Losing your house to the IRS may be your worst fear. The law does allow the IRS to seize and sell a home to pay a back tax debt. It is a difficult process for IRS, but IRS Revenue Officers are increasingly threatening to do just this.
More often than not, the threat by an IRS Revenue Officer to seize your house is a bluff. To sell a house, the IRS must make a referral to the Department of Justice. Unless you have heard from the Department of Justice, your house is not in the process of being sold. However IRS Revenue Officers are increasingly making this threat.
While IRS may make this threat, the IRS and Department of Justice sell few homes because there is no equity in them. If your house has equity in it, watch out! We are no longer dealing with a kinder, gentler IRS.
To determine equity, IRS will usually use distraint or auction value. No one will pay fair market value for a house with a notice of federal tax lien on it. The auction value is usually 60 percent of fair market value. If that number does not exceed the underlying mortgage, the IRS will not ask the Justice Department to go to District Court to ask permission to seize.
Also as a rule, the IRS will only seize houses in large dollar tax cases and where taxpayers do not cooperate, comply or communicate. Retirement age and health considerations are also a factor. However the enforcement pendulum has swung and where they would not seize a house a few years ago, the IRS will do so now.
Taxpayers should know that the IRS does not take houses unannounced or by surprise. A court process must be exhausted first. If a taxpayer has a house with substantial equity and they owe the IRS large dollar amounts, the risk is regrettably real in the next year or two that the IRS will seize a house where they would not have done so a few years ago.