Enforcement of Tax Liens

This year, one subject that raised a lot of questions related to title to real estate acquired by the foreclosure process for failure to pay real estate taxes and the sales of those properties. Although the process is laid out very clearly in the statute, Title 36, particularly §§ 942 and 943, it has proven challenging for tax assessors to always get things right. The Law Court has been very clear that if there is even a minor error in the tax foreclosure process, it will be declared to be void if challenged by the taxpayer.

One of the particular areas of concern is the requirement under Title 36, Section 943 (the so-called 30-day notice), which must be served to complete the foreclosure process. A common mistake that is made is that the notice is simply sent to the address of the property itself, rather than to the owner’s usual place of abode, or last known address. Another problem we have seen is that when a town isn’t careful, it assesses property to one property owner when there are multiple property owners, including husbands and wives. A notice of foreclosure only sent to one property owner may not be effective against the property as a whole, and, at a minimum, will not be effective against the interests of the property owner who was not notified. Even when it is clear that the process was handled properly, towns often choose to file a quiet title action to ensure that they have good title to property before attempting to re-sell it. The title standards of the bar generally require a ten-year waiting period for titles to be considered clear. There is no impediment to the town selling the property once it obtains title through the foreclosure process, even if title has not been declared by a court. It is critical that the assessor carefully follows the exact process laid out in Title 36, §§ 942 and 943, for the municipality to properly acquire title to property acquired because of tax delinquency.

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.