The Legal Reference Guide for Revenue Officers has been established as a Handbook keyed to the Internal Revenue Manual, it is not the source of procedural instructions. Revenue officers and other Internal Revenue Service personnel must still look to the basic Internal Revenue Manual (IRM) provisions outside the Handbook for such instructions. While revenue officers are not expected to have the comprehensive knowledge of the law required of attorneys, it is hoped that they will gain a sufficient understanding from the material in the following sections to recognize the legal problems that might call for reference to Counsel for consideration.

This IRM is a handbook containing the legal authorities for suits against the government. See also IRM 25.3.1.4, Authorization for Filing Suits, Counterclaims or Third Party Complaints for a discussion of the authority under IRC §7401

IRM 5.17.1, General Information provides a list of the parties with an explanation of their role with suits.

Program Reports: Suits are individual to the case and are of a wide variety and scope. When it is appropriate the Collection employee will provide a case Narrative Report for Area Counsel and the Department of Justice identifying all pertinent facts so that appropriate legal action may be taken. Narrative Reports are discussed in IRM 5.17.12, Investigations and Reports.

Program Effectiveness: Whenever litigation involving collection matters is pending or the institution of affirmative legal action to effect collection is being considered, revenue officers will, in the main, be investigators of facts. They will be required to prepare reports concerning any facts ascertained. The lawyers charged with the responsibility of handling the cases must rely on those facts and reports when making case decisions.

Collection Advisory maintains a copy of any suit documentation until the suit is closed. After case closure see Document 12990 Records and Information Management Records Control Schedules, under section Internal Revenue Service Records Control Schedule (RCS) 28, Tax Administration Collection, in:

Preserving electronically stored information is covered in:

The table lists commonly used acronyms and their definitions:

For procedural guidelines on responding to suits and claims for damages brought against the United States, see:

For information regarding some of the general characteristics and procedures followed in instituting and carrying out a lawsuit for effecting or assisting in the collection of taxes, and some of the most common types of lawsuits commenced by the United States, see IRM 5.17.4, Suits by the United States.

The Anti-Injunction Act contains a broad prohibition on suits to restrain the assessment or collection of taxes. IRC § 7421(a) provides as a general rule that "no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom the tax was assessed." This rule also applies to the liability of transferees or fiduciaries. IRC § 7421(b).

IRC § 7421 is based on the general rule of equity that where a person has an adequate remedy at law, he or she may not seek equitable relief by way of injunction against the assessment or collection of taxes. The remedy is to pay the tax assessed (or a divisible portion thereof for the Trust Fund Recovery Penalty) and file a refund suit in federal district court or the United States Court of Federal Claims, or, in the case of income, estate or gift tax, to litigate the merits of the tax in the United States Tax Court.

See IRM 5.17.5.9, Statutory Exceptions for a discussion of statutory exceptions to the prohibition against suits to restrain assessment or collection of tax.

A declaratory judgment is a request for a court to declare the rights of parties, without ordering anything to be done.

Under the Declaratory Judgment Act, 28 USC § 2201, federal tax questions are exempt from the jurisdiction of the district courts to render declaratory judgments. In Eastern Kentucky Welfare Rights Organization v. Simon, 506 F.2d 1278 (D.C. Cir. 1974), rev'd on other grounds, 426 U.S. 26 (1976), the court held that a party whose tax liability was not directly in dispute could maintain a declaratory judgment action where there was no adequate remedy at law and where a judgment would not have the effect of restraining assessment or collection of taxes. In In re Frey, 98-2 USTC ¶ 50,638 (M.D. Fla. 1998), the court dismissed plaintiff's wife's request for a judgment under section 2201, declaring that the wife was not a nominee of her husband. The court cited the exemption of tax disputes from section 2201. See also Rodriguez v. United States, 629 F. Supp. 333 (N.D. Ill. 1986).

District courts have original jurisdiction to compel an officer or employee of the United States or any of its agencies to perform a duty owed the plaintiff. However, relief in the nature of mandamus is not available:

In In re 1900 M Restaurant Assoc., Inc., 319 B.R. 302 (D.D.C. 2005), the debtor sought a court order compelling the Service to consider an administrative offer in compromise. The court determined that the Service's decision not to process the debtor's offer-in-compromise, pursuant to Service policy of returning as nonprocessable any offer-in-compromise submitted by bankrupt taxpayer, and of requiring tax repayment issues to be resolved as part of plan confirmation process, was one committed to the discretion of the Secretary of the Treasury, and was not reviewable on prayer for relief in the nature of mandamus.

