What Happens to Transferred Assets When You Owe Back Taxes?
The IRS May Be Able to Seize Assets Transferred to Other Parties
Transferring assets to other people can be tempting when you owe back taxes – you might think that putting assets in your children's, spouse's, or a friend's name will prevent the IRS from seizing those assets. Or if you're dealing with a corporation, it might be tempting to make large payments to shareholders or to transfer everything to another corporation.
However, these transfers are often considered fraudulent, and the IRS and most state revenue agencies have a lot of legal authority to seize inappropriately transferred assets. The rules are complicated, but the bottom line is that the IRS can seize transferred assets regardless of whom you've transferred them to. This post outlines the basics – but to get help now, use TaxCure to search for an experienced tax professional today.
Key takeaways
- Transferring assets to other people or corporations when you owe back taxes is very risky.
- The IRS has the power to seize assets in other people's or entities' names if the transfer was made to avoid paying tax.
- This can happen whether you transfer the assets before or after you incur the tax liability.
- The IRS typically has the right to seize the transferred asset or get a judgment lien against the transferee for the value of the asset's equity.
- If the IRS incorrectly targets a transferred asset, a licensed tax pro can help you appeal and avoid the levy.
What to expect if you transfer assets to avoid paying taxes
The IRS will only start looking at transferred assets if they are unable to collect the tax debt from you personally. If you have assets, bank accounts, or wages that can pay the tax debt, the IRS will seize those first. However, if you don't, the agency will start looking at transferred assets.
This may play out in a few different ways. If you apply for hardship relief (for example, currently not collectible status or an offer in compromise), you must note all assets transferred for less than fair market value during the last 10 years on Form 433-A (individuals) or Form 433-B (business). If you list assets in this section, the IRS may decide to do additional research before approving your request for relief. Note that if you deliberately don't list assets that should be included, that is, providing the IRS with fraudulent documents, which is generally considered to be tax fraud.
Alternatively, if a revenue officer has been assigned to your case, they will do a search to look for your assets. They'll look for assets that you own right now, but they'll also look for assets that you recently transferred. Then, they'll look at the details of the transfer – and if you transferred the asset for nothing or for less than fair market value, they'll pursue that asset or its equity to collect the unpaid tax.
At that point, the agency will contact the transferee (the person or entity that received the asset), and they'll attempt to seize the asset or the value of its equity from the transferee.
What is a transferee?
According to the IRS, a transferee may be a donee, heir, legatee, devisee, or distributee. In plain language, this means anyone who received a gift or inherited an asset.
A gift does not necessarily mean that the transferee paid nothing – it just means that the transferee paid less than fair market value, and by extension, the value of the asset over what was paid is considered to be a gift.
For example, say that you take $20,000 and you put it into a bank account in your child's name. Your child is the transferee, and the IRS may look at seizing those funds to cover your unpaid taxes. Or imagine that you know you're going to owe a tax bill, and you sell a boat worth $25,000 for $1000 to a family member – the family member is a transferee.
That said, it's not illegal to give assets away or to sell assets for less than their fair market value. It's only a problem in situations where you've done so to evade the payment or collection of taxes or other debts. Note that other creditors may also go after recently transferred assets to collect unpaid debts – they use slightly different processes and are subject to different laws than the IRS, but they still have the right to do so.
Is the transferee liable for your tax debt?
No, the transferee is not liable for all of the tax debt. However, they are liable for the portion of the tax debt related to the equity they received in the asset you transferred to them.
Let's say you transferred an asset worth $100,000 to a friend who paid you $10,000. The IRS may determine that the friend is now liable for $90,000 of your tax debt. The IRS must go through the courts for this process – they can't just issue a lien against your friend or seize the asset as if it's in your name.
Based on the specifics of the situation and state law, the transfer may be set aside – that means that it's considered null and void, as if it never happened, and the asset is still owned by the transferor. Or the courts may issue a judgment lien against the transferee for the value of the asset's equity – this is not the same as a federal tax lien.
To continue with the example above, if the courts set aside the transfer, the IRS may be able to seize that asset, even if it's in someone else's name. Or if the courts issue a judgment lien against the friend, the IRS may be able to seize other assets to collect the $90,000. For instance, if the friend has $90,000 in their bank account, the IRS may go after that simply because it's a lot easier to seize cash in a bank account than to seize a physical asset like an RV.
But before any of that can happen, the IRS must prove transferee liability.
How does the IRS prove transferee liability?
To establish that a transferee is liable, the IRS must establish that the transferor transferred property to the transferee and that the transferor is liable for a tax debt. The transferor must have been liable for the tax debt at the time of the transfer, or they must have made the transfer in the year that they incurred the liability. Finally, the transferee must have assumed liability for the tax in the transfer contract, or they must be liable under state or federal law.
For example, let's say that you own a property and there's a federal tax lien attached to the property. You sell or give the property to a friend, and the contract stipulates that they must pay off the lien. That is a situation where the contract makes the transferee liable for the tax.
