​Profiting From Auctions

​Local governments should ensure they have taken measures to prevent fraud in tax deed auctions.

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​Sheriff's deputies in Broward County, Fla. have arrested individuals who allegedly used the county's tax office to defraud property owners, the Sun Sentinel reports. According to detectives, tax office employee Roberto Martinez used forged power-of-attorney documents to collect proceeds from the tax deed auctions of homes belonging to people who had failed to pay property taxes. In such auctions, the property owner receives the remaining funds, after the unpaid taxes and accrued interest have been subtracted, unless the owner signs over the right to collect those funds. Detectives say Martinez and associates outside the tax office — including the president of a local funding company — used forged documents in 28 sales between 2014 and 2016, and a recent audit has uncovered 22 additional fraudulent sales, bringing the total of allegedly stolen funds to $2.4 million.

Lessons Learned

Municipal tax collection agencies and their internal auditors should review and strengthen four areas, based on the events in this news story:

  • Ensure that legal notifications requirements and processes are followed. Agencies should notify the legal titleholder of record and all lien holders, including mortgage companies, of a tax deed sale. Failure to strictly comply with the mandatory notice requirements is a violation of due process and may void the tax deed sale. In this case, following this procedure could have helped identify deceased or falsified property owners. The procedure would have been particularly helpful if the agency required a response from the property owner before the property auction and if this part of the process was conducted by a different tax office official, which may have prevented the fraudster from hiding this information. Another effective measure is requiring that copies of all power of attorney documents be sent to property owners, which would be an obvious tip-off of fraudulent activity, including forgery. Furthermore, requiring that a third party, such as an official in the Sheriff's office or the municipal finance department, review documentation of tax deed sales would be an effective deterrent and detection measure.
 
  • Tighten controls over power of attorney agreements in tax deed sales. Measures could include requiring a lawyer to be involved in developing these agreements, as well as certifying the qualifications of companies involved in tax deed sales and their employees.
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  • Encourage property owners to be vigilant and proactive in protecting themselves. Many municipalities have notification programs, including online, that notify property owners any time a document is recorded related to their property. Property owners also should check the municipal register's records often to ensure that there are no liens, deeds, or mortgages they are not aware of recorded on their property. With regard to ensuring legal notification processes are followed, property owners should keep all relevant offices informed, in writing, of any change of address. Property owners also need to learn about their legal rights and obligations in these situations, and governments at all levels must help them stay educated. Parenthetically, investors in the related area of tax lien speculation also should learn about the fraud risks to their investments.
     
  • Consider changing the rules. Local governments in every U.S. state assess taxes against all types of real property. Some states allow local county tax collectors to sell tax lien certificates, while other states sell the tax deeds and allow investors to own the properties after purchasing the tax deeds. However, real estate investors who purchase tax lien certificates only purchase the liens against the properties and the authority to enforce the liens against the property owners. Unlike purchasers of tax deeds in tax deed states, tax lien certificate purchasers do not immediately own the properties upon purchasing tax lien certificates. They may not acquire possession of the properties or evict property owners. The homeowners may remain in the properties during the redemption period set by state statutes. They also have the opportunity to pay the back taxes plus interest paid by the tax lien investors. The time frame for the redemption period varies from state to state — from six months to four years. That adds an extra measure to help prevent the kind of fraud in this story.​

Art Stewart
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About the Author

 

 

Art StewartArt Stewart<p>​Art Stewart is an independent management consultant with more than 35 years of experience in internal audit, financial management, performance measurement, governance, and strategic policy planning.​​​</p>https://iaonline.theiia.org/authors/Pages/Art-Stewart.aspx

 

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