The Federal Tort Claims Act does not apply to "[a]ny claim arising in respect of the assessment or collection of any tax or customs duty, or the detention of any goods, merchandise, or other property by any officer of customs or excise or any other law enforcement officer." 28 USC § 2680(c).

28 USC § 2679 provides that the remedy against the United States under the Federal Tort Claims Act for injury or loss of property, or personal injury or death arising from the negligent or wrongful act or omission of any employee of the Government while acting within the scope of his or her office or employment is exclusive. Thus, any other action for money damages arising out of or relating to the same subject matter against the employee is precluded with the exception of claims based on constitutional violations discussed in IRM 5.17.5.14, Violations of Constitutional Rights - "Bivens" Actions below. This rule does not apply to negligent or wrongful acts during the collection of any tax. 28 USC § 2680(c). The exclusive remedy for wrongful acts by IRS employees during the collection of federal taxes is IRC § 7433, discussed in IRM 5.17.5.16, Civil Damages for Certain Unauthorized Collection Actions below.

Filing an administrative claim with the appropriate agency is a prerequisite to the institution of a suit against the United States for damages for injury or loss of property or personal injury or death caused by the negligent or wrongful act or omission of any employee of the Government while acting within the scope of his or her office or employment. 28 USC § 2675. Heads of administrative agencies or their delegates may settle any claim for money damages not in excess of $25,000. 28 USC § 2672.

The Attorney General is authorized to defend any civil action or proceeding brought in any court against any employee of the Government, or his or her estate, for any such damage or injury. 28 USC § 2679(c). Any Internal Revenue Service employee against whom such an action or proceeding is brought must immediately advise the General Legal Services function in the field, if a field employee, or the General Legal Services Division of the Office of Chief Counsel, if a National Office employee, of the details by telephone or facsimile transmission. In addition, he or she must immediately forward all process and pleadings served upon him or her, or a true copy thereof, to Area Counsel or, in the case of National Office Employees, to the Associate Chief Counsel, General Legal Services, CC:GLS. The employee sued must thereafter render any assistance and give any additional information requested by the United States Attorney.

IRC § 7433(a) states explicitly that, except as provided in IRC § 7432 (see IRM 5.17.5.15, Civil Damages for Failure to Release Lien, above), it is the "exclusive remedy" for damages for alleged improper actions in connection with the collection of any federal tax.

Despite the exclusivity provision in IRC § 7433, the United States has been sued for civil damages under IRC § 7431(a) (providing cause of action for unauthorized disclosure of return information) for unauthorized disclosures of return information occurring in the context of collection activities. See Rorex v. Traynor, 771 F.2d 383 (8th Cir. 1985); cf. Flippo v. United States, 670 F. Supp. 638 (W.D.N.C. 1987). The Service’s position is that IRC § 7431 was never intended to redress defective collection activities, and that IRC § 7433 provides the exclusive remedy for alleged damages resulting from alleged improper collection activities. See Shwarz v. United States, 234 F.3d 428, 432-433 (9th Cir. 2000).

IRC § 7433 applies to wrongful collection activity; it does not apply to activity stemming from the assessment or determination of taxes. See Ivory v. United States, 96-1 USTC ¶ 50,078 (S.D. Ohio 1996); see also Morse v. United States, 96-1 USTC ¶ 50,216 (E.D.N.Y. 1996).

A person other than the taxpayer who claims the Service wrongfully levied upon property he or she has an interest in or lien on, to satisfy the tax liability of another, may bring suit against the United States in federal district court. IRC § 7426(a)(1). See Rev. Rul. 2005-49 and Rev. Rul. 2005-50.

In EC Term of Years Trust v. United States, 550 U.S. 429 (2007), the Supreme Court in an unanimous opinion held that IRC § 7426(a)(1) provides the exclusive remedy for third-party wrongful levy claims. Third parties with such claims cannot bring refund actions under 28 USC § 1346(a)(1).

For the purposes of IRC § 7426, a levy is considered wrongful against a third person if:

A levy may irreparably injure or destroy a senior lien even though legal rights to enforce the senior lien interest survive the levy. Such irreparable injury may occur, for example, where the Service seizes money in accounts subject to the senior lien and nothing is left for the senior lienholder to pursue. Another example is where the Service sells seized personal property to numerous purchasers, which the senior lienholder cannot realistically pursue to satisfy its claim. Treas. Reg. § 301.7426-1(b).

A person against whom the tax is assessed for which the levy was made cannot bring a wrongful levy suit under IRC § 7426 .

A wrongful levy action may be brought without regard to whether the property has been surrendered to or sold by the Government. However, it may not be brought prior to the time the Government has in fact levied upon the property.

There is no requirement that administrative claim remedies be exhausted before a wrongful levy suit can be brought unless recovery of damages is sought as well.

