5.12.4. Judicial/Non-Judicial Foreclosures

(1) A foreclosure is the process by which an owner's right to a property is terminated, the foreclosing party's interest is liquidated, and junior creditor interests on the property are extinguished. This IRM contains instructions and information related to third party foreclosures.

(2) This IRM provides guidance regarding the following types of third-party foreclosures:

• Judicial foreclosures, as referenced in 28 USC § 2410 and 26 USC § 7425(a), and

• Non-judicial foreclosures, as referenced in 26 USC § 7425(b).

(3) When the IRS is a creditor in a foreclosure, IRS employees investigate the circumstances to ensure the government’s interest is protected.

(1) The policies in this IRM are based upon the following United States Code, IRC sections, and Treasury Regulations.

(2) The following Policy Statements and Delegation Orders regulate lien certificate and foreclosure procedures:

• IRM 1.2.1.6.2, Policy Statement 5-2, Collecting Principles, and

• IRM 1.2.2.6.4, Delegation Order 5-4 (Rev. 3), Federal Tax Lien Certificates.

(1) The Director, Collection Policy is responsible for overseeing policy and procedures regarding the foreclosure program and related IRMs.

(2) Collection Policy, Enforcement is responsible for development and delivery of policies within the lien program.

(3) Managers of employees who work judicial and non-judicial foreclosures are responsible to ensure these procedures are followed and employee actions are timely and accurate.

(4) Employees who work judicial and non-judicial foreclosures are responsible to follow the procedures in this IRM.

(1) Civil Enforcement Advice and Support Operations (CEASO) management is responsible to ensure effectiveness and measure objectives through management reviews. Throughout this IRM, “CEASO” is referred to more generally as “Advisory”.

(2) Specific case activity on foreclosure cases is documented in the following systems:

• The Integrated Collection System (ICS) is used to control lien-related requests and foreclosure activities and to document case work by Advisors, Revenue Officers (ROs), and Advisory Tax Examiners.

• The Centralized Lien Organization (CLO) uses the Accounts Management System (AMS), to document responses to lien payoff requests, including those issued pursuant to foreclosures.

(1) Access to systems used in working foreclosures is controlled using standard access guidelines through Business Entitlement Access Request System (BEARS).

(2) Third-party foreclosures are subject to external audits.

(1) Acronyms used throughout this IRM are included in the following table:

(2) See IRM 5.12.1-2, Exhibit, Glossary of Common Acronyms in IRM 5.12, for additional common acronyms used throughout IRM 5.12.

(1) Related IRMs are referenced throughout this section. Other related sources include the Local Law Guides.

(1) The purpose of a judicial or non-judicial investigation is to determine first whether the foreclosing party holds an encumbrance senior or junior to the IRS’ position.

• If the foreclosing encumbrance is junior to the IRS’ position, the federal tax lien remains on the property undisturbed by the foreclosure. The IRS may be asked by the purchaser to discharge the property from the lien.

• If the foreclosing encumbrance is senior to the IRS’ position, the federal tax lien will be extinguished from the property after the foreclosure sale, as provided by state law. An investigation may be needed to determine how the equity in the property is impacted by the foreclosure and whether any action is warranted to protect that interest.

(2) Other Investigations (OI) to investigate foreclosures originate in Advisory.

(3) During the course of a judicial or non-judicial investigation, when the applicant, taxpayer, representative, or IRS employee misses a specific deadline, follow-up is based on meeting the IRS' requirements to maintain its standing in the proceeding. Follow-up should be initiated no later than fourteen (14) calendar days after the missed deadline. This follow-up includes closing the case if this action is appropriate.

(4) When circumstances dictate, the employee should use problem solving and negotiation techniques, considering the perspective of the taxpayer, Power of Attorney (POA), or third party when working toward case resolution.

(5) Any written notification or other communication should address the issue(s) clearly and in a language understandable to someone unfamiliar with IRS terms, acronyms, and jargon.

