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Issue  176  Article  305
Published:  3/1/2010

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Dirt Tales From the Deed Vault - Episode 34
John Dillard, Vice President and Legal Counsel

This month's installment of Dirt Tales examines the effect of an IRS lien in foreclosure.

Jeff Mills is an attorney whose practice is limited to conducting foreclosures for his lender clients. In fact, he calls his law firm Jazzy Jeff's Foreclosure Mill. Recently he received a phone call from another attorney who had been engaged to purchase a house that had been foreclosed upon by Jazzy Jeff. The other attorney inquired as to whether Jeff had been aware that the debtor had a rather substantial IRS tax lien against them and whether Jeff had given IRS notice of his foreclosure. Jazzy Jeff likes to be known for getting his foreclosures completed as fast as the system will allow and he admitted that he had not given the IRS any notice regarding his foreclosure. "Since they were a junior lien why would I have to worry about sending them a notice?" he asked. "They hadn't filed a Request For Notice" he added.

The other attorney explained why it was necessary to give the IRS notice. He cited 26 CFR §01.7425-3(d) which provides that in a foreclosure of a superior mortgage lien interest the IRS lien will be extinguished as it pertains to the real property foreclosed upon provided at least 25 days notice is given in writing to IRS. However, the other attorney pointed out, Internal Revenue Code §742.5(d) provides the IRS has 120 days in which to redeem the foreclosed property by simply tendering the amount of the sales price.

Without having given the IRS at least 25 days notice of the foreclosure Jazzy Jeff had failed to follow the guidelines set out for extinguishing IRS liens and consequently the lien remained on the land, notwithstanding the foreclosure or the fact that it was junior to the deed of trust.

Query, what would have been the outcome if there had been two deeds of trust superior to IRS' lien, with the second one foreclosing and giving proper notice to IRS. Then during the 120 day of redemption the first lien holder institutes foreclosure and in fact forecloses on their deed of trust and also gives at least 25 days notice to the IRS. Does the foreclosure by a superior deed of trust then nullify the IRS 120 day right of redemption? IRS posed that fact situation in 2003 and the Office of the Chief Counsel issued an opinion letter, GL-105261-03, in which they maintained that their original 120 day of redemption would remain in effect.

§6337 of the Code also grants the taxpayer a right to redeem their property following foreclosure of a tax lien for 180 days from the date of the foreclosure by tendering the sales price plus 20%.

Whenever an IRS lien is discovered in the course of a title examination prior to the institution of a foreclosure due care must be taken that the regulatory and statutory mandates of the IRS are strictly followed and complied with.


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