The granting of injunctive relief is available only in wrongful levy actions brought under IRC § 7426(a)(1), and then only after the property has in fact been levied upon by the United States. Thus, a court may enjoin the Government from proceeding with enforcement of the levy if the court determines that:

A third party is considered to have a superior interest if:

If the court’s determination is in favor of the third party, usually the injunction is either made permanent where the Government does not have possession of the property, or is continued until the levy is released and the specific property is returned to the person.

In addition to injunctive relief, there are three alternative types of relief which a court may grant to a third party if the court determines the levy is wrongful. IRC § 7426(b)(2). The court may:

The court can order the property wrongfully levied upon to be returned only where the property is identifiable and still in the Government’s possession. Such property includes money, where identifiable, such as a coin collection. Otherwise, the relief granted is limited to the amount of the money.

If a third party recovers a money judgment, then the United States must pay interest, at the overpayment rate established under IRC § 6621, from the date the Government received the money wrongfully levied upon to the date of payment of such judgment. Money wrongfully levied upon is "received" at the time the Government acquired possession of such money. Similarly, where the property has been sold, the United States must pay interest, at the overpayment rate established under IRC § 6621, from the date of the sale of the property wrongfully levied upon to the date of payment of such judgment. IRC § 7426(g).

If surplus proceeds have been realized from the sale of property by the United States pursuant to a levy, any person (other than the taxpayer) may bring an action against the United States in district court based on his claim that he:

"Surplus proceeds" are those in excess of the amount necessary to satisfy the tax liability giving rise to the levy plus the expenses of the levy sale.

If the district court determines that the interest or lien of any party (other than the taxpayer) to an action under IRC § 7426 was transferred to the proceeds of a sale of such property, the court may grant a judgment against the United States in an amount equal to all or any part of the amount of the surplus proceeds of such sale. IRC § 7426(b)(3). A third party whose rights are junior to those of the United States in property sold pursuant to levy may recover all or any part of the surplus sale proceeds to which he or she is legally entitled if the third party’s interest or lien was transferred to the proceeds of sale.

A certificate of discharge may be issued where property subject to a tax lien is sold and, under an agreement with the Service, the proceeds from the sale are held as a fund subject to the liens and claims of the United States in the same manner, and with the same priority, as the liens and claims on the discharged property. IRC § 6325(b)(3).

Claimants to the property may bring an action against the United States in a district court where they are unable to resolve a dispute among competing lienholders, including the United States, concerning their rights to specific property sold pursuant to the agreement with the Service. IRC § 7426(a)(3). Unlike wrongful levy actions and actions for surplus proceeds which may be instituted by any person other than the taxpayer, any person including the taxpayer may bring an action under this provision whether or not such person is a party to the agreement described in IRC § 6325(b)(3). Treas. Reg. 301.7426-1(a)(3). A voluntary payment, however, by a third party to clear a tax lien from property is not an agreement sufficient to invoke district court jurisdiction under IRC § 7426(a)(3). See Denham v. United States, 811 F. Supp. 497 (C.D. Cal. 1992); Ticor Title Insurance Co. v. United States, 1988 WL 383576 (C.D. Cal.1988).

If the court determines that a party has an interest in or a lien on an amount held as a fund pursuant to an agreement providing for the proceeds of sale of property to be substituted for the property, the court may grant a judgment in an amount not in excess of the substituted sale proceeds. IRC § 7426(b)(4). The court may enter such judgments as are appropriate to distribute the fund to the parties legally entitled thereto.

At the request of the owner (including the taxpayer) of any property subject to any lien, the Service must issue a certificate of discharge of such property if such owner:

If the property owner believes the Service has overvalued the United States’ interest in the property, he or she may, within 120 days after the certificate is issued, bring a civil action against the United States in a district court to have the court determine whether the value of the United States' interest in the property is less than the value determined by the Service. IRC § 7426(a)(4).

If the court finds that the Service’s valuation of the interest of the United States in the property exceeds the actual value of such interest, the court must grant a judgment ordering a refund of the amount deposited, and a release of the bond, to the extent that the aggregate of the amounts thereof exceeds the value determined by the court. IRC § 7426(b)(5). The plaintiff is entitled to interest at the overpayment rate established under IRC § 6621 from the date the Service received the deposited amount to the date the judgment is paid. IRC § 7426(g).

Persons other than taxpayers who are harmed by the reckless, intentional or negligent actions of IRS officers or employees in disregard of the Internal Revenue Code may collect damages against the United States in connection with any of the four causes of action authorized by IRC § 7426. (Taxpayers, themselves, may recover such damages under IRC § 7433). These persons are bound, in all respects, to all requirements of IRC § 7433, discussed in IRM 5.17.5.16, IRC § 7433 as Exclusive Remedy; Limitations above, including the requirement that they first exhaust their administrative remedies. These administrative claims are filed with the Advisory Group Manager for the area where the taxpayer resides. See Pub 4235 .