(1) A foreclosing lienholder should be encouraged to request a discharge of the property from the lien under IRC 6325(b)(2) before initiating the foreclosure action rather than join the United States in a judicial proceeding. It would be to their advantage to eliminate the Government's right of redemption and to the government's advantage to eliminate lengthy litigation.

(2) When a discharge is requested before the foreclosure, review the request following standard discharge guidelines found in IRM 5.12.10 , Lien Related Certificates, and take the following actions:

1. Furnish a commitment letter to the foreclosing party within thirty (30) calendar days of receipt of a complete and acceptable application.

2. Issue the certificate of discharge after receipt of proof that the taxpayer has been divested of right, title, or interest in the property.

Caution: Do not issue a certificate of discharge when litigation has been initiated but not yet resolved without the prior approval of Area Counsel.

(3) In non-judicial foreclosures, a discharge commitment letter should not be issued if adequate notice of sale has been provided as required by IRC 7425 (see IRM 5.12.4.5, Effective Notice of Non-Judicial Sale). If a discharge is requested, advise the parties of the procedures for requesting the release of the government’s right of redemption, as described in Pub 487, How to Prepare an Application Requesting the United States to Release its Right to Redeem Property Secured by Federal Tax Lien.

(4) If a Federal agency has foreclosed non-judicially and given adequate notice, but thinks the lien remains a cloud upon the title, a certificate of discharge should be issued as an accommodation to that agency.

(1) The subject of mortgage forgiveness may be encountered when working foreclosure cases. The information provided here is for an awareness of a taxpayer's potential tax consequence arising from foreclosure.

(2) When lenders foreclose and sell a borrower's property or restructure the borrower's loan, the lender may forgive or cancel portions of the loan. A lender may use this as an alternative to, or in conjunction with, a deficiency judgment against the borrower for the balance remaining on the loan after the foreclosure sale. The tax code treats the amount forgiven as income to be taxed. The following are typical scenarios where loan forgiveness may be encountered:

• Lender modifies loan reducing the principal balance of loan and the borrower keeps property.

• Property is sold and deeded back to the lender.

• Lender forecloses and the property sells for less than the amount of the loan.

(3) Cancellation of debt may impact the IRS’ decision to discharge or subordinate a lien interest related to a foreclosure investigation. Asking the lender or borrower whether a portion of the debt will be cancelled should be added to the foreclosure investigation questions for those parties.

(4) The amount forgiven is all or a portion of the remaining amount on the original loan less either the new loan or the sale amount of the property. This forgiven amount becomes cancellation of debt income to the taxpayer. Cancellation of Debt income must be included as ordinary income on the taxpayer’s return unless exclusion is allowable.

(5) The Mortgage Forgiveness Debt Relief Act of 2007 increased incentives for borrowers and lenders to work together when the foreclosure involves the borrower's principal residence. The law lessens the income tax burden created by debt forgiveness, resulting from mortgage restructuring or foreclosure, by allowing taxpayers to secure lower mortgage payments without facing higher taxes or at least not having a higher tax bill because of a foreclosure. See the documents below for additional information on this topic:

• IRS FAQs – Mortgage Forgiveness Debt Relief Act found at Home Foreclosure and Debt Cancellation | Internal Revenue Service (irs.gov),

• Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (And Section 1082 Basis Adjustment,

• Pub 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals), and

• Pub 544, Sales and Other Dispositions of Assets.

(1) The DOJ through the U.S. Attorney’s Office is responsible for working 28 USC 2410 foreclosures. DOJ requests assistance from Advisory as needed when working these cases but case priority is dependent on DOJ resources.

(2) Assistance required by DOJ of the IRS may include the following:

• Determination of the IRS lien priority,

• Determination regarding surplus or excess proceeds,

• Redemption investigation, and

• Other information as requested.

(3) By statute, DOJ may withhold three percent (3%) of all amounts collected pursuant to civil debt collection activities, including judicial foreclosures. Although the DOJ "holds back" this three percent when forwarding sales proceeds to the IRS through the Intra-Governmental Payment and Collection (IPAC) system, taxpayers will receive credit for the full amount received by DOJ without reduction for the 3% fee. See IRM 3.17.243.7.2, DOJ Payments Transferred via IPAC, for additional information.

