Tax Liens

I traveled to my recorder’s office to research the title on a foreclosure property that had an opening bid posted of $14,600. What I found was a 2008 federal tax lien on the property for $27,600. This was on the same day that the sale was to be held so I did not have the time to research the problem before the sale was held. Briefly, this is what I have learned on the subject from different sites, verified on the IRS web site www.irs.gov/irb/2007-36_IRB/ar17.html: (But I still have a BIG question)

Assuming the debt being foreclosed on is senior to the fed tax lien:

1) The lender foreclosing must give 25 day notice to the IRS of the sale and receive their “consent” to have the sale in order for the junior tax lien to be wiped out.
2) If the IRS has been notified and given consent, the IRS has a 120 day right of redemption after the sale and, if acted upon, the buyer at the sale will be reimbursed the purchase price by the IRS plus interest.
3) If the IRS does not redeem within the 120 days, the tax lien is gone for good.
4) If the IRS has not been notified and given consent, the tax lien is still there.

The Question: As a possible buyer at a sale, how can I know that the the IRS has been sent the proper notice and given consent? Is it always done by the Trustee as a requirement of preparing for a foreclosure sale on a property with a tax lien? Will the IRS respond to a telephone call about this?

I contacted the Trustee (a law firm) holding the sale and they said they would not give out any info about the title of a sale property (standard reply).
It seems important before bidding that I get something in writing from the lender or Trustee that the IRS has been satisfied or some assurance from the IRS direct.

Any experiences with this question would be appreciated…..

 

Answer:

There are a lot of issues here and some missing info, but I think you can break down the analysis into a few basics.

First you say the opening bid is $14,600, but the lien is $27,600. How much is the first lien, how much is the house likely to sell for, and how much is the house actually worth on the market?

If you bid on the house and are unsuccessful, game over. If you happen to get the house, one of two things happen. Either the IRS elects to recover the property and pay you off, or you get them to release the lien.

You say it’s a foreclosure, and let’s also assume the IRS lien is in 2nd position, and the first lien is $50,000. If the house sells for $70,000, the first will collect their $50K, the IRS will probably take the remaining $20K, and release the lien, making the house free and clear, and you get $30,000 of equity.

Now let’s say the value is $100K, but the first lien is 90K. No matter what the sale price is, there isn’t enough equity there for the IRS to fool with. If there is not enough “2nd lien market value” left after the sale, it’s likely they would go away after filing a request.

It really doesn’t matter if the IRS has been notified or not, they will eventually make their decision to redeem and recover, based on any equity left in the home. So as any good investor knows, you just have to know your exit strategy before you buy, to know if it is financially worth the trouble or not.

You either win (get the house and the lien released) or you tie (the IRS repays you and takes the house). I don’t see a “lose” situation here.

Good luck!