The amount of damages recoverable by persons other than taxpayers is an amount equal to the lesser of $1 million ($100,000 in the case of negligent disregard) or the sum of the actual direct economic damages sustained by the plaintiff as a proximate result of the reckless or intentional or negligent actions of the Service officer or employee, plus the costs of the action. IRC § 7426(h).

For purposes of adjudication under IRC § 7426 , the assessment of tax upon which the interest or lien of the United States is based is conclusively presumed to be valid. IRC § 7426(c). The merits of the tax liability cannot be contested unless the United States requests the foreclosure of its tax lien in such action pursuant to IRC § 7403.

General period for IRC § 7426(a)(1)-(3). A suit under IRC § 7426 must be commenced within a statutory time period that runs from the date of the levy or from the date of an agreement under IRC § 6325(b)(3) (relating to substitution of proceeds of sale), giving rise to the suit. IRC § 6532(c))(1); Treas. Reg. § 301.6532–3(a).

Special period for levy action. However, if a written request for the return of property is made under IRC § 6343(b) within the above time frame, the statutory time is extended a period of 12 months from the date of filing the request or 6 months from the date of disallowance, whichever is shorter. IRC § 6532(c)(2). A written request for the return of property which is considered inadequate under Treas. Reg. § 301.6343-2(c) does not extend the statutory time period. To be considered adequate, a written request must include:

Period for IRC § 7426(a)(4). A suit under IRC § 7426(a)(4), with respect to the determination of value of the United States’ tax lien interest in real or personal property, must be commenced within 120 days after the day on which the certificate of discharge is issued.

The provisions of IRC § 7422(a) (relating to prohibition of suit prior to filing claim for refund) do not apply to actions under IRC § 7426. IRC § 7426(f). Therefore, it is unnecessary for a person to file an administrative claim for refund before instituting an action under IRC § 7426. An administrative claim, in the form of a written request, may be filed seeking the recovery of property wrongfully levied upon, under IRC § 6343(b) (relating to return of property), although the filing of such claim is not a prerequisite to the commencement of an action under IRC § 7426(a)(1). (The request, however, will extend the limitations period for filing an action for a period of 12 months from the date of filing the request or six months after the disallowance of the request, whichever is shorter. IRC § 6532(c)(2).) Similarly, the filing of an administrative application under IRC § 6342(b) (relating to surplus proceeds), seeking a distribution of surplus proceeds resulting from the sale of property pursuant to levy, is not a prerequisite to the commencement of an action under IRC § 7426(a)(2).

As discussed in IRM 5.17.5.17.7, Damages in Actions for Wrongful Collection Brought by Persons Other Than Taxpayers above, an administrative claim must be made with the Service before civil damages may be awarded under IRC § 7426(h).

Under 28 USC § 2410(a), the United States may be named as a party in any civil action or suit in any federal district court, or in any State court having jurisdiction of the subject matter, in the following actions with respect to real or personal property on which the United States claims a mortgage or other lien, including a federal tax lien:

28 USC § 2410 is a consent statute only; it does not confer authority upon any court to foreclose a lien, quiet title to property, partition or condemn property, or to entertain an interpleader suit. There must be a basis for jurisdiction independent of 28 USC § 2410. See Wells v. Long, 162 F.2d 842 (9th Cir. 1947); Shaw v. United States, 331 F.2d 493 (9th Cir. 1964); Simmons v. United States, 280 S.E.2d 463 (N.A. App. 1981). In other words, the court in which the suit is brought must have authority to conduct the type of proceeding instituted. If, for example, a court does not have authority to foreclose a mortgage, 28 USC § 2410 cannot be cited as a basis for jurisdiction over the United States, even though the property is encumbered by a tax lien.

If the United States no longer has a lien or mortgage on the subject property, then it cannot be joined as a party under 28 USC § 2410. See United Sand and Gravel Contractors, Inc. v. United States, 624 F.2d 733 (5th Cir. 1980).

The United States may be named a party to a suit to quiet title to real or personal property on which the United States has a mortgage or other lien, including a federal tax lien. 28 USC § 2410(a)(1). An action to quiet title is a proceeding instituted by persons claiming some interest or title in the property and seeking to remove a cloud from their title.