(1) When the IRS is joined in a foreclosure action, the Assistant U.S. Attorney (AUSA) within the U.S. Attorney’s Office forwards a copy of the summons and complaint, along with a request for the information needed to prepare an answer, to Advisory (through the ACR office).

(2) Promptly screen the request for Notice of Federal Tax Lien (NFTL) filings and determine the balance due on the liens involved in the proceedings. Provide information as follows to the so they can take the legal action deemed appropriate:

1. If there is no outstanding liability, advise the AUSA so that a disclaimer can be filed on behalf of the United States.

2. If there is an outstanding liability for NFTLs involved in the proceedings, furnish any information requested by the AUSA that may be obtained without a formal investigation (e.g., payoff information).

   Note: Payoff information may be provided through a standard IRS letter such as Letter 3640-C, Lien Payoff for Judicial Foreclosure, or another format agreed to by the local AUSA.

(3) In all cases where the government has a lien interest, take the following actions:

1. Open a Non-Field Other Investigation (NFOI) 146, Judicial Foreclosure, on ICS no later than seven (7) calendar days after receipt.

2. Document the receipt date of the notice of judicial foreclosure.

3. Establish a case file.

(4) If a redemption investigation is needed, follow up with the AUSA or the court for the date of sale.

(5) When the property is sold for an amount greater than the balances due on the foreclosing instrument plus other liens senior to the federal tax lien, take action to obtain the surplus (or excess) proceeds for application to the taxpayer's account.

(6) Each area is responsible for establishing the time frame and methodology for following up on foreclosure case issues. However, during the course of an investigation, when the applicant, taxpayer, representative, or IRS employee misses a specific deadline, follow-up is based on meeting the IRS’ requirements to maintain its standing in the proceeding. Follow-ups should be initiated without delay, and no later than fourteen (14) calendar days after the missed deadline. This follow-up includes closing the case, if appropriate. Established procedures should strive to provide a minimum of ninety (90) calendar days remaining available to conduct a redemption investigation.

(7) When an RO is assigned to investigate a foreclosure, the RO should provide the following to Advisory by the date specified on the Courtesy Investigation:

• A completed Form 4376, Report of Investigation (IRC 7425 or 28 USC 2410), or a memorandum detailing the situation,

• The original history documentation, if not on ICS, and

• Any other information requested by the AUSA.

(1) The United States has the right to redeem property sold at foreclosure and resell it. This redemption process and redemption investigations are more fully covered in IRM 5.12.5, Redemptions.

(2) 28 USC 2410(c) provides that where a sale of real estate is made to satisfy a lien prior to that of the United States, the United States shall have 120 calendar days from the date of sale (or the period allowed by state law, if longer) to redeem the property. This gives time to investigate and determine whether it would be to the advantage of the United States to redeem the property.

(3) Redemption provides the IRS an opportunity to resell the foreclosed property for more than the cost of redemption with the resulting benefit to the Government. A principal consideration in such an investigation entails a determination as to whether the value of the property sold in the foreclosure proceeding is reasonably in excess of the amount required to effect the redemption.

(4) When a courtesy investigation is necessary to determine whether to exercise the right of redemption, it is generally issued by Advisory within thirty (30) calendar days before or after the scheduled date of sale, thus allowing the maximum amount of time to complete the redemption process.

(5) In cases where it appears that redemption may be feasible, the assigned employee retains the Courtesy Investigation and the original Form 4376. A copy of the Form 4376 and any other information requested by the U.S. Attorney is returned to the Advisory GM by the due date of the OI.

(1) The elements of a non-judicial foreclosure investigation can generally be divided in two categories:

• Notification of the foreclosure sale

• Foreclosure sale and subsequent activities

(2) The responsibility for the investigation can generally be divided by the elements. The following table generally describes the responsibilities and actions, but these may vary based on case facts and availability of resources.

