Article of the Month for April 2005

Foreclosure and IRS' Redemption Rights

by Ward Hanigan

Debtors in trouble frequently owe the IRS for unpaid income taxes. IRS often secures its lien rights against them by recording (at the local county recorder's office) a Notice of Federal Tax Lien. Thereupon the tax lien automatically attaches to the taxpayers' equity in any property in their name in the county.

In most instances IRS is a junior lienholder in that its lien is usually the one most recently recorded, and therefore, the most susceptible to being wiped off by a foreclosure of any prior recorded senior lien (1st or 2nd, etc.)

If IRS' lien is wiped off by a trustee's sale it has the right to redeem the property from the new owner within the following 120 days. Then IRS would sell the property at its "redemption sale", presumably for a lot more than what it went for at the earlier trustee's sale. The sale proceeds go pro-tanto towards its incidental expenses, reimbursement to the redemption fund, the tax liability and then to the "party entitled" (the next junior lienor in priority at the trustee's sale). If IRS does not exercise its redemption right within the 120 days it will automatically expire.

IRS' redemption payment includes:

The practical consequences of an IRS lien recorded against property that's in foreclosure are: Generally IRS won't attempt to redeem property where the outstanding tax liability is less than $10,000 dollars. You can call the revenue agent listed on the recorded tax lien to get a "ballpark" estimate of what the tax lien currently amounts to. Also, IRS won't redeem if it doesn't have a "guaranteed bidder" for the property who has signed their Agreement To Bid and has put up the requisite 20% bid guarantee.

If IRS exercised their redemption right they'd pay off the foreclosure buyer and record their Certificate of Redemption. Then they'd advertise the property for sale in a local newspaper, announcing the particulars of the sale that would take place in their local offices approximately 20 days later. In addition they'd contact people who asked to be on their local bidder's list.

IRS' redemption sales are made without warranty of any kind concerning the condition of the property or the status of its title record. Most of their sales are by public outcry. The winning bidder must have sufficient Cashier's Checks, made payable specifically to IRS, to cover 20% of the top bid. The balance is due within 1 to 10 business days (set by the revenue agent). Upon payment in full IRS will issue the buyer a Director's Deed (which is the equivalent of a quitclaim deed) to record.

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