A judgment or decree in quiet title actions discharges a federal tax lien from the subject property to the extent provided by the local law applicable to similar matters. 28 USC § 2410(c). It is not necessary for the person bringing a quiet title action to request a judicial sale to discharge the Government’s interest from the property. See IRM 5.17.4.15, Action to Quiet Title for a discussion of the Government’s right to bring an action to quiet title to property that it has acquired through the enforcement of a federal tax lien.

A taxpayer may bring a quiet title action under 28 USC § 2410(a)(1) against the United States to challenge the procedural validity of a federal tax lien and sale, but may not contest the merits of the underlying tax assessment in the proceeding. See James v. United States, 970 F.2d 750 (10th Cir. 1992); Hughes v. United States, 953 F.2d 531 (9th Cir. 1992); McCarty v. United States, 929 F.2d 1085 (5th Cir. 1991); Pollack v. United States, 819 F.2d 144 (6th Cir. 1987); Aqua Bar & Lounge, Inc. v. United States, 539 F.2d 935 (3d Cir. 1976). In other words, section 2410 waives sovereign immunity with respect to procedural violations arising from assessment, levy, seizure, or sale, but not with respect to the amount of tax liability assessed.

If the United States has a mortgage or other lien on real or personal property, it may be joined as a party in a proceeding to foreclose that interest, but only if a judicial sale is being sought. 28 USC § 2410(c).

When the foreclosure action involves an encumbrance senior to a federal tax lien, the judicial sale discharges the federal tax lien to the extent it would discharge any other junior lien under the local law of the place where the court is situated. 28 USC § 2410(c). If the foreclosure involves real property, the rights of the United States in such instances are protected by providing a period of time in which the United States may redeem the property. If the foreclosure action involves an encumbrance junior to the federal tax lien, the sale will not disturb the federal tax lien, unless the United States agrees to the sale of the property free and clear of its liens. In that event, the proceeds are distributed according to the priorities of the parties’ interests.

The effect on a federal tax lien of judicial proceedings to which the United States is not a party and in cases involving nonjudicial sales of property, is discussed below in IRM 5.17.5.19, Proceedings in which United States is not a Party - Background .

The United States may be named a party to a partition suit where it has a mortgage or lien on the subject property. 28 USC § 2410(a)(3).

A partition suit is a judicial proceeding:

As a general rule, a partition purchaser takes subject to liens and outstanding interests unless the decree of court provides for the sale free and clear of such encumbrances. The issue whether the interests of third parties, including the United States, may be satisfied out of the property partitioned, or must be satisfied from the proceeds of sale of the property, is governed by local law. Since the law varies according to jurisdiction, the question should be referred to Area Counsel for determination.

A voluntary partition may be accomplished by any method which the parties deem best, such as by deed, written agreement or sale of the property and division of the proceeds, unless there is a statute to the contrary.

The United States, pursuant to 28 USC § 2410(a)(4), may be added as a party to a condemnation suit, where it has a mortgage or lien on the property being condemned.

A condemnation suit is:

A condemnation action is an appropriation of land or personal property for public purposes. The condemnation award stands in the place of the land or personal property, and the rights of all persons, including the United States, may be treated as though transferred to the award.

The United States may be joined as a party to interpleader suits and suits in the nature of interpleader. 28 USC § 2410(a)(5).

A person may bring an interpleader suit if:

A person in these circumstances institutes an interpleader suit to avoid subjecting himself or herself to possible multiple liability by mistakenly surrendering the property to one other than the claimant legally entitled to the property. The person institutes the suit by naming all such claimants as defendants, and surrenders the property to the court for distribution in accordance with its determination of the rights of the various claimants. Such person is referred to as the interpleader.

A person cannot join the United States under 28 USC § 2410(a)(5) if the only claimants to the property are the taxpayer and the United States. Rosenheck v. United States, 79 A.F.T.R.2d ¶ 97-2715 (N.D. Okla. 1997); Queen City Savings & Loan Assoc. v. Sanders , 46 A.F.T.R.2d ¶ 80-5715 (W.D. Wash. 1980). In that instance, there is only one claimant to the property because the United States stands in the shoes of the taxpayer.

"Suits in the nature of interpleader" are actions where the plaintiff is claiming some interest in the fund deposited as contrasted to a pure interpleader action where the plaintiff asserts no claim to the fund deposited.

Most cases in which the United States is named a party under 28 USC § 2410 are brought in state courts.

28 USC § 1444 authorizes removal of actions covered by section 2410 to a federal district court. The Chief Counsel Directives Manual (CCDM) provides that, in general, Area Counsel attorneys should recommend to the Department of Justice to have cases removed to a federal district court. See IRM 34.5.6.6, Removal to Federal Court. Immediately consult with Area Counsel whenever any questions arise as to whether the Government's interests will be best protected by having the case removed from state court.

