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Taxing, Briefly: Will the IRS Take My House?

I met a new client about a month ago.  I was excited. It was the first in-person meeting I’d had for over a year due to COVID.  The client had settled a lawsuit, and the settlement income—though taxable—had been reported incorrectly on her Form 1099-MISC, so that the IRS got it into its administrative head that it was subject to self-employment income. It wasn’t.

Yes, in this metaphor, the iguana is the IRS, and the sandwich is your house.

The client’s total liability would have been about $10,000, which was not insignificant to her, but to the IRS is like a grain of administrative sand.  Nonetheless, her number one concern was whether the IRS was going to take her house.  My client was well educated, highly intelligent, and entirely serious. As such, laughing it off was out of the question. I received a call the other day from another client—different circumstances, same question.

So, allow me to clear this up.

A Bit of Background

In an address to the British House of Commons in 1906, Winston Churchill observed that “taxes are an evil—a necessary evil—but still an evil.” On Churchill’s totem pole of loathing, income taxes ranked a not-so-distant second place to Hitler, himself.[1]  Nonetheless, even Churchill recognized the need for revenue. The United States estimates that it will bring in $3.9 trillion dollars of revenue this year.  Of this, nearly $2 trillion comes from individual income taxes.[2]

You are Not Special – And That’s a Good Thing

Although $2 trillion is a huge figure, equally as huge is the amount of unpaid taxes that go uncollected each year – approximately $1 trillion. The IRS seizes less than 500 big-ticket assets per year, and not all of these are houses. Though your t-ball coach and your helicopter mom told you that you were special, the chances that the IRS will try to take your house is less than 1 in 35 million.[3] You’re not that special.

Why does the IRS seize so few houses?  It’s actually quite simple. To collect revenue from levying an asset (seizing property to collect delinquent taxes) requires the IRS to do more work than it can be bothered to do. The IRS is all about the low hanging fruit.  Let me explain.

This Isn’t ‘Nam.  There Are Rules.

In a supremely vast generalization, when someone fails to pay tax, the IRS will assess the liability against him and send a notice and demand letter to him.[4] After that, things only get worse for the taxpayer. His tax liability becomes a lien in favor of the IRS against all of his property real and personal.[5]

After the lien attaches to his property, making him unable to sell it, he will receive a notice of intent to levy (a politely phrased letter that is nevertheless a threat to seize any and all property owned by the taxpayer and to collect the tax owed).[6]  After all administrative and legal remedies are exhausted, the IRS may collect the taxpayer’s liability through enforced collection (levy).[7]

You Get What You Pay For

As a tax attorney, I am a bit biased in my belief that when your liability is big enough that the loss of your home is a concern, you should already have retained a tax attorney.  Competent counsel can mitigate enforced collection efforts, and, in many cases, wholly eliminate it—whether this means they waive their magic wand and make the liability go away (sometimes), or they negotiate a reasonable collection alternative for the taxpayer (almost always, if you haven’t previously been a knucklehead taxpayer, and you use the right counsel).

What Will the IRS Levy?

Assuming that you don’t retain counsel, or your counsel’s magic wand is on the fritz, the IRS will start levying on the easiest assets that you have, like garnishing your wages, salary, or any commissions that you receive.  This takes almost zero effort. A letter to your employer is about all this takes. So, it’s the IRS’s preferred enforcement mechanism.  If garnishment is insufficient, the IRS may move to levy your bank and retirement accounts.  Banks will generally put up a bit more resistance than an employer and will freeze the accounts for three weeks or so, in an attempt to “facilitate” a negotiation between the taxpayer and the IRS.

What Can’t the IRS Levy?

However, there are a number of assets that the IRS cannot levy (seize).[8]  These include necessary clothing, schoolbooks, fuel, food, personal effects (up to $6,250), unemployment benefits, worker’s compensation, a percentage of his wages and social security payments, and when the liability is less than $5,000, any property used as a residence by the taxpayer any property owned by the taxpayer used as a residence of another individual.  Critically, the IRS must obtain a Federal district court order approving the seizure of the principal place of residence of the taxpayer or tangible personal or real property owned by the taxpayer used in the taxpayer’s trade or business before the IRS can seize such property.[9]

The Cost-Benefit Analysis – Ever in Your Favor

What she said.

Seizing a house or actual, tangible assets is a pain in the IRS’s administrative rear, because the IRS must jump through a ton of hoops.  Not only must the IRS get a Federal judge to sign off on the sale, which requires a lot of work in and of itself, once it gets the order, it will have to sell the property at a public sale. This takes time, and, even for the IRS, time is money.

The cost-benefit analysis of going through the rigmarole of seizing a house, convincing a judge that the taxpayer has been an exceptionally bad boy (we’re talking really, really bad), and then selling the home almost never favors the IRS taking these extra steps.

So, fear not, dear taxpayer; the IRS doesn’t care enough to take your house. Nonetheless, of you are still concerned that the big bad revenue collecting wolf will eat you out of house and home (metaphorically), call a good tax attorney, and we’ll assuage your fears.

Footnotes:

[1] “The idea that a nation can tax itself into prosperity is one of the crudest delusions which has ever fuddled the human mind.”  Address at Royal Albert Hall, April 21, 1948.

[2] See Table S-4.

[3] There were approximately 143 million tax returns filed in 2017, and the number has not varied too significantly since then.

[4] IRC § 6201; IRC § 6303(a).

[5] See IRC § 6321.

[6] IRC § 6502(a); IRC § 6331(a).

[7] Id.

[8] IRC § 6334(a).

[9] IRC § 6334(e)(1).

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