(3) The positions authorized to determine the adequacy of notice and consent to the sale is addressed in IRM 1.2.2.6.4, Delegation Order 5-4 (Rev. 3), Federal Tax Lien Certificates.

(1) To meet the timeliness requirements of IRC 7425(c)(1), a notice of non-judicial sale must be given:

• In writing,

• By registered or certified mail or by personal service,

• To the Advisory Consolidated Receipts (ACR) office,

• No less than twenty-five (25) calendar days prior to the sale.

(2) For purposes of IRC 7425, "personal service" may be accomplished by the use of personal delivery services (PDS) such as Federal Express and United Parcel Service. For PDS, the date of service is the date of actual delivery, not the date the notice was given to the delivery service. For USPS registered or certified mail, the date of service is the mailing date.

(3) The ACR is the designated office for third parties to submit notices of non-judicial sale. Notices received by other offices do not comply with IRC 7425(c)(1) requirements. The IRS is not required to reply to these mis-routed or otherwise untimely notices. However, at the discretion of Advisory management, mis-routed notices may be forwarded to the ACR for informational purposes or returned to the submitter for corrective action.

(4) In situations where the NFTL has not been filed, or has been filed less than thirty-one (31) calendar days before the sale, it is not necessary for the foreclosing party to notify the IRS of the sale. In these situations, the sale shall discharge the property from the federal tax lien just as it does under local law for other junior liens.

(5) The date of the sale is determined by how the junior liens will be divested from their interest in the property. Determine the date of sale by following the chart below.

(6) When the sale is postponed, the seller of the property is required to give notice of the postponement to the Advisory group manager in the same manner required under local law with respect to other secured creditors. If the postponed sale date is more than 31 calendar days from the NFTL filing date, notice of sale is required to be given even though such notice was not originally required.

(7) In the case of a forfeiture of a land sales contract, Area Counsel should be consulted to determine if the IRS has a redemption right.

(1) Once it has been determined that an investigation is appropriate, open an NFOI -147, Non-Judicial Foreclosure, on ICS no less than seven (7) calendar days prior to the date of sale. Include the receipt date of the IRC 7425 notice in the history.

(2) The non-judicial sale notice is considered adequate if it contains all the following information:

• Name and address of the person submitting the notice of sale,

• Copy of each Form 668(Y)(c), Notice of Federal Tax Lien, affecting the sale or a list containing the name(s) and address(es) of the taxpayer, date and place of each NFTL filing, and the IRS office named on each NFTL filing,

• Detailed description of the property to be sold, including the address of the property, the legal description as contained in a title or deed, any distinctions or particularities as can happen with multiple tracts of land, and, if available, a copy of the abstract of title,

• Date, time, place, and terms of the proposed sale of the property,

• In the case of a perishable property sale as described in IRM 5.12.4.6.1, Definition of Perishable Goods, a statement as to the reason the property is believed to be perishable,

• Approximate amount of the principal obligation, including interest, due the person or creditor selling the property, and

• Description of other expenses (e.g. legal, selling costs, etc.) which may be charged against the sales proceeds.

(3) The notice is considered inadequate if it does not contain the information described in (2) above. In that situation, Advisory provides written notification to the submitter via Letter 1840, Notice of Inadequacy of Nonjudicial Sale Notice.

(4) A timely notice will be considered adequate if the IRS fails to notify the sender, in writing, that the notice is inadequate, more than five (5) calendar days prior to the date of sale.

(5) The Advisory group manager may, at their discretion, consent to the sale of the property free of the lien or title of the United States even though notice of the sale is not timely or is otherwise inadequate.

(6) The Advisory executive will provide an alternative method for the internal tracking of receipts and dispositions where the acknowledgement of the notice or inadequacy of the notice is the only issue, such that the case is not entered onto ICS.

(1) Review the notice of sale for timeliness and adequacy.

(2) If adequate notice was not submitted timely, the federal tax lien will not be impacted by the pending sale, unless the United States consents to the sale free of the tax lien. The foreclosing lienholder will be required to either:

• Pay the amount of the tax lien in full, or

• Request a discharge of the property from the tax lien.

