The IRS’s remedies for collecting tax liabilities are not unlike creditor’s remedies under state law. Under state law, a creditor can sue a debtor and get a judgment for which they can take enforcement action. A creditor might also hold a lien on the debtor’s property e.g. a mortgage. If a debtor tries to transfer his property to avoid a creditor’s right to attach or foreclose that property, state laws provide that fraudulent transfers can be nullified or the transferee can be liable to the creditor.
Federal Tax Liens
The Internal Revenue Code provides for a federal tax lien to attach to a delinquent taxpayer’s properties to secure collection of the tax debt. If a tax debt remains unpaid the IRS can record a tax lien in the county property records. A federal tax lien attaches to all of a taxpayer’s property of any kind including real property, personal property, and bank accounts. They can enforce the lien by taking possession of the properties burdened by the lien.
In addition to the IRS’s lien, they can sue the delinquent taxpayer and get a judgment just like any other creditor. That would be an avenue to get a judgment lien. However, this is not a likely remedy since the IRS already has a very strong statutory lien.
Just as state laws prevent debtors from making transfers to avoid liability, federal law provides for transferee liability for tax debts. Transferee liability can attach to income tax liability, estate tax liability, and gift tax liability.
If a taxpayer attempts to transfer property to protect it from the IRS clutches, he normally wouldn’t make a complete irrevocable transfer of his entire equitable and legal property interest. He doesn’t intend to part with full ownership and control. His primary intent is to keep it out of the hands of the IRS.
Also, it won’t do him any good to “sell” the property at its full fair market value because the proceeds will be subject to IRS collection. Even if he can structure the disposition as a true sale or another complete conversion, he would have to do so without receiving market value.
The IRS has the authority to proceed against a transferee as a remedy available to any creditor under statutory and common law creditor’s rights. That includes fraudulent transfer laws, corporate dissolution laws, as well as equity doctrines.
In most cases other than lien cases the IRS will proceed against a transferee where the transfer was not an arms-length transaction. If the property is disposed of for less than its fair market value the transferee can be liable but only if the transfer leaves the transfer insolvent.
The transferee cannot be liable for more than the market value of the property transferred. Also, Sec 6901 provides a statute of limitations for transferee liability cases. The IRS generally must take action within one year after the expiration of the period of limitation to assess the tax against the transferor.
Practical Effect of Transferee Liability
The practical effects of transferee liability law and tax liens are as deterrents against fraudulent transfers to avoid the collection of taxes. The lien, as well as potential transferee liability, effectively denies the taxpayer of a market for such transfers. For that reason, a potential transferee of property should conduct their due diligence.
The IRS publishes IRS tax help available on the IRS website. They often provide explanations in common English. Finally, taxpayers should consult a tax attorney for an understanding of their exposure under the law.
Guardian Tax Law
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Tucson, AZ 85711