizure of a principal residence under Internal Revenue Code (IRC) section 6334(e)(1). The other is a suit to foreclose the federal tax lien against a principal residence under IRC section 7403. The suit to foreclose is the secondary alternative used only when the seizure remedy is not the optimal solution.
The current IRM 18.104.22.168, Judicial Approval for Principal Residence Seizures, provides the instructions for obtaining a court order allowing administrative seizure of a principal residence under IRC section 6334(e)(1). While not explicitly stated, the same considerations apply to suits to foreclose the tax lien on a taxpayer’s principal residence. Additionally, a suit to foreclose should only be pursued when there are no reasonable administrative remedies and hardship issues, as described below, are considered.
The No Equity Rule
If your home has “no equity”, the IRS is barred from seizing and selling it. The sale must result in money recovered. If you are not sure what this means, the term “Equity” is defined as the difference between what your house is worth, and how much you owe the bank on it. Generally, when the IRS or your tax attorneys determines the equity in your property, a quick-sale discount figure will be applied (FMV x.80) (or a 20% discount). In many cases, applying this calculation alone makes the seizure and sale of your residence a no go for the IRS.
How Often Does this Happen?
In 2014, for example, the IRS Data Book reported that there were 432 seizures of real property (houses) and personal property (cars) made. That’s out of the millions of delinquent taxpayer collection accounts. Folks, that is 0.00003927272 percent. Remember, this is generally against established IRS Policy. In most cases that I have seen, the IRS only goes after a residence if there is very large tax bill, a whole lot of equity, and the client failed to take the matter seriously enough and all other collection methods failed (e.g., bank levy or wage garnishment).
Unless you are a high roller or have just ignored the IRS collection efforts to work out a payment arrangement, chances are they don’t want your home. And, not only is seizing it a lot of work, but selling it is even more work. The lesson learned is that engaging the IRS early and tendering a well thought out plan to address your tax debt will avoid most of, if not all of, the unpleasant IRS collection tactics. In short, take the initiative; don’t wait for the IRS to send you a Notice of Seizure.