The Department of Justice has primary responsibility for protecting the Government’s interest in cases in which the United States is joined as a party, regardless of the court involved. In tax cases, it cannot adequately protect the Government’s interest without the aid and assistance of the Service. This requires both the assistance of the Area Counsel’s office in certain cases and the Area Director’s office in all cases.

Any pleading (whether or not designated as a complaint) that seeks to join the United States because of a federal tax lien must include the name and address of the delinquent taxpayer, and if a notice of federal tax lien has been filed, the date and place such notice was filed as well as the Service office that filed it. 28 USC § 2410(b). These requirements must be met with respect to each filed notice of tax lien. The pleading must be served personally on the office of the U.S. Attorney for the district in which the suit is pending and on the Attorney General, in Washington, D.C., by registered or certified mail. An answer or other pleading must be filed by the United States within 60 days after service. 28 USC § 2410(b).

The U.S. Attorney should contact the office of the Area Director responsible for collection of the account under which the lien arose and forward a copy of the summons and complaint to that office. Depending upon local procedures, the U.S. Attorney may also send a copy of the summons and complaint to Area Counsel. The U.S. Attorney will request information concerning the assessment, the property involved, and the claims of all lienholders.

A copy of a complaint involving an interpleader action must be forwarded to Area Counsel. The Area Director's office should immediately investigate the claims of all competing claimants and provide this information to Area Counsel. The information should be specific and include tax data in addition to claimant information. In interpleader cases, Area Counsel is required to prepare a defense letter to the Department of Justice, Tax Division. See Chief Counsel Directives Manual (CCDM), IRM 34.5.6.2, Referral of 28 U.S.C. § 2410 Cases to Field Counsel for a general discussion of Counsel procedures in section 2410 actions, and IRM 34.5.6.7.1, Specific Procedures for Handling Interpleader Suits for specific procedures relating to interpleader suits.

If the United States receives an application for administrative discharge of the property from the federal tax lien during the pendency of a proceeding to which the United States has been joined as a party, it will be submitted to the Area Director by the U.S. Attorney. The U.S. Attorney will be consulted and provide instructions if such application is received directly by the Internal Revenue Service.

As a general rule, applications for discharge of property from the tax lien made without consideration after the commencement of a proceeding in which the United States has been named will be rejected. This is because the Service has established procedures whereby a mortgage holder bringing a foreclosure action can be assured an administrative discharge of a federal tax lien after the completion of the action, if:

In any suit where a debt owing the United States is due (and when a federal tax lien is involved the amount is always due), the United States may sue to foreclose its own lien and seek a judicial sale of the real or personal property. 28 USC § 2410(c); IRC § 7403. When the federal tax lien is the primary lien, the United States is authorized to bid at the sale an amount equal to its claim plus the expense of sale. 28 USC § 2410(c); IRC § 7403.

If real or personal property is sold in a 28 USC § 2410 action to satisfy a lien senior to a federal tax lien, and surplus proceeds are available, the United States may seek its share of the proceeds. The United States will receive proceeds according to the tax lien’s priority with respect to the property sold, for application to the taxpayer’s liabilities.

The redemption period gives the Service time to investigate and determine whether it would be to the advantage of the United States to redeem the property. The principal consideration in such an investigation is whether the value of the property sold in the foreclosure proceeding is substantially in excess of the amount required to effect the redemption.

When the United States redeems real property from a judicial sale pursuant to 28 USC § 2410(c), a junior lienholder may redeem the property from the United States if permitted under the local law where the property is situated.

28 USC § 2410(d) provides a uniform method for determining the amount to be paid by the United States when it redeems real property, whether the redemption is made under the authority of 28 USC § 2410(c) or IRC § 7425(d)(1) (relating to real property sold at nonjudicial sales).

The redemption price cannot be greater than the amount paid by the purchaser at the judicial or nonjudicial sale, plus interest at the statutory rate of 6% from the date of sale to the redemption date, plus the excess, if any, of any expenses incurred after the foreclosure sale in maintaining the property over the income from the property during this period. Where the property is not rented out, but is used by the purchaser, the income includes the reasonable rental value of the property. 28 USC § 2410(d).

IRC § 7810 established a revolving fund not to exceed $10,000,000 under the control of the Treasury Department which is available without fiscal year limitation for all expenses necessary for the redemption by the Government of real property as provided in IRC § 7425(d) and 28 USC § 2410(c). The revolving fund generally has less than this amount on hand at any given time. Contact Collection Advisory to determine the exact amount available for redemption.

