How Often Does the IRS Make a Mistake in Property Seizures?

The Treasury Inspector General for Tax Administration (TIGTA) is required under Internal Revenue Code Section 7803(d)(1)(A)(iv) to annually evaluate the IRS’ compliance with the legal seizure provisions to ensure taxpayer’s rights are not being violated.  The IRS appears to be human, and it makes legal and administrative errors when seizing property, says the Treasury Inspector General for Tax Administration (TIGTA).

In September of 2019 TIGTA  completed the Fiscal Year 2019 Review of Compliance With Legal Guidelines When Conducting Seizure of Taxpayers’ Property.  The TIGTA conducted a review of 52 IRS property seizures from July 1, 2017 to June 30, 2018 to determine if they complied with the requirements of Internal Revenue Code sections 6330 to 6344 and Internal Revenue Manual guidelines.

The IRS made 260 seizures in the period under review. The number of seizures conducted by the IRS diminished from 10,090 in Fiscal Year 1997 to 74 in Fiscal Year 2000. The number of seizures has increased since Fiscal Year 2000; however, total seizures in Fiscal Year 2017 were approximately 3 percent of those reported for Fiscal Year 1997. Additionally, seizures have decreased by 58 percent from 776 in Fiscal Year 2011 to 323 in Fiscal Year 2017. 

IRS seizures are usually the result of a lack of cooperation or failure to draw out substantial equity in property. It is extremely important to understand your rights and how to protect them.

Here is what was found:

Many of the Seizures Conducted Involved Real Property and Varied Geographically

During the period July 1, 2017, through June 30, 2018, the IRS conducted 260 seizures against taxpayers with unpaid liabilities. TIGTA reviewed the population of seizures to identify any common characteristics or trends. Seizures involved real property, and the majority of them were classified as “other” real property, which is real property other than a taxpayer’s primary or personal residences.

Seizure Procedures and Internal Controls Were Not Always Followed

To determine the IRS’s compliance with seizure procedures and guidelines, TIGTA reviewed a judgmental sample of 52 seizures from the 260 seizures that the IRS conducted from July 1, 2017, through June 30, 2018.  The judgmental sample of 52 seizures consisted of: 5 principal residences, 19 personal residences, 20 other real property, 5 other personal property, and 7 business-related assets.  Income reported by the sampled taxpayers based on the most recently filed tax return ranged from more than $3,000,000 to a loss of more than $15,000,000 with an average income reported of $91,142. The average balance due for taxpayers at the time of the seizure for the tax modules included on the seizure ranged from more than $3,000,000 to approximately $14,000,000 with an average balance due of $398,207.

TIGTA’s review of the 52 seizures identified seven instances on six seizures in which the IRS did not comply with a particular I.R.C. or an Internal Revenue Manual (IRM) requirement, or there was no guidance on the specific issue.

Seizures would not have occurred with accurate property valuation and encumbrance analyses

I.R.C. § 6331(j) requires that no levy may be made on any property or right to property which is to be sold under I.R.C. § 6335 until a thorough investigation of the status of the property has been completed. The elements of investigation should include the determination that the equity in the property is sufficient to yield net proceeds from the sale to apply to the liability. The IRM requires a record check to verify the taxpayer’s interest in the property and to identify any encumbrances against the property no more than 90 calendar days prior to submission for the group manager’s approval.  Besides determining the fair market value of assets, the Revenue Officer is required to conduct a records search to verify ownership and identify all recorded encumbrances against the property. In addition, after a seizure and before a sale, a current records check must be completed and Form 2434-B, Notice of Encumbrances Against or Interests in Property Offered for Sale must be updated if the most recent records check is 90 calendar days or more prior to the sale date.

If Revenue Officers do not evaluate the condition of the property and complete the encumbrance analysis correctly, assets with no equity can be seized only to be released, which wastes the Government’s resources and can put undue burden on taxpayers.

TIGTA included recommendations in their FY 2018 report to ensure that there is documentation of the Revenue Officer’s discussions with the PALS for property valuation and to identify encumbrances.  The IRS partially agreed with the recommendations providing that there is already IRM guidance for these discussions; however, the IRS proposed to issue memorandums to remind employees of their responsibilities as included in the IRM. The proposed corrective actions were completed in December 2018, which is after these seizures occurred; therefore, we are not making a recommendation at this time

Revenue Officers and property appraisal and liquidation specialists are not always notified of nonjudicial sales

The IRM provides that property is discharged from a tax lien when the holder of a superior encumbrance forecloses nonjudicially under I.R.C. § 7425(b)(2) and properly notifies the IRS. Publication 786, Instructions for Preparing a Notice of Nonjudicial Sale of Property and Application for Consent to Sale, provides a step-by-step guide for lienholders to properly notify the IRS of nonjudicial foreclosure sales. In addition, Publication 786 clearly describes the reason for a nonjudicial sale notice is to notify the IRS of the sale in order for property to be sold free and clear of any liens in which the IRS is a secured creditor.

