We are in the midst of the third shutdown of the Internal Revenue Service (IRS) in the past five years. Is now the time for the real estate industry to break its dependence on the IRS as a way of avoiding delays and harm to the industry?
As a tax controversy attorney I often find myself in the middle of real estate transactions. I work with buyers and their agents to file delinquent returns, resolve tax debts, and establish installment agreements that won't limit their ability to borrow. I work with sellers and their agents to resolve balances due to the IRS and State, obtain lien releases, and secure accurate demands for tax debts. These transactions are often difficult to complete within the escrow period under the best of circumstances. When the IRS is involved, but isn't available because of a government shutdown a transaction can be impossible to complete.
IRS Involvement in Real Estate Transactions
Buyers, sellers, agents, lenders, and escrow are all dependent in one way or another upon services provided by the IRS. With the government shutdown in its third week these services aren't being provided and have the potential to delay or doom transactions.
For many loans, the buyer's income is verified in part through tax returns and tax return transcripts obtained using Form 4506-T. If the buyer has a Federal tax debt then verification of an installment agreement is generally required for purposes of calculating their debt-to-income ratio.
Sellers with Federal tax liens filed against them must obtain a demand and release from the IRS. If the lien will be paid in full, then this is a document that can obtained within a few days. If the tax lien will not be paid in full, then a minimum of 30 days is required to obtain the demand and release. If the IRS is closed over a budget impasse this document isn't produced at all and the transaction is delayed.
Lenders rely on IRS tax transcripts to verify income and many won't fund until the transcripts are received directly from the IRS. If the transaction is a refinance involving an IRS tax lien, then a demand and release must be obtained to ensure clear title.
Escrow can't complete a transaction until the loan is funded based off of IRS tax return transcripts (see above) and lien demands have been secured (see above).
Agents are at the mercy of the IRS for the all of the above issues and can't close a deal or receive their commission until the IRS has done their part.
If the IRS, as an essential component of many real estate transactions is increasingly unreliable, then it's time to minimize their role in the industry. Based on your experience in the industry, what can be done?