Florida Foreclosure With an IRS Junior Lien: Joinder, IRC 7425, and the 120-Day Redemption Right

Florida forecloses through the courts. A lender, a condominium association, or a homeowners association files suit, names everyone with a recorded interest, gets a judgment, and the clerk sells the property at auction. Junior interests are cut off. That is the deal.

A federal tax lien plays by different rules. The United States cannot be sued like an ordinary lienholder, its lien cannot be wiped out by a case it was never part of, and even when it is properly joined, it keeps a right to buy the property back after the sale. Lenders, associations, and auction buyers who ignore those rules end up with title that is less clean than they paid for.

The United States must be joined

The vehicle for naming the United States in a foreclosure is 28 U.S.C. 2410. Subsection (a) consents to the United States being named as a party in a civil action in federal or state court to foreclose a mortgage or other lien on property on which the United States has or claims a mortgage or other lien. Florida circuit court foreclosures fit within that consent.

Subsection (b) sets the requirements. The complaint must describe the nature of the United States interest with particularity. For a tax lien, it must give the name and address of the taxpayer whose liability created the lien and, if a notice was filed, the identity of the filing office and the date and place of filing. In a state court action, service goes to the United States Attorney for the district (or a designee) and by mail to the Attorney General. The United States then has 60 days to respond, unless the court allows more.

Sixty days is longer than many plaintiffs plan for. Build it into the case schedule.

What happens if the United States is left out

IRC 7425(a) answers this directly. If the United States is not joined in a judicial action described in 28 U.S.C. 2410(a), and notice of the federal tax lien was filed in the proper place when the action was commenced, the judgment and any judicial sale are made subject to and without disturbing the federal lien.

Translation: the auction buyer takes the property with the IRS lien still attached. The foreclosure did nothing to it.

If no notice was filed when the case began, 7425(a)(2) says the effect on the federal lien follows local law. That is the silent lien situation, and it is why foreclosing plaintiffs search the record when they file and again before judgment.

There is one more piece. If a judicial sale in a case where the United States was not a party does discharge the federal lien, 7425(a) lets the United States claim the sale proceeds, with the same priority its lien had, at any time before distribution is ordered. Surplus funds in Florida foreclosures can draw an IRS claim.

Senior lien, junior lien

Whether the federal lien is wiped out depends on priority. If the foreclosing mortgage was recorded before the IRS filed its notice, the mortgage is senior and the foreclosure can cut off the junior federal lien, subject to the redemption right below. If the federal notice was filed first, the foreclosing party is junior. Under 28 U.S.C. 2410(c), a sale to satisfy a lien inferior to the federal lien is made subject to the federal lien unless the United States consents otherwise.

Associations deserve a special note. A condominium or homeowners association lien that arises after the IRS filed its notice is generally junior to the federal tax lien. An association that forecloses its assessment lien on a unit owned by a taxpayer with a prior IRS notice is selling the unit subject to the IRS lien, not free of it. Priority under IRC 6323 turns on recording dates and the protections in 6323(b), and association lien rights under Florida law should be analyzed against those federal rules before anyone sets a sale date.

The 120-day redemption right

Even when the federal lien is properly cut off, the United States keeps a right to redeem. Under 28 U.S.C. 2410(c), when real property is sold to satisfy a lien prior to that of the United States, the United States generally has one year to redeem. For liens arising under the internal revenue laws, the period is 120 days or the redemption period allowed under state law, whichever is longer.

IRC 7425(d) provides a parallel right for nonjudicial sales: the IRS may redeem within 120 days from the sale or the local redemption period, whichever is longer. Florida residential foreclosures are judicial, so 2410(c) is the usual source, but the result for a tax lien is the same 120-day floor.

What the United States pays to redeem is set by 28 U.S.C. 2410(d): the amount the purchaser actually paid at the sale (including, for a lienholder who credit bid, the amount of its debt satisfied by the sale), plus 6 percent interest per year from the date of sale, plus any amount by which necessary expenses for the property exceeded its income and reasonable rental value.

Does the IRS actually redeem?

Redemption requires the IRS to put up money and then sell the property itself, so it makes sense only when the auction price was well below value. A property that sold for a credit bid far under its worth is the kind of property that draws attention. A fair auction price leaves nothing to gain.

For auction buyers, that uncertainty is the real cost. Title insurers often treat the 120 days as a waiting period. Resales and refinances stall. The IRS has a process for applications asking the United States to release its right to redeem, described in Publication 487, and Publication 783 cross-references it for foreclosure situations.

Clearing the lien before the sale

A cleaner path in many cases is to deal with the federal lien before the foreclosure sale. Publication 783 notes that when a mortgage foreclosure is anticipated, the owner or another interested party can apply for a discharge under IRC 6325(b)(2)(A) or 6325(b)(2)(B), and the IRS will issue a conditional commitment letter within 30 days of receiving a complete and approved application. At the end of the foreclosure, the certificate issues under the terms of that letter. When the property is underwater, a no-value discharge may cost nothing.

A checklist for each side

Foreclosing lenders and associations

• Search for federal tax lien notices against every owner when the case is filed and again before judgment.
• Name the United States under 28 U.S.C. 2410 with the particulars subsection (b) requires, and serve it correctly.
• Calendar the 60-day response period.
• Confirm whether your lien is actually senior to the federal notice.

Auction buyers

• Check the docket: was the United States joined, and was it served?
• Check priority: was the foreclosed lien senior to the federal notice?
• Plan for the 120-day redemption period, or pursue a release under Publication 487.

Owners facing foreclosure

• The foreclosure does not reduce your tax debt, and any deficiency or canceled mortgage debt has its own tax consequences. See the foreclosure tax guide.
• If you are buying back or selling before the sale, see the purchaser protection guide for what a buyer will demand.

Florida law runs the foreclosure. Federal law decides what happens to the federal lien. Respect both, and the title holds.