Nearly 4 million new foreclosures were filed in 2009, an increase of 21 percent over 2008. In 2008, foreclosures catapulted 120 percent over the prior year. Foreclosure filings, now at historic highs, include: default notices, scheduled foreclosure auctions, and bank repossessions.
Recent legislation aimed at easing these proceedings, along with a rise in loan modification activity, has not done enough to address the need for intervention, according to the Treasury Inspector General for Tax Administration (TIGTA). TIGTA serves as the watchdog of the inner workings of the Internal Revenue Service.
TIGTA initiated an audit to determine why the rate of foreclosures continues to soar. Auditors also examined whether the federal government’s interests in the federal tax liens (FTLs) involved in the foreclosure process were being protected.
“As home mortgage foreclosures have increased, reaching record levels, it is imperative that the IRS comply with laws, policies, and procedures to ensure that Americans’ rights are protected,” J. Russell George, TIGTA’s Inspector General, said in a statement. “The IRS must make every effort to improve its foreclosure procedures, including better coordination with the United States Attorneys’ Offices.”
Foreclosure and the IRS
When a FTL is initiated on a piece of property, the IRS participates in the collection process. If there are surplus proceeds once the mortgage is satisfied, the tax agency may be able to collect the amount owed to the federal government.
TIGTA concluded that the IRS was not acting in a way that would protect that ability to extinguish the federal tax debt. The agency noted that due to improper handling of some cases, taxpayers lost the opportunity to reduce the amount of taxes they owed because money collected was, instead, applied to the FTL balance. Some of these problems arose because of a lack of coordinated effort between the two federal offices involved in foreclosures: the IRS Advisory Unit and the United States Attorney’s Office (USAO).
The state in which a foreclosure case occurs determines which of the two federal offices have control, and whether the foreclosure is consider judicial or nonjudicial.
Judicial foreclosures are done in states where the action is by order of a court. It starts when the lender files a complaint. After the court declares a foreclosure, the property is auctioned to the highest bidder. This type of proceeding is handled by the USAO. The IRS Advisory Unit has no jurisdiction, but assists by providing necessary information to the Attorney’s Office.
TIGTA found that the coordination between the two offices for the exchange of information was lacking in several points:
- The advisory unit must follow up to determine if the USAO filed a proper and timely claim which would make it possible for the government to collect surplus proceeds. TIGTA found this step often is not done.
- The advisory unit also did not always check to see if their recommendation to release the right of redemption was followed. The right of redemption refers to a period of time after the foreclosure during which the homeowner can redeem the property. The right of redemption is not available in all states.
- Finally, the advisory unit did not always provide the sale information necessary to consider the potential redemption of the property after a foreclosure sale.
Nonjudicial foreclosures occur in states where a property can be disposed of without a court order. This type of proceeding starts when the mortgage lender sends a notice of default or notice of sale to the borrower, and files the complaint in the county recorder’s office. Generally, a specified amount of time must pass between the filing of the notice and the actual foreclosure. After that is done, a public auction may take place in which the property is sold to the highest bidder.
For nonjudicial foreclosures, the IRS Advisory Unit is the control point. TIGTA concluded:
- Information the IRS provides to the public for submitting a timely notice of sale to the advisory unit is not consistent with the Internal Revenue Code. That is, the advisory unit judges the timeliness of a notice by the postmark date. But information provided to the public specifies that timeliness is determined by the receipt date.
- The advisory unit does not screen the notice of sale or provide sufficient documentation as to why a notice is rejected.
- The advisory unit does not act consistently in answering requests to release the right of redemption.
To remedy these shortfalls, TIGTA recommended that the Director of Collections, Small Business and Self Employed Division must ensure that:
- Timely information regarding the application of surplus proceeds is provided by the advisory unit.
- The advisory unit supplies timely recommendations regarding the value of releases of rights of redemption.
- The advisory unit receives adequate information to consider the possible redemption of foreclosed properties.
- Communications between the public and the advisory unit, and between the public and the USAO, are consistent with tax law in the future.
- Foreclosure files include supporting evidence when notices of sale are rejected.
- Release of rights of redemption are timely and appropriate.
The IRS agreed with TIGTA on each of these points and is in the process of taking corrective action.