The IRM notes that nonjudicial foreclosure sale notices are generally directed to the IRS Collection Advisory function, and that the Revenue Officer working the case is to be provided a copy of the foreclosure notice so that the Revenue Officer can decide what further action should be taken. If the case is not assigned, has been reported currently not collectible, or is assigned to the Automated Collection System, the history should be noted accordingly. The IRM includes that to meet the requirements of I.R.C. § 7425(c)(1) a notice of nonjudicial sale must be given:

• In writing.
• By registered or certified mail or by personal service.
• To the Advisory function group manager (or other delegated office) for the Field Collection area where the sale is to be held.
• Not less than 25 calendar days prior to the sale.

The IRS stated that it receives about 50,000 nonjudicial foreclosure notices every year. Currently, when the IRS receives the nonjudicial notices, employees count and file them without taking any additional action. The Advisory function does not generally cross-reference every notice received to determine if there is an active collection case, even though IRM procedures require the Advisory function to send a copy of the notice to the assigned Collection function employee. In addition, there are no case controls or indicators used to track nonjudicial notices received by the IRS. The IRS further stated there is no provision that allows for a purchaser to be paid interest on the held funds in this type of situation.

Lienholders are complying with I.R.C. § 7425 nonjudicial foreclosure notices; however, the IRS is not properly notifying the relevant Collection function personnel to ensure that improper seizure actions are not taken so that IRS resources are used efficiently and taxpayers are not burdened. If promptly informed of nonjudicial foreclosures, IRS management could allocate their limited resources on other assets that do not have a nonjudicial foreclosure notice.

There are no internal controls to prevent Revenue Officers from receiving keys to property prior to seizure

TIGTA reviewed the IRM and asked the IRS if there are any guidelines or procedures on accepting and securing keys for a seized property. The IRS stated there are no procedures on accepting keys to a property that has not been seized. IRS management stated that there are no internal controls in place to guide or prevent Revenue Officers from accepting keys to property prior to seizure. However, if the IRS accepts keys to property that has not been seized, the Government may be held liable for damage to the property because the IRS could be considered the custodian of the property. Also, without any guidance for securing property keys, there is a risk of losing or misplacing them, leading to delays, and potentially burdening the taxpayer.

The PALS did not request that the Revenue Officer release seized property when a taxpayer filed for bankruptcy

The IRM includes that the PALS should check the ICS within two workdays of the sale date and check the Court Electronic Records system if there is an indication the taxpayer may have filed bankruptcy. Recommendation 1: The Director, Field Collection, should require the Advisory function to determine if there is an active collection case when nonjudicial foreclosure notices are received and, if there is, to properly notify the assigned Collection function employee by providing a copy of the foreclosure notice, as required by the IRM. Recommendation 2: The Director, Collection Policy, Small Business/Self-Employed Division, should update the IRM to provide guidance to revenue officers and the PALS employees on the appropriate practice of accepting keys prior to seizure, including what is required to properly secure the keys when they are accepted.

Seizures of Taxpayers’ Property Who are Experiencing Economic Hardship

Pursuant to I.R.C. § 6343(a)(1)(D), the IRS must release a levy if it is causing an economic hardship, i.e., taxpayers who are having difficulties meeting basic living expenses. A levy can include: the garnishment of wages, in which case the employer remits wages to the IRS; it can be the attachment of a bank account, in which case the bank remits the account contents to the IRS; or it can be the seizure of an asset, such as land or personal property, in which case the IRS follows a process whereby it seizes the property and sells it to pay off or contribute to the tax debt.

When deciding whether to seize property, IRS seizure procedures take into consideration numerous factors including whether the taxpayer falls into one of these three categories: “will pay,” “can’t pay,” or “won’t pay.” The IRS is more likely to seize assets of a “won’t pay” taxpayer, such as a taxpayer who has the ability to pay the tax debt but refuses to do so. However, the IRS will not seize property from taxpayers who are deemed either “will pay” or “can’t pay.” The “will pay” and “can’t pay” categories include taxpayers who are otherwise in filing and payment compliance and have proposed a collection alternative such as an installment agreement or offer in compromise, as well as those taxpayers who “have no ability to make payments and have no distrainable assets.” If a taxpayer has “distrainable assets” (i.e., assets capable of being seized) and the taxpayer cannot or will not utilize the equity in those assets, IRS procedures permit seizure of assets.

This year we reviewed the seizures of all 56 taxpayers who had a low-income indicator on their tax accounts. In six of those 56 cases, the IRS seized property of taxpayers who appeared to be experiencing an economic hardship. The property in question was typically real property on which the taxpayer was unable or unwilling to borrow or sell to pay off or contribute to payment of the tax debt.