(3) No action is required when the notice is untimely, as described in IRM 5.12.4.5.1, Timeliness of IRC 7425 Notice. At management’s discretion, Advisory may review these notices to determine whether to open an OI, or to notify an RO who is assigned to the taxpayer’s collection case. See IRM 5.12.4.8, Non-Judicial Sale Activities and Tasks, for a partial list of considerations.

(4) No formal investigation is required when the items to be sold are consumer goods. Provide a copy of the notice of sale to the employee assigned the balance due to decide what further action is required, if any. If the case is not assigned, has been reported currently not collectible, or is assigned to the Automated Collection System (ACS), no further action is needed.

(1) A written request for the acknowledgment of the receipt of a notice of sale should be honored as resources allow. Acknowledgement can be made through the mailing of a duplicate notice or via facsimile as long as the third party is agreeable to the method.

(2) See IRM 1.2.2.6.4, Delegation Order 5-4 (Rev. 3), Federal Tax Lien Certificates, for the positions authorized to acknowledge IRC 7425 Notices, and to reject them because of inadequacies.

(1) The Advisory group manager is authorized to disclose to any person who has a proper interest whether an adequate notice of sale was given. Disclosure may be made either before or after the sale.

(2) Any person desiring this information should submit a written request to the Advisory group manager that states their name and address, clearly describes the property sold, identifies the applicable NFTL(s), and gives the reasons for requesting the information.

(1) The term "perishable goods" means any tangible personal property which, in the reasonable view of the person selling the property, is liable to perish or become greatly reduced in price or value by keeping, or cannot be kept without great expense.

(1) Notice of the sale must be given:

• In writing,

• By registered or certified mail or by personal service,

• To the Advisory Consolidated Receipts (ACR) office,

• Before such sale.

(2) The notice of sale of perishable goods shall contain the same information required in IRM 5.12.4.5.2, Adequacy of IRC 7425 Notice.

(3) In the event of a postponement of the scheduled sale of perishable goods, the seller is not required to notify the Advisory group manager of the postponement.

(4) If notice requirements are met, the sale will discharge the subject property from the lien or title of the United States. The proceeds are not discharged.

(5) For provisions relating to the authority of the Advisory group manager to discharge property where the proceeds of the sale are held as a fund subject to the liens and claims of the United States, refer to IRM 5.12.10.3.4, Substitution of Proceeds of Sale.

(1) The proceeds of the sale (exclusive of costs) are held as a fund for not less than thirty (30) calendar days after the date of the sale and remain subject to the liens and claims of the United States. Distribution of the fund is in the same manner and with the same priority as the liens and claims had with respect to the property sold.

(2) If the seller fails to hold the proceeds of the sale in a fund in accordance with the provisions of IRC 7425(c)(3), the seller becomes personally liable to the United States for an amount equal to the value of the interest of the United States in the fund.

(3) The buyer of the perishable property is afforded certain protection. Even if the proceeds of the sale are not held by the seller but all the other provisions are satisfied, the buyer of the property at the sale takes the property free of the liens and claims of the United States.

(1) Any person requesting consent to sell property free of the lien (or title derived from the enforcement of the lien) must submit an original and two copies of the information required in Pub 786, Instructions for Preparing a Notice of Nonjudicial Sale of Property and Application for Consent to Sale.

(2) The information required, as stated in Pub 786, can be submitted electronically from an external source (e.g., foreclosure attorney) as long as the electronic transmission includes all of the required information and is submitted under the penalties of perjury declaration. An electronic signature is acceptable. Internally, the information can be forwarded via secured messaging.

(1) As a general rule, consent may be given without a field investigation if the property is:

• Of nominal value,

• Consumer goods, or

• Real property in which the Government's interest is less than the criteria established in IRM 5.12.5.1.2, Criteria for Working Redemption Investigations.

(2) If the property is real property in which the Government's interest is more than the redemption investigation criteria, the application for consent should be investigated to determine the most feasible administrative action to take. See IRM 5.12.5.1.2, Criteria for Working Redemption Investigations.

