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ASK THE EDD ATTORNEY – WILL THE IRS TAKE YOUR HOUSE

By Robert S. Schriebman
October 26, 2016

INTRODUCTION:

If you owe the IRS they can seize and sell any property you own that is not exempt by law. Can and will the IRS take your house? I recently attended a tax controversy seminar where one of the speakers was a high level IRS collection boss. He was asked if the IRS still seizes and sells a taxpayer’s house? Without hesitation he stated, "yes." The "yes" was qualified by the statement that a house will be seized and sold for taxes only in extreme circumstances when the taxpayer’s conduct is so outrageous as to leave the IRS no choice.

The recent case of U.S. v. Eileen McGrew illustrates an example of how poor divorce planning can cost a non-liable spouse her house. See U.S. v. Eileen McGrew Ninth Cir, 2016 U.S.T.C para50.443, October 17, 2016.

The Sad Case of Eileen McGrew

Eileen and Kenneth McGrew separated in February 2002 but did not seek a final divorce until September 2006. They did not divide their community property until September 2009 or 7 years after the separation. Kenneth and Eileen jointly owed the IRS for the year 2000 (return filed in 2001). Kenneth thereafter continued to owe the IRS from 2001 through 2005 (return filed in 2006). In the marital property division, Eileen got the family residence, but that was not until 2009. The IRS seized Eileen’s house and wanted to sell it at public auction. Eileen filed a lawsuit in the U.S. District Court challenging the sale on the grounds that the house was her separate property and as such could not be taken by the IRS for Kenneth’s post-separation tax liabilities. Eileen lost her case.

In general, the whole of the community estate is liable for a debt incurred by either spouse before or during the marriage. Cal. Fam. Code §910(a). This means that the community estate is liable for debts incurred by either spouse for the period preceding their separation. See Cal. Fam. Code §910(b) Babb v. Schmidt, 496 F.2d 957; 959-60 (9th Cir. 1974).

The McGrews owed the IRS for the year 2000 while they were still together. That was a joint liability. They separated in February 2002. After their separation Kenneth continued to owe the years 2001 through 2005. Legally these tax debts are the separate tax debts of Kenneth. Does Kenneth’s tax debts attach to his one half interest in the family home even though the couple was separated back in 2002? Remember, they did not divide their property until 2009 – seven years after separation.

The Court ruled that Kenneth’s tax debts attached to his one half interest in the house because the house was not transferred to Eileen until 2009. Here we have a situation where Eileen has 100% title to the house, but because the couple waited so long in transferring their property the IRS lien did indeed attach to Kenneth’s one half post-separation interest in Eileen’s residence. The division of the community estate, including the residence, did not eliminate or otherwise affect the tax liens. As a result, the tax lien for the tax year 2000 did and does encumber both interests in the residence, and the liens for the tax years 2001 through 2005 did and do encumber what was Kenneth’s half interest in the residence even though Eileen now holds that half also. The IRS was entitled to foreclose upon and sell the residence for the purpose of satisfying those liens. IRC §7403c.

Conclusion

While the case of Kenneth and Eileen may be unusual on its facts, it illustrates clearly how deadly sloth can be. Sloth is one of the seven deadly sins, along with greed and anger. If you are planning a divorce or separation, it is important to divide the marital property as quickly and efficiently as possible.

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Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 40 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments.

Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See "California Tax Collection Practice and Procedures" and "California Taxation Practice and Procedure," both published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, "IRS Tax Collection Procedures – A Manual for Practitioners" published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, "IRS Tax Collection Procedures – A Manual for Practitioners" published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See "California Tax Collection Practice and Procedures" and "California Taxation Practice and Procedure," both published by Commerce Clearing House.

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