Because of the law’s prohibition on levies that cause an economic hardship, we asked the IRS why its procedures allow the seizure of property from taxpayers who appear to be already experiencing an economic hardship. The IRS offered various rationales including that

I.R.C. § 6343(a)(1)(D) does not apply to the seizure of property and applies only to “monthly income.” We could not identify support for this rationale. The seizure of real property may impact a taxpayer’s financial well-being in the same way as the seizure of financial assets if the taxpayer needed to access the equity in the real property to meet basic living expenses. Another explanation provided by the IRS is that Revenue Officers give due consideration to the seizure of assets such as land and whether such seizure exacerbates an economic hardship. IRS management also stated that seizing the taxpayer’s property can decrease the taxpayer’s monthly expenses (homeowners association dues, property taxes, utilities, etc.) associated with the asset, while allocating the equity in the asset that was seized and sold to the taxpayer’s liability.

The IRS does have procedures that require Revenue Officers to consider economic hardship before a levy. However, we could not identify any specific procedure which addresses a situation in which the taxpayer is already experiencing an economic hardship but possesses property (real or personal property) where there may be some available equity. Although Revenue Officers made statements in cases we reviewed that the taxpayer did not indicate the seizure would cause an economic hardship, there is a possibility that some taxpayers in these types of situations could ease their economic hardship by accessing the equity in the property. The IRS procedures could better address how Revenue Officers should proceed in this type of situation.

The Director, Collection Policy, Small Business/Self-Employed Division, should develop a procedure which addresses the situation in which the taxpayer is already experiencing an economic hardship, but possesses property (real or personal property) where there may be some equity the taxpayer may need to access for basic living expenses.

The Internal Revenue Service Violated Taxpayer Rights by Seizing Assets During the Collection Due Process Period and Failing to Provide the Required Notice

The I.R.C. § 6331 authorizes the IRS to seize a taxpayer’s property for unpaid tax after sending the taxpayer a Letter 1058, which provides the taxpayer the opportunity to exercise their Collection Due Process (CDP) rights of appeal. If a taxpayer does not pay overdue taxes, make other arrangements to satisfy the tax debt, or request a hearing within 30 calendar days of the date of the notice, the IRS may seize the taxpayer’s property. The law requires that if the taxpayer files a timely request for a CDP hearing, levy actions on the assessments that are the subject of the CDP notice must generally be suspended during the appeal period and while any court proceedings are pending.  Additionally, the law provides that during the pendency of the CDP hearing, the running of the collection statute of limitations is suspended.

Appeals’ mission is to resolve tax controversies on a basis that is fair and impartial to the Government and the taxpayer. In CDP hearing cases, the Appeals officer is responsible for making a determination based on the facts and the law known to Appeals during the time of the hearing.  After Appeals has made its determination and if the taxpayer disagrees, the taxpayer can petition the U.S. Tax Court and appeal the CDP determination. Generally, all collection actions are suspended from the date of the taxpayer’s request until a Notice of Determination is issued or the Tax Court’s decision is final.

If the taxpayer did not timely request a CDP hearing with Appeals, the taxpayer may be entitled to an “equivalent hearing” with Appeals, but only if specifically requested. An equivalent hearing is equivalent to a CDP hearing in all ways except that there is no statute suspension, no retained jurisdiction, and the taxpayer does not have the right to seek judicial review of Appeals’ decision at the conclusion of the hearing.

The IRM includes that the Letter 1058 should be hand delivered to the taxpayer if possible, left at the taxpayer’s home or business if no contact was made with the taxpayer, or issued to the taxpayer by certified or registered mail with a return receipt. The Revenue Officer should personally deliver the Form 668-B to the taxpayer or leave it at the residence of the taxpayer. The Letter 1058 should include all tax modules that are included on the Form 668-B. If the Letter 1058 was issued previously to the taxpayer and it did not include all of the assessed tax modules, an updated Letter 1058 needs to be issued. The Form 668-B should generally contain all outstanding tax modules; however, there is an exception if the additional tax modules arise after approval but prior to the seizure. When this occurs, the case file must include documentation that the Revenue Officer attempted to advise the taxpayer that the Form 668-B does not include all of their tax liabilities.

The General Services Administration’s Outsourced Sales Expenses Were Not Always Correctly Charged to the Taxpayer’s Account

In September 2017, the IRS established a pilot program through the General Services Administration (GSA) to outsource the sale of seized property through the Internet. The IRS outsourced sales to the GSA pilot program from September 25, 2017, through August 15, 2018. On August 15, 2018, the Director, Collection, approved for the GSA to become a permanent option to outsource personal property sales. The GSA fee schedule includes a flat fee of $275 for the sale of seized vehicles; however, for other personal property, there is a sliding fee scale. The scale starts at a fee of $250 (or the sale amount if less than $250) for sales up to $1,000. For sales from $1,000.01 to $5,000, the fee is 25 percent of the sale proceeds, and at the top end of the scale, for sales of more than $250,000.01, the fee is 6 percent of the proceeds.