Nothing gives you a sense of powerlessness like a Federal Tax Lien. Just ask my client, Robert Sprinkle. It's the IRS' not so gentle way of securing its interest in your real and personal property when you have back taxes. However, Mr. Sprinkle didn't have back taxes. In fact, he was/is a model citizen. This 85 year old hero fought for our country in the Korea and Vietnam Wars, he is 100% service disabled and was generally enjoying his well-deserved retirement when the country he fought hard defending came knocking. The IRS wanted him to pay the taxes of someone else!

In 2008, Mr. Sprinkle sold some property to an acquaintance. We'll call him Mr. Jones. Jones signed a Promissory Note with amortized monthly installments and gave Sprinkle a mortgage on the property. Sprinkle properly recorded the mortgage with the County. Over the course of some time, Jones paid Sprinkle about $6,000 toward his note. Unfortunately, in the meantime, Jones failed to pay his taxes for 2 years and the IRS filed 2 liens on the property in the combined amount of about $40,000.00.

After the tax liens were filed, Jones could not pay Sprinkle per the note. To save Sprinkle the effort and expense of a judicial foreclosure proceeding, Jones gave Sprinkle the property back and quitclaimed a deed to Sprinkle. (Bank of America, Countrywide and other big banks do this all the time. Their tall building lawyers call it a “deed in lieu of foreclosure”). Sounds reasonable and pragmatic, right? Sprinkle took superior title to the property. The county appraiser's records show that the property was worth significantly less than Jones owed Sprinkle on the note. Sprinkle did not know about the liens.

Fast forward to April, 2012. Sprinkle performed a title search on the property and found the liens. He called the IRS several times and got the runaround. He hired us to handle the problem. We requested a lien withdrawal from the IRS' lien advisory group for this area, in Tulsa, Oklahoma. Lien advisory requested a certified appraisal of the property before it denied our request. Interestingly, the certified appraisal we requested showed that the property was worth less than it was worth when Jones gave Sprinkle the property back.

The Internal Revenue Manual talks about non-judicial foreclosure (i.e. deed in lieu of foreclosure proceedings). It says that the IRS will do a lien valuation (value of the property, less 20%, less competing property interests and administrative costs). Sprinkle took the property back, subject to the IRS' liens, but, as stated, Jones owed Sprinkle significantly more than the property was worth when he took it back from Jones. In fact, it was worth less years later when Sprinkle asked for the liens to be removed, as shown by the certified appraisal Sprinkle paid for on the property at the IRS' request. In other words, the IRS liens were valueless any way you cut it, and they should have been released. Easy right? Wrong.

Tulsa lien advisory told us they were getting a legal opinion on this from IRS legal. Weeks later they came back, threw around some case names (with irrelevant points) and told us we lose. There were different, outlandish theories of why we lose, but they would not put any in writing (one higher up even said that the IRS owned the property outright now, since Sprinkle released the mortgage when Jones gave him the property back!). They did say that Sprinkle could pay the IRS $6,000 of Jones' tax bill to have the liens removed. When pressured, the IRS told us the $6,000 was the amount that Sprinkle had been enriched at the expense of the government. What?

We then embarked on a sea of bureaucracy appealing the decision up the chain of command, for several months, until we ultimately got to the chief of all appeals. He agreed within minutes that the IRS' lien was valueless at the time Sprinkle took back title to the property. After jumping through some more red tape, IRS lien advisory Tulsa begrudgingly issued the releases nearly 9 months later. There are few, if any, real estate transactions that could wait for this type of runaround.