Now, here's an example related to corporations, where legal statute determines the transferee's liability. Say that a corporation is dissolving, and instead of paying all of its debts, it makes big distributions to shareholders. Most states have laws that allow the IRS, the state revenue agency, or other creditors to sue the shareholders for the value of these distributions. Some states even have laws that allow a corporation's director to be deemed liable for the value of the distributions, even if the director is not a shareholder.
Types of transfers that may lead to transferee liability
These transfers may fall into the following categories. The courts can use any of these categories to determine that a transferee is liable for the tax debt, up to the value of the transferred assets.
- Fraudulent transfer – Includes actual fraud where property is transferred with the intent to delay or prevent the collection of a debt, and constructive fraud, which is when an asset is transferred for less than its value (aka inadequate consideration) and the transferor is insolvent or made insolvent by the transfer, regardless of the transferor's intent.
- Trust fund doctrine – if someone transfers assets to someone else and it makes them insolvent or otherwise unable to pay their taxes, the trust fund doctrine says that the recipient is holding the assets in trust for the transferor. Typically, this applies in cases where a corporation has transferred money or assets to shareholders.
- Successor liability – assigns liability to a successor corporation for another corporation's debts if that corporation survived a merger, consolidation, or reorganization, or if that corporation bought or received most or all of another corporation's assets.
- Transfer to shareholder or corporate distributee – applies if a corporation makes asset transfers or cash distributions to a shareholder.
These concepts may overlap. For example, a transferee may be liable based on both the fraudulent transfer and the trust fund doctrines.
What to do if the IRS is going after transferred assets
First, be aware of the risks – putting assets into other people's names does not protect you from paying your tax debts, and in fact, it can often put you and your loved ones or associates at greater risk.
Second, reach out to an experienced tax professional for help. This is a very complex issue, and generally, you are not going to get the help you need from a big nationwide tax firm. Instead, use Taxcure to search for a tax professional who is experienced with these types of cases.
Third, if you believe that the transfer was legitimate, you need to appeal. The steps you take vary based on whether you are the transferee or the transferor.
How to avoid the seizure of transferred assets if you owe back taxes
If you owe the tax debt, you may be able to stop the IRS from going after transferred assets by working with them to resolve the tax debt. In particular, you can often stop levies by setting up payment plans (typically referred to as installment agreements). If you've recently transferred assets, you generally will not get approved for an offer in compromise or currently not collectible status.
You can also appeal if you've received a Final Notice of Intent to Levy. The appeal options vary based on when you received the notice and where you are in the collection process- but typically, you get to explain why the seizure shouldn't move forward and talk with the IRS about payment options.
How to protect yourself if you're the transferee
To prove that you're not liable, you'll need to establish that the transfer was legitimate. That may involve proving:
- That the transfer was done before the transferor incurred the tax debt, but not in the same year they incurred the tax liability.
- That the transfer was legitimate – for example, you paid fair market value for the asset.
- That the transfer didn't make the transferor insolvent.
- The IRS should be going after the taxpayer's other assets.
Whether you're the transferee or the transferor, you should strongly consider reaching out to a tax professional for help.
FAQs about transferring assets when you owe tax debt
Can the IRS seize property I transferred to my child?
Yes. If the IRS determines that you transferred the property to your child to avoid paying tax, the IRS may be able to seize the property or cash.
Can the IRS seize property I put in my spouse's name for my tax debts?
Yes, if the IRS determines that you transferred the property to your spouse to avoid paying your tax debt, they can seize the assets or hold your spouse liable for the value that was transferred. However, if you filed jointly, your spouse is also liable for the tax debt – learn more about liability for your spouse's tax debts.
What if someone transfers an asset to me, and I wasn't aware of their tax debt?
Unfortunately, you may still be liable whether or not you know about the tax debt.
What if I sold an asset that was given to me by someone who was trying to evade paying taxes?
The new transferee is generally only liable if they knew that the asset was fraudulently transferred to you. If they did not know and if they purchased the item in good faith, they are generally not liable. However, you may still be held liable for the equity that you received, even if you have passed on the asset.
What is an alter ego tax lien?
An alter ego tax lien is when the IRS files a tax lien for your tax debt against your alter ego. Limited liability companies (LLCS) or corporations owned by a single person, for example, are often considered to be alter ego of the taxpayer.
What is a nominee tax lien?
A nominee tax lien is when the IRS files a lien against someone who has received assets from a taxpayer who transferred them to avoid paying a tax lien. For example, say that you title a boat in a friend's name so that the IRS will not seize the boat for your unpaid taxes. The IRS may file a nominee lien against the new owner of the boat. This is not a tax lien; rather, it's a judgment lien.
Is transferring assets to avoid paying taxes a crime?
Yes, transferring assets to avoid paying taxes can be considered a crime. The IRS may refer the case for criminal investigation and bring tax fraud or evasion charges against you.
Get Help Now
If you're dealing with transferred assets, tax liens, IRS asset seizure, or similar issues, you need to reach out to a tax professional as soon as possible. TaxCure makes it easy to find a pro – start your search now, look at profiles from top tax pros, and reach out to the ones who feel like the best fit.
