Can the IRS Seize Jointly Owned Property?

The Internal Revenue Service possesses significant authority to collect delinquent taxes, including the power to seize a taxpayer’s property. This process, known as a levy, is a legal seizure to satisfy a tax debt and is distinct from a lien, which is a claim against property. Before a levy can happen, the IRS must follow a specific protocol. This includes assessing the tax, sending a bill, and providing a “Final Notice of Intent to Levy” at least 30 days prior to the seizure, giving the taxpayer a window to address the debt.

The Federal Tax Lien on Jointly Owned Property

The foundation of the IRS’s power to seize property is the federal tax lien. This legal claim arises after the IRS assesses a tax liability, sends a “Notice and Demand for Payment,” and the taxpayer fails to pay the amount due. The lien attaches to all property and rights to property belonging to the delinquent taxpayer. This includes the taxpayer’s specific interest in any property they own jointly with someone else.

This lien establishes the IRS’s legal stake in a jointly held asset before any seizure action begins. The lien gives the government a security interest that follows the property, no matter who holds it. This empowers the IRS to pursue collection actions that can impact other co-owners of the property, and its reach covers everything from real estate to financial accounts.

The lien’s attachment to a taxpayer’s interest in joint property is an important step. It effectively separates the delinquent taxpayer’s share from the non-liable owner’s share under federal tax law. This distinction allows the IRS to target the value of the taxpayer’s portion of the asset to satisfy the outstanding tax debt.

Types of Joint Ownership and IRS Reach

The extent to which the IRS can enforce its lien depends on the specific form of joint ownership. Different legal structures for holding property create different rights and limitations for creditors, including the IRS.

Tenancy in Common

In a tenancy in common, each co-owner holds a separate and divisible interest in the property, and these interests do not have to be equal. For example, one owner could hold a 70% share and the other a 30% share. The IRS can attach its lien to the delinquent taxpayer’s specific interest, making this property vulnerable to collection action because the taxpayer’s portion is clearly defined.

Joint Tenancy with Right of Survivorship

Joint tenancy involves two or more owners holding equal shares in a property with a right of survivorship, meaning a deceased owner’s share automatically passes to the surviving joint tenants. The IRS tax lien can attach to the interest of one joint tenant. Depending on state law, the attachment of the lien may sever the joint tenancy and convert it into a tenancy in common, which extinguishes the right of survivorship and allows the IRS to force the sale of the taxpayer’s separate interest.

Tenancy by the Entirety

Tenancy by the Entirety (TBE) is a form of ownership available only to married couples in certain states, treating the couple as a single entity with a right of survivorship. Historically, state laws protected TBE property from the creditors of only one spouse. However, this protection does not apply to federal tax liens. The Supreme Court case, United States v. Craft, established that a federal tax lien against one spouse can attach to their interest in property held as TBE. The Court reasoned that the delinquent spouse’s rights in the property, such as the right to use it and receive income from it, were significant enough to be considered “rights to property” under federal law. This ruling allows the IRS to pursue the taxpayer’s interest, even if state law would prevent other creditors from doing so.

The IRS Seizure and Sale Process

Once a federal tax lien is attached to a taxpayer’s interest in jointly owned property, the IRS can enforce it through seizure and sale. For liquid assets like bank accounts, the IRS can use an administrative levy, which does not require court intervention, to seize funds directly from the financial institution.

For real estate, the process is more complex and requires judicial foreclosure. The IRS must file a lawsuit and obtain a court order to sell the property. The IRS can request the court to approve the sale of the entire property, not just the delinquent taxpayer’s fractional interest. This is authorized under 26 U.S.C. § 7403, which allows for the sale of a property to satisfy a tax debt as long as the interests of all parties are considered.

If the court orders the sale of the entire property, the proceeds are distributed according to a specific priority. The funds are first used to cover the costs of the seizure and sale. Next, the IRS applies the delinquent taxpayer’s share of the proceeds to their outstanding tax liability. Any remaining funds from the delinquent taxpayer’s share are returned to them. The non-liable co-owner is legally entitled to receive their proportionate share of the net proceeds from the sale, and the court ensures this distribution is made.

Administrative Options for Non-Liable Owners

When the IRS places a lien or initiates a levy on jointly owned property, the non-liable co-owner is not without recourse. The Internal Revenue Code provides specific administrative procedures to protect their interests and challenge the IRS’s action.

One remedy is filing a wrongful levy claim. This action is appropriate when the non-liable owner believes their property was improperly seized to satisfy another person’s tax debt. The claim must be filed with the IRS within nine months of the levy and must detail the claimant’s interest in the property and why the levy is considered wrongful. If the IRS agrees, it can return the property or the proceeds from its sale.

Another procedure is an application for discharge of property from the federal tax lien. This process allows a co-owner to have the lien removed from the property, which is often necessary to sell or refinance it. To obtain a discharge, the non-liable owner must pay the IRS an amount equal to the value of the delinquent taxpayer’s interest in the property, effectively buying out the government’s claim and clearing the title.