(1) When consent to a non-judicial foreclosure sale is given, prepare the consent letter which includes the following information:

• Name and address of person requesting consent,

• Reference to the authority under IRC 7425(c)(2),

• Detailed description of property to be discharged,

• Description of liens to be divested,

• Unpaid balance of the federal tax liens, including accruals,

• Date and place NFTL(s) filed,

• Statement that surplus proceeds are subject to the liens of the United States, and

• Signature of approving official (normally Advisory Group Manager).

(2) Provide the original and a copy of the consent letter to the requestor. Retain a copy of the letter for the case file.

(3) When it is determined that consent to the sale should not be given, prepare a letter that informs of the non-consent and contains the following information:

• Name and address of requestor,

• Reference to IRC 7425(c)(2),

• Recommended alternate procedure (e.g., discharge of property, substitution of proceeds of sale, etc.), and

• Signature of the approving official (normally Advisory Group Manager).

(1) The primary purpose of the non-judicial foreclosure sale investigation is to determine how much the property sells for in relation to the amount owed on the foreclosing party's encumbrance and the fair market value of the property. A significant difference in either or both may result in action by the IRS.

• If the sale produces an amount in excess of the foreclosing party's prior encumbrance (plus other required costs), a determination is needed regarding the surplus (or excess) proceeds.

• Regardless of the presence of surplus proceeds, if the property sells for less than its fair market value, a determination is needed as to whether sufficient equity remains for the IRS to exercise its redemption rights.

(2) In the event of surplus proceeds, the employee assigned determines what party handles these funds. It could either be the one that conducted the sale or another party charged with that responsibility by state law.

(3) The IRS has two methods available to pursue surplus proceeds - issuing a levy or filing a claim.

(4) Issue Form 668-A, Notice of Levy, when a Letter 1058, Final Notice, Notice of Intent to Levy and Notice of Your Right to a Collections Due Process Hearing, has been issued for all applicable tax periods and the IRS has reason to believe that the holder of the surplus proceeds is not disbursing the funds in accordance with the legal requirements or is disbursing them to a creditor junior to the IRS.

• The levy may only include those modules where TPC notice requirements are met and all Collection Due Process (CDP) appeal rights are extinguished or resolved. If the CDP process has been completed on some but not all modules, issue the levy containing only those modules.

• If the proceeds available will more than full pay the levy and there are remaining liabilities, or if the liabilities have not been through the appropriate CDP process, do not issue a levy. File a claim as described in (5).

(5) If the IRS cannot levy for the excess sale proceeds, the statutory lien remains and the IRS must look to its rights as a creditor under the laws of the state in which the foreclosure and sale took place. Use Form 10492, Notice of Federal Taxes Due, to serve as written notice to the settlement attorney or other third party that the IRS may be entitled to excess proceeds. State law controls how and to whom a claim for the proceeds is submitted.

• Some, but not all, states require the party distributing the proceeds to use the priority order of the junior liens attached to the property prior to the foreclosure sale.

• Sometimes, an interpleader suit is initiated by the party responsible to distribute the funds to determine who has rights to the funds. Address questions to Area Counsel.

(6) The employee's investigation should determine if there is a problem with the distribution of the funds and, if appropriate, recommend involvement of Area Counsel.

(7) Apply all payments directly related to non-judicial sales to the taxpayer's account using DPC 57.

(1) IRC 7425(d) provides for the redemption by the Government of real property sold in a non-judicial proceeding when such sale is made to satisfy a lien that is prior to the United States. The period for redemption is 120 calendar days or the period provided by State law, whichever is longer.

(2) If the sale is of real property either the Advisor or the RO, based on assignment of the investigation, completes Form 4376 with their recommendation regarding the right of redemption. This process may also require assistance from a Property Appraisal and Liquidation Specialist (PALS). When an RO and/or a PALS is involved in the investigation, it is essential that all required documentation be included when forwarding the results of the investigation to Advisory. The final review and processing of Form 4376 is the responsibility of Advisory.