The revolving fund is reimbursed from proceeds of subsequent sales of redeemed real property in an amount equal to the amount expended to make such redemption. See IRM 5.12.5.5, Federal Tax Lien Revolving Fund and IRM 5.12.5.5.1, Advances from the Revolving Fund, for procedures relating to the revolving fund.

By exercising its power of redemption, the United States can purchase property sold at distress prices and resell the property at a profit. Any profit from the sale of redeemed property subject to a tax lien is applied to reduce the liability of the taxpayer whose assessment gave rise to the lien. Surplus proceeds (within the meaning of IRC § 6342(b)) resulting from any sale under IRC § 7506 of real property redeemed by the United States, are not paid into the general Treasury but are placed in a deposit fund account provided for by IRC § 7809, so that they may be paid to parties legally entitled to them.

In cases where a federal tax lien is discharged and the Government does not exercise its right to redeem under 28 USC § 2410(c), the right will cloud the title to the property for 120 days or, if greater, the period allowable for redemption under applicable local law. When title is clouded, resale by the purchaser is difficult, if not almost impossible, and also usually deters a purchaser from making any improvements until he or she is sure that his or her right to the property is complete. For this reason, purchasers frequently ask the Government to release its redemption right.

A person desiring a release of the Government’s right of redemption after a foreclosure suit should submit his or her application to the U.S. Attorney in the jurisdiction where the foreclosure action was held. The U.S. Attorneys have been delegated limited authority to accept or reject applications.

Upon receipt of an application, the U.S. Attorney will forward it to the Area Director for valuation of the redemption right. The valuation will usually require a determination of the fair market value of the property, the value of senior encumbrances, the amount required to redeem, etc. The Area Director will forward his or her valuation to the Area Counsel, who analyzes the entire case in the light of the legal factors involved. Area Counsel will transmit its recommendation to the U.S. Attorney or to the Tax Division in Washington, whichever is appropriate.

The Department of Justice generally will not release a right of redemption, even where the right is valueless, without some consideration being paid.

If the United States is not a party under 28 USC § 2410 to formal judicial proceedings, the effect of a judgment, or a judicial sale pursuant to such a judgment, depends upon whether a notice of federal tax lien was filed before the action was commenced.

For example, if a notice of federal tax lien is not on file on the date a foreclosure action of a first mortgage is brought, and if local law provides that junior liens on real property will be discharged by a judicial sale pursuant to a judgment in a foreclosure action, then a federal tax lien on the property will be discharged by the judicial sale. The result is the same whether the lien arose before or after the date of commencement of the foreclosure action or whether notice of lien was filed at any time after the commencement of the foreclosure action.

If the United States has not been joined in a judicial proceeding in which the judicial sale discharges the federal tax lien from the subject property, then the United States may intervene in the suit pursuant to IRC § 7424, and:

The United States has no right of redemption (except as provided by local law) where real property is sold in a judicial proceeding to which it has not been named as a party and it has not intervened pursuant to IRC § 7424.

A nonjudicial foreclosure on real or personal property is a sale made pursuant to:

A nonjudicial sale, pursuant to a lien senior to a federal tax lien or title derived from the enforcement of a tax lien, will discharge the tax lien or divest the title to the extent provided by local law with respect to junior liens if the notice of lien was filed, or the title was recorded, in the place dictated by local law, more than 30 days before the sale, and the Area Director was given timely and adequate notice of the sale.

In situations where a notice of federal tax lien has not been filed or has been filed less than 31 days before the sale, a notice of sale is not required. In these situations, the sale shall have the same effect with respect to the discharge of the federal tax lien/NFTL as provided by local law with respect to junior liens. This is the same result as where the United States does not have a tax lien on file and it is not joined as a party to a 28 USC § 2410 proceeding.

The notice of sale must be given in writing, by registered or certified mail or by personal service, not less than 25 days prior to the sale, to the IRS official, office and address specified in IRS Publication 786, "Instructions for Preparing a Notice of Nonjudicial Sale of Property and Application for Consent to Sale." See Treas. Reg. § 301.7425-3. According to Publication 786, the notice should be addressed to the Advisory Group Manager for the area in which the notice of federal tax lien was filed. The requirements for the adequacy of such notice are set forth in Treas. Reg. § 301.7425-3(d), and these requirements must be satisfied with respect to each notice of tax lien filed, and with respect to each recorded title. This notice requirement gives the Government an opportunity to review its position and determine the appropriate action, such as purchasing the property, without placing an undue burden on a foreclosing creditor since he or she need only check the record for federal tax liens or title on the date the action is commenced. See IRM 5.17.5.19.3, Nonjudicial Sales of Perishable Goods regarding nonjudicial sales of perishable goods.

