The Internal Revenue Service was inconsistent in how it processed foreclosure cases and coordinated with local United States Attorneys’ Offices, and needs to improve its procedures, according to a new government report.

J. Russell George

The report, by the Treasury Inspector General for Tax Administration, noted that when a taxpayer fails to pay taxes, the IRS may attach a claim to a taxpayer’s real property known as a federal tax lien. The IRS files a Notice of Federal Tax Lien in the appropriate local government offices, notifying the interested parties that a lien exists on the property. When a property has a federal tax lien attached, the IRS may collect the proceeds from a foreclosure sale to cover the taxes owed.

A foreclosure is either judicial or non-judicial. The U.S. Attorneys’ Offices are responsible for protecting the federal government’s interest in judicial foreclosure sales, while the IRS is responsible for protecting the federal government's interest in non-judicial foreclosure sales.

Although the IRS does not have the primary responsibility for protecting the federal government’s interest in judicial foreclosure proceedings, it must coordinate such proceedings with the USAO.

TIGTA reviewed whether the IRS effectively and efficiently protects the federal government’s interest during foreclosure proceedings when a Notice of Federal Tax Lien has been filed. TIGTA found that the IRS could improve its coordination with the USAO for judicial foreclosures. TIGTA also found that the information the IRS provided to the public for submitting a timely notice of sale for non-judicial foreclosures was inconsistent with the Tax Code.

“As home mortgage foreclosures have increased, reaching record levels, it is imperative that the IRS comply with laws, policies and procedures to ensure that Americans’ rights are protected,” said TIGTA Inspector General J. Russell George in a statement. “The IRS must make every effort to improve its foreclosure procedures, including better coordination with the United States Attorneys’ Offices,” he added.

TIGTA made five recommendations to the IRS in its report, and the IRS agreed with all of those recommendations. TIGTA recommended that the collection director of the IRS’s Small Business/Self-Employed Division ensure that the IRS Advisory Unit provides timely information regarding the application of any surplus proceeds and timely recommendations regarding the value of any releases of rights of redemptions.

The Advisory Unit also should have sufficient information to consider the potential redemption of foreclosed properties, said TIGTA. Communications with the public should be consistent with the tax law, the report recommended. Foreclosure files should include evidence supporting any rejection of notices of sale, according to TIGTA, and releases of the rights of redemption need to be timely and appropriate.

In response to the report, IRS officials agreed with the recommendations and plan to issue a yearly memorandum establishing work priorities that will reinforce the Internal Revenue Manual guidance for identifying cases, entering them into the Integrated Collection System, and closing the cases. The memorandum will address the need for timely responses to the USAO regarding recommendations for surplus proceeds or release of rights of redemption, along with an appropriate history notation. Foreclosure and redemption practices will be considered as a topic for the next available Revenue Officer Continuing Professional Education training program.

The IRS also plans to look into opening a dialogue between its Advisory Unit and the U.S. Attorneys’ Offices, as appropriate and as resources allow. The IRS is currently revising various foreclosure and redemption products.