Question: I have been divorced for several years. As part of our settlement agreement, the family home is now owned jointly by my ex and myself. I have just learned that my former husband owes the IRS a lot of money, and am concerned whether the house can be foreclosed by the IRS.
Answer: Yes. The Internal Revenue Service has the statutory authority to seek Court approval to sell jointly owned property, even if one of the parties does not owe the government any money.
If a Court authorizes the IRS to foreclose on property, and you do not owe any back taxes, you will receive half of the sales proceeds when it is sold.
When you were married, you and your husband owned the property as tenants by the entirety. Upon divorce, title to the property automatically changed into a tenant in common arrangement. This means that both you and your former husband own a divisible half interest in the family home.
The federal statute authorizing such foreclosure sale reads as follows:
The court shall ... proceed to adjudicate all matters involved therein and finally determine the merits of all claims to and liens upon the property, and in all cases where a claim or interest of the United States therein is established, may decree a sale of such property... (26 U.S.C. §7403)
Notice the emphasis on the word "may." According to one Judge in a very recent case, the "courts have discretion to refuse foreclosure when equity dictates." Equity means "fairness" -- doing what the Judge believes is right under the particular facts and circumstances of each case.
Let's look at this case in more detail. William and Lanell Johns purchased real property in 1987, and subsequently divorced. As in your case, the family home was not sold, and William and Lanell then owned the property at tenants in common.
William moved out of the house, but Lanell has resided there since 1990. She has been diagnosed with cancer and her only income is a monthly disability check in the amount of $788. William owes the IRS over $100,000.
Judge Roger Vinson, Senior United States Federal District Judge for the Northern District of Florida, rejected the IRS's request to foreclose on the property. Although the Judge recognized that the statute gave him discretion on whether or not to allow the forced sale, he explained that "this discretion is 'limited' and should be exercised rigorously and sparingly, keeping in mind the Government's paramount interest in prompt and certain collection of delinquent taxes".
In making his decision, the Judge looked at a number of factors.
First, Lanell had a reasonable expectation that the property in which she has lived would not be foreclosed upon "to satisfy a debt owed by her ex-husband, from whom she has been divorced for 14 years."
Second, the Judge weighed the hardship that a foreclosure would produce on Lanell. While the Judge acknowledged that she would be entitled to her rightful share of the sales proceeds should foreclosure take place, he also recognized that "financial compensation may not always be a completely adequate substitute for a roof over one's head."
Accordingly, the Judge took into consideration Lanell's financial and health status, and determined that to force a sale of the family home would be a significant hardship and burden merely "to satisfy a debt owed solely" by her former spouse.
In denying the IRS request, the Judge wrote:
... the taxes at issue in this case are the sole obligation of Mr. Johns, who does not reside on the property and who will be relatively unaffected by the foreclosure. It is only Ms. Johns who will be significantly affected. To allow the government to foreclose on the land – and in the process displace an unemployed, disabled woman of modest and limited means who has lived on the property for 16 years while battling repeated bouts of cancer – would be an extremely inequitable and offensive result.
In the Johns case, the facts strongly supported keeping the wife in the property. But each case is different. The law allows a judge the right to foreclose, but this is not a mandatory requirement.
In most cases, the jointly owned property will be sold. The burden will be on you to convince the IRS (and perhaps the Court) that it would be inequitable and an extreme hardship if you were displaced from your home.