The Internal Revenue Service collection power is unlike any other creditor. Upon assessment (recording on the books of the IRS that the taxpayer owes the tax, penalties, and/or interest), there is an immediate lien (unrecorded) against all of the taxpayer’s property and right to property. The IRS generally sends the taxpayer a notice to pay the additional tax. After repeated notices, the IRS will commence enforced collection.
IRS collection includes filing notice of the federal tax lien with the local recorder of deeds (at that moment the unpaid tax is public information and sometimes published in local newspapers) and levy (seizure) the taxpayer’s property. The IRS can seize your personal property (bank account, retirement account, IRA, automobile, boat, jewelry, furniture, investments such as coins, baseball cards, and other investment property) and real property (personal residence, vacation home, rental property, and other real estate).
The IRS often seizes property by issuing a wage levy (a continuing garnishment against your wages) and levy on your bank account or other investment financial account. Imagine if the IRS obtains the entire balance of your checking, debit account, or retirement account. What would you do if your debit card stopped working when you needed to purchase groceries, gasoline, or pay the bill at a restaurant?
The IRS has the power to seize your business assets including tangible property (equipment and inventory) and intangible property (including contract rights such as a franchise).
A husband and wife may think that titling property as joint tenants by entirety will protect them from the federal tax lien, especially if a tax liability is only assessed against one spouse and not the other spouse. Under state law (entirety property states), a creditor of one spouse may not seize property owned by a husband and wife as joint tenants by entirety for the debt of only one spouse. And, therefore, your accountant, attorney, or other advisor may also believe that you are protected from the IRS levy power under state law property rules. However, that belief is false. The U.S. Supreme Court held in United States v. Craft, 535 U.S. 274 (2002), that the federal tax lien will attach to entirety property even if the tax debt is from only one spouse. The IRS can and does seize entirety property owned by husband and wife for only the tax debt of one spouse, including a family residence.
Transferring your property to another person or entity may not protect you from the federal tax lien. The IRS may rely upon alter ego, nominee, and fraudulent conveyance statutes to seize property transferred to another party.
A tax controversy attorney knows the procedural rules to contest filing notice of a federal tax lien and an IRS seizure. A tax attorney will explore collection alternatives including an installment agreement, collateral agreement, offer in compromise, and other options.
Sometimes the IRS tax assessment is not proper due to technical procedural errors or perhaps the IRS did not properly apply the facts and or tax law, and the taxpayer does not owe the outstanding tax liability. In some cases a tax controversy attorney may successfully have the tax liability abated.
Perhaps you are also a creditor of the taxpayer and the IRS seeks to enforce its tax lien right against the taxpayer’s property. Often general state creditor priority laws do not apply when the IRS is a competing creditor. A tax controversy attorney can help a competing creditor argue that he or she may have priority over a federal tax lien.
Anyone who is facing federal tax collection issues should promptly contact a tax controversy attorney.