How Asset Seizure Procedure Affects the Outcome
For the most part, the IRS meticulously documents each step it takes, which is usually why it is easier to challenge the Service aggressively rather than waiting until everything is done. But the agency’s asset seizure procedure is often a glaring exception, as a May 2015 Inspector General’s report sharply criticized the IRS in this area.
Back in 1998, a fed-up Congress ordered the IRS to overhaul its asset seizure procedure in a way that better protected taxpayers'[ interests. The result was the PALS department. Someone probably stayed up all night to come up with this acronym, which stands for Property Appraisal and Liquidation Specialists. These individuals are supposed to ensure that the pre-seizure validation process is transparent and reasonable, and that the actual sale is fair to all parties. According to the report, PALS do a great job in the first area, but there are often flaws in the execution.
These issues are apparent in other areas as well. Just a few weeks before the Inspector General’s report was published, a Washington State federal judge handed down an order in Moore v. United States, a case in which agents essentially spun the Wheel of Misfortune to determine the proper FBAR penalties. Ultimately, this halfhearted effort could not even meet the very low evidentiary standards in the Administrative Procedures Act.
But I digress. Back to the blog…
Determining Asset Value
This portion of the Service’s asset seizure procedure is rather mechanical. However, there are some conclusory components, and questions in this area sometimes cause problems for the IRS later. Since most of these actions involve real estate, that’s the example we will examine.
Step one is to establish an asset’s fair market value. Internal Revenue Manual Section 5.10 clearly dictates that the PALS must do more than copy and paste the information from the county tax appraisal website. The public record is a starting point, but the PALS must also consider comparables and general market conditions. If possible, there should also be a physical property inspection. This valuation must also take into account some intangible factors that may not directly affect market value, such as the property’s use (whether it is commercial or residential) and the taxpayer’s cooperation level.
Next, the PALS determine the cleverly-named Reduced Forced Sale Value, which is currently 60 percent of the FMV (fair market value). That figure may be a bit high, as most “we buy ugly houses” home investors pay about 50 percent of FMV. But the IRS calculation is probably close enough to pass muster under the aforementioned APA (advanced pricing agreement).
Finally, PALS calculate the net possible sales proceeds, after subtracting costs like:
- Satisfying senior liens, such as first mortgages and delinquent property taxes,
- Pre-seizure costs, like locksmiths and perhaps even an armed escort, and
- Storage, liquidation, and other post-seizure costs.
If the sales proceeds would satisfy at least a bulk of the tax debt, and there are no black-letter rules here, the asset seizure procedure may proceed.
Asset Seizure Procedure Part II: The Sale
The PALS must produce a sales plan based on their assessment. Sometimes, this plan is very detailed and includes almost step-by-step instructions as to what agents must do. But other times, there are almost no details, and field agents are basically on their own. That deficiencey leads to issues like:
- Failure to Document Personal Items: The IRS is supposed to document the contents of seized property to make sure that they get back to the right place, especially since some of these items may not belong to the taxpayer. But many times, this information is incomplete at best.
- Failure to Remove Personal Information: This issue most often comes up with regard to vehicle seizures, as items such as personal property in the car, license plates, and Event Data Recorders remain with the vehicle instead of being removed.
Before 1998, the IRS could essentially take these things and taxpayers had no recourse. But now, the IRS may be responsible for damages if the asset seizure procedure is not followed correctly. In some cases, the deficiencies may even be sufficient to overturn the seizure altogether.