Where the United States is not given proper notice of the sale, although notice of lien was duly filed, or the title was duly recorded, more than 30 days before the sale, the sale does not disturb the lien or title of the United States. Treas. Reg. § 301.7425-2(a). This rule does not apply in any case in which, prior to the date of sale, the Area Director consents to the sale of the property free of the lien or title, even though the United States did not receive proper notice of the sale. IRC § 7425(c)(2).

If the nonjudicial sale is pursuant to a lien junior to the federal tax lien or the United States’ title, then the sale does not discharge the tax lien or divest the title, regardless of whether notice is given to the Area Director. In such instances, the United States may enforce the lien against the real or personal property by administrative or judicial proceedings or may take any appropriate action with respect to its title.

If the property is perishable, or is liable to become greatly reduced in value by retaining, or cannot be kept without great expense, the 25-day notice rule is not applicable and the property may be sold free of the tax lien or title as long as notice is given at any time prior to the sale. IRC § 7425(c)(3); Treas. Reg. § 301-7425-3(c)(1). The proceeds of the sale (exclusive of costs) must be held at least 30 days after the sale date as a fund subject to the claim of the United States with the same priority as the claim had with respect to the property sold. IRC § 7425(c)(3); Treas. Reg. § 301.7425-3(c)(1).

A seller becomes personally liable to the United States for the value of its claim in the proceeds if:

In any event, even if the proceeds of such sale are not so held by the seller, but all the other provisions relating to the sale of perishable goods are satisfied, the buyer of the property at the sale takes the property free of the federal tax lien or title. Treas. Reg. § 301.7425-3(c)(1).

The term "perishable goods" is defined as tangible personal property which, in the reasonable view of the seller, is liable to perish or become greatly reduced in price or value by retaining or cannot be kept without great expense. Treas. Reg. § 301.7425-3(c)(2). These goods are the same as those the Internal Revenue Service is authorized to sell pursuant to IRC § 6336 (relating to sale of perishable goods) and IRC § 6863(b)(3)(B)(ii) (relating to exceptions to stay of sale of seized property pending Tax Court decision).

The United States may redeem real (not personal) property sold in nonjudicial proceedings where the sales were to satisfy a lien senior to a federal tax lien or to a title obtained as a result of the enforcement of a tax lien. IRC § 7425(d)(1). This right of redemption exists even where the Area Director has given his or her consent prior to the sale. Treas. Reg. § 301.7425-4(a)(1). The period of time for redemption in these cases is 120 days from the date of sale or the period allowable for redemption under local law, whichever is longer. IRC § 7425(d)(1). Thus, the United States will always have the right to redeem real property sold at such sales, whether or not other lienors have similar rights under local law.

The amount to be paid by the United States where it exercises its right of redemption is the amount prescribed in 28 USC § 2410(d) (discussed in IRM 5.17.5.18.12, The Redemption Price above). IRC § 7425(d)(2); Treas. Reg. § 301.7425-4(b). As a result, the amount to be paid by the United States is uniform in all cases, regardless of whether the United States redeems the real property from a purchaser at a judicial sale to which the United States was a party or a purchaser at a nonjudicial sale.

After the United States has exercised its right of redemption under IRC § 7425(d), the Service will apply to the officer designated by local law, if any, for the documents necessary to provide evidence of redemption. If no such officer has been designated by local law, or if the officer so designated fails to issue the necessary documents, the Service is authorized to issue a certificate of redemption for the property redeemed by the United States.

The documents issued by the local officer or the certificate of redemption executed by the Service must be recorded in the proper registry of deeds in order to record title to the redeemed property. If the state in which the real property redeemed is situated has not by law designated an office in which the Service-issued certificate of redemption may be recorded, the certificate must be filed in the office of the clerk of the federal district court for the judicial district in which the redeemed property is situated.

A certificate of redemption properly executed constitutes prima facie evidence of the regularity of the redemption. When the certificate is recorded, it transfers to the United States all the rights, title, and interest in and to the redeemed property acquired by the purchaser from whom the United States redeems the property. IRC § 7425(d)(3); Treas. Reg. § 301.7425-4(c).

If a federal tax lien is discharged or title divested by a nonjudicial sale under IRC § 7425 and the Service does not exercise its right to redeem, the right to redeem clouds title to the property. In many cases the Service is asked to release its right of redemption. The information required in an application for the release of the right of redemption is set forth in Rev. Proc. 68-10, 1968-1 C.B. 758. The Area Director will review the application to determine if the release has any value, and if so, how much the applicant should pay for the release. No processing charge is made for the release of a valueless right of redemption regardless of the fact that the value of a release has an intangible value to the applicant. Treas. Reg. § 301.7425-4(c)(4).