A Wisconsin court just put the IRS ahead of state tax collectors for leftover foreclosure funds in a case involving Bank of America. Here’s what mortgage pros need to know
On September 17, 2025, the Wisconsin Court of Appeals decided a dispute that should matter to anyone working in the mortgage industry. The case, Bank of America NA v. The Estate of Richard P. Nelson, United States of America, and State of Wisconsin Department of Revenue, centered on what happens to surplus funds left after a foreclosure sale when both the IRS and a state tax agency have outstanding liens.
Richard Nelson died owing substantial tax debts – $175,431.51 to the IRS and $115,975.33 to the Wisconsin Department of Revenue. Bank of America, which held the mortgage on Nelson’s property, foreclosed and sold the property at a sheriff’s sale. After paying off the mortgage and related fees, $54,421.96 remained as surplus. The court ordered the clerk to hold onto this surplus until it could be determined who was entitled to the funds.
Both the IRS and the Wisconsin Department of Revenue claimed the surplus, each citing their tax liens. The IRS relied on the federal priority statute, 31 U.S.C. § 3713, which gives the federal government’s claim priority when a deceased debtor’s estate is insufficient to pay all debts. The state argued that this statute did not apply in a foreclosure context and that the court clerk was not an “administrator” as intended by the law.
The appeals court affirmed the lower court’s decision, siding with the IRS. The court held that the federal priority statute does apply to foreclosure surplus funds and that the court clerk, by holding and controlling the surplus, functions as an “administrator” under the statute. The court also confirmed, based on probate records, that Nelson’s estate was insolvent.
The outcome: the IRS, not the state tax agency, was entitled to the surplus funds. The court also denied the Wisconsin Department of Revenue’s request for reconsideration, maintaining its interpretation of the federal statute and the clerk’s role.
For mortgage professionals, this case is a clear reminder that federal tax liens take precedence over state claims when distributing surplus funds from a foreclosure. The decision underscores the importance of checking for federal tax liens before distributing any leftover funds, especially when an estate is insolvent and multiple government creditors are involved.
In practical terms, if you’re handling foreclosures or advising clients on properties with outstanding tax debts, this ruling shows that the IRS will generally have the first claim on surplus funds. It’s a straightforward but important takeaway for anyone in the mortgage business: when surplus money is on the table, federal tax liens come first.
