How to Handle Tax Foreclosures When the Property Has an IRS Lien

After a municipality goes through the statutory foreclosure process because of delinquent taxes on a piece of real estate, it normally takes the property free and clear of any pre-existing liens, mortgages, executions of judgment, or other clouds on the title to real estate. The exception to this is when the property has an IRS lien against it for unpaid income taxes by the property owner. There is, however, a method for dissolving those liens if the proper procedure is followed. When the lien is dissolved, the municipality will own the property free and clear of the IRS lien at the time that it takes title. 

At the time of foreclosure, the tax collector should send a copy of the lien certificate to the IRS at the same time it is recorded with the registry of deeds. The municipality should also send a copy of the notice of impending foreclosure to the IRS itself. The way to extinguish an IRS lien against the property is by the municipality sending the IRS a copy of a notice pursuant to 26 U.S.C.A. § 7425. Samples of the notice can be found on the IRS website (IRS publications 786 and 4235). The statutory notice will extinguish the IRS lien as long as it is sent to the IRS by certified mail at least 25 days prior to the date of automatic foreclosure. It is best to send the section 7425 notice to the IRS at the same time that the 30–45 day notice of pending foreclosure is sent. The IRS has a redemption period of 120 days following the date that the municipality takes title through the foreclosure process. Thus, it would be wise to wait the 120 days after taking possession before selling the property. 

While it is not clear that the IRS would foreclose on a lien against property that is no longer owned by a taxpayer, but rather is owned by the municipality, obviously clean title to the property is preferred, and the sending of this notice is the way to achieve that.