Collecting Tax Liabilities from Third Parties
11 Pages Posted: 21 Nov 2016
Date Written: September 12, 2016
Creditors call it fraud. Debtors call it asset protection. I call it the “asset shuffle.” Whatever you call it, it is an age-old dance done by debtors trying to keep their assets from creditors they don’t like. Debtors either transfer assets to favored parties or else try to disguise their true interests in assets. From the creditor’s point of view, the wrong people have the money.
Debtors do the asset shuffle with the IRS. I have come across more than one taxpayer who thinks they will “win” if they die with unpaid tax debts. What they do not realize is that their death does not end the dance. Sure, they may pass assets to their beneficiaries. But those beneficiaries often unwittingly inherit what Burgess and William Raby aptly called “the cloud inside the silver lining.”
Over time, the IRS has developed three counter-moves to the asset shuffle. This article explains how the IRS uses those counter-moves to collect from third parties, parties who may become your clients and who are at risk for such collection actions. The key to helping such clients --- including knowing even what questions to ask them --- is to understand how the IRS takes property from third parties to satisfy the tax liability of a taxpayer.
The names for the IRS counter-moves are “Transferee,” “Nominee,” and “Alter Ego” liability. The three names describe the three types of special relationships that might allow the IRS to collect the taxpayer’s tax liabilities from those types of third parties. They are legally distinct doctrines and have different legal process, although they often end up mushed together in a single proceeding.
Part I gives a couple of background points of law. Part II compares and contrasts the substantive law of these three theories. Part III compares and contrasts the procedural rules of the three theories and gives thoughts on possible actions to defend your clients.
Keywords: alter-ego; nominee, transferee liability, IRS collection, tax liens, tax administration, quiet title
JEL Classification: K34, K42
Suggested Citation: Suggested Citation