Can the IRS Seize a Financed Car for Back Taxes?

The Internal Revenue Service (IRS) has broad authority to collect unpaid tax debts, including seizing a taxpayer’s assets. This power allows the agency to address outstanding liabilities, with property seizure being one of the more forceful actions available.

IRS Power to Seize Property

The IRS can legally seize a taxpayer’s property to satisfy unpaid tax liabilities, an action known as a levy. A levy is a legal seizure of property to satisfy a tax debt, distinct from a lien, which is a legal claim against property. This authority originates from Internal Revenue Code Section 6331. Before a levy can occur, the IRS generally must assess the tax, send a notice and demand for payment, and the taxpayer must neglect or refuse to pay.

A federal tax lien, governed by 26 U.S. Code Section 6321, arises automatically when a person liable for any federal tax fails to pay it after a demand for payment. This lien attaches to all of a taxpayer’s property and rights to property. While the lien is a claim against property, a levy is the actual taking of that property. For the federal tax lien to have priority, the IRS generally files a Notice of Federal Tax Lien (NFTL) under Internal Revenue Code Section 6323.

Before the IRS can proceed with a levy, it must provide a Final Notice of Intent to Levy and Notice of Your Right to a Hearing. This notice must be sent at least 30 days before the levy, informing the taxpayer of the IRS’s intent to seize property and providing an opportunity to challenge the proposed action.

Seizure of Financed Property

The IRS does have the authority to seize a financed car if a taxpayer owes back taxes and has not made arrangements to resolve their debt. However, the process is more intricate than seizing property that is owned outright due to the presence of a prior lien held by the lender. A financed vehicle typically has a security interest perfected by the lender, such as a bank or credit union.

When the IRS seizes a financed car, the prior perfected lien of the lender generally takes precedence over the IRS’s claim. This means that if the vehicle is sold, the lender is typically paid first from the proceeds up to the amount of their outstanding loan. Only any remaining proceeds after satisfying the lender’s claim and sale costs would then be applied to the taxpayer’s outstanding tax liability. The IRS’s lien is usually junior to security interests that were perfected before the IRS filed its Notice of Federal Tax Lien.

The IRS is less likely to seize a financed vehicle if there is little or no equity in it, meaning the car’s value does not significantly exceed the loan balance. In such cases, the costs associated with seizing and selling the vehicle might outweigh the potential funds recovered for the tax debt, making the seizure financially impractical for the IRS. However, if there is substantial equity in the vehicle after accounting for the loan, the IRS may still proceed with seizure to recover a portion of the unpaid taxes. The IRS may also consider the taxpayer’s need for the car, particularly if it is essential for work or daily life, as seizing it could cause economic hardship.

The IRS Seizure Process

Before physically seizing a vehicle, the IRS must issue a Final Notice of Intent to Levy and Notice of Your Right to a Hearing under Internal Revenue Code Section 6330. This notice provides the taxpayer with a final opportunity to address the debt or request a Collection Due Process (CDP) hearing within 30 days. The CDP hearing allows taxpayers to challenge the proposed levy action before an impartial officer from the IRS Office of Appeals.

After the required waiting period following the final notice, if the tax debt remains unpaid and no resolution is reached, the IRS can proceed with seizure. IRS agents or their authorized contractors would locate the vehicle and take possession. This can involve towing the vehicle from a public area or, if necessary, obtaining a writ of entry to access private property.

Immediately following the seizure of property, the IRS is required to provide the owner with a written Notice of Seizure, as stipulated by 26 U.S. Code Section 6335. This notice specifies the sum demanded and provides an account of the seized property.

Post-Seizure Actions and Resolution

After a vehicle has been seized, the IRS will proceed with its sale to satisfy the outstanding tax liability. The sale of seized property, governed by 26 U.S. Code Section 6335, typically occurs through a public auction or sealed bids. The IRS must provide a notice of sale to the owner and publish a notification in a newspaper or post it in public places. The sale cannot take place less than 10 days or more than 40 days from the time of public notice.

The distribution of the sale proceeds follows a specific order. First, the costs associated with the seizure and sale are paid. Next, any prior perfected liens, such as the outstanding balance on a financed car loan, are satisfied from the proceeds. Only after these expenses and prior claims are paid, any remaining funds are applied to the taxpayer’s outstanding tax liability. If there is any surplus money after all claims are satisfied, it is returned to the taxpayer.

Taxpayers also have a right to redeem seized property under 26 U.S. Code Section 6337. This means they can reclaim the property at any time before the sale by paying the full amount due, including the expenses incurred by the IRS. Additionally, if a taxpayer did not utilize their right to a Collection Due Process (CDP) hearing before the levy, they may still have administrative channels to appeal the seizure after it has occurred.