So now I'm wondering if the irs will frown on this and force the sale of the property to pay the $130K (I doubt they could for the same reasons he couldn't get financing) but assuming they could how would they now that it's half hers?
First, it's not $130,000 from what said. If I understand your facts right, $130,000 is the amount that he took out from the inherited IRA. That distribution is subject to tax, but the rate of tax will depend on his filing status and what other income he has. It may also be that some withholding was taken out from the distribution to help pay the taxes on it. You might want to see if there was any withholding taken out.
The IRS has the power to seize his interest in the property and sell it to pay tax that he owes. But that is not something that would be done very quickly. Moreover, if he is living in the place as his principal residence, the IRS will need to get an order from a federal district court prior to seizing it and selling it. Seizure of a home is a last resort for the IRS to collect tax owed. The IRS tries to work out a collection resolution to the problem with the taxpayer first. If that cannot be done, the IRS generally looks to levy/seize other income or assets before resorting to a personal residence. As a result, seizures and sales of homes by the IRS are not all that common as they can usually reach some other resolution to deal with it before that occurs.
I was a revenue officer with the IRS prior to becoming an attorney. Revenue officers are the ones who handle the most complex collection cases and who do the seizures of cars, homes, businesses, etc., to collect tax. During my time as a revenue officer I seized, as I recall, only 8 homes out of the several thousand cases I handled. Out of those, only 1 house actually went to sale. In all the other cases a resolution short of selling the house was reached. There are some circumstances where the IRS might not exhaust everything else first and instead go for the home, the most common being where the IRS officer realizes that (1) the home could fully pay what is owed and (2) everything else the taxpayer has combined wouldn't pay it all off, so that in the end the IRS would have to take the house anyway. In that situation, it is less burdensome to both the IRS and the taxpayer to just get the house sold and pay the tax from that. But even then, there is a lot of notices, phone calls by the IRS and eventually visits to the taxpayer by a revenue officer before that happens. In short, if he cooperates with the IRS it is rather unlikely he will lose the house if it is his residence.
Now, there are a number of possible outcomes to deal with what he owes. Which one is what he will get depends on the details of his case. Among the possibilities are:
1. An installment agreement. It is possible to get an installment agreement that lasts longer than 5 years. Indeed, they could go 10 years or even more in some circumstances. But those kinds of installment agreements are not given automatically nor are they done at the service center. So you won’t see a lot of references to longer agreements on the IRS site. But a revenue officer or even the automated collection system (ACS) can give out agreements that go beyond what the automatic installment agreement program will accept.
2. An offer in compromise (OIC). These can be tricky to get, and a lot of people (including some in the IRS) don't really understand how they work. The key concept here is that the IRS will accept (in most cases, there are some exceptions) an offer for something less than the entire balance due as full payment on the liability if what the taxpayer offers is more than the IRS could get using any other collection method. This usually means the taxpayer is offering an amount that includes some money that either is coming from someone else (like a relative or friend) or from a source that is exempt from levy and thus is property the IRS cannot reach.
3. Reporting the case currently not collectible (CNC). Here, the IRS would file its notice of federal tax lien (ensuring that the IRS gets paid if the home or other property is sold) and then shelve the case for awhile until the taxpayer’s ability to pay improves.
4. Bankruptcy. A lot of people have the mistaken notion that it is not possible to deal with taxes in bankruptcy. The reality is that for most taxes bankruptcy can help. Whether it is the right move for the particular taxpayer depends on his/her individual circumstances. In order to get income tax discharged in Chapter 7 the taxpayer needs to file the bankruptcy more than 3 years after the return was filed and more than 240 days after the tax is assessed. So your brother wouldn't get the tax discharged in Chapter 7 for this right now. But if he qualifies for Chapter 13 he might get to make payments in bankruptcy that might be more favorable than an installment agreement he gets from IRS.
5. Levy/seizure of property. This is a last resort for the IRS if nothing else can be worked out with the taxpayer.
There can be other, less common resolutions too.
A tax attorney with experience in collection matters could certainly help. Not all tax attorneys have collection experience so you’d have to ask. It may be that some other tax professional might be of help, too, notably a enrolled agent (EA) who used to be an IRS revenue officer might be helpful as well. The EA couldn't help much with bankruptcy, but could certainly assist with dealing with IRS collection. I've handled tons of collection matters and what you describe is actually not quite as complicated as I think you fear it is. It just takes understanding what IRS looks for and organizing your information to figure out what options are workable.