Taxpayers often ask us whether they can transfer property to another person if they have an unpaid tax debt or they expect to have a tax debt they cannot pay. There are a number of rules that have to be considered in answering this question. The answer varies based on whether the IRS has a lien for the unpaid taxes.
Transfers After the IRS Lien Arises
Generally, anyone can transfer their property to others as they see fit. The IRS’s federal tax lien can prevent taxpayers from legally transferring clear title to the property to another person.
A lien is like a post-it note that attaches to the taxpayer’s property. It tells the other party that is acquiring the property that the IRS has an interest in the property. Unlike most other liens, the IRS’s tax lien does not have to be filed in the public records to be valid. This means that the other party who is acquiring the property may not know of the IRS lien.
The IRS’s lien generally arises automatically once a federal tax is due. More precisely, the IRS’s lien comes to be when the federal tax is assessed. The term “assessed” means recorded on the IRS’s books. It is the accounting entry made on the IRS’s books. The IRS generally assesses a tax when the taxpayer files a tax return to report the tax liability or the IRS audits or otherwise adjust the taxpayer’s account.
So if you owe a federal tax, you cannot legally transfer property to another party to avoid paying the IRS.
Transfers Before the IRS Lien Arises
You may be wondering what happens if you transfer property prior to the time the tax is assessed and the federal tax lien arises? This can come up if you know that you will have a federal tax liability in the future and you transfer assets in advance of incurring the tax liability.
In this situation, the IRS, like other creditors, may be able to bring suit to ask the courts to set aside the transfer pursuant to the fraudulent transfer rules. The IRS can use either the federal or applicable state fraudulent transfer rules. These rules generally allow the courts to set aside transfers of property if there is actual or constructive fraud involved in the transfer.
- Actual Fraud. Actual fraud requires a fraudulent intent to defraud the IRS or knowledge or notice of fraud with respect to the IRS. The courts usually look for various “badges of fraud” to show that there was actual fraud involved.
- Constructive Fraud. Constructive fraud does not require an intent to defraud. It applies if the taxpayer transfers property for less than full consideration or equivalent value for the property. It may also apply if the transfer makes the taxpayer insolvent.
Taken together, these rules can be used to prevent you from transferring property in the period of time preceding the assessment or liability for a federal tax.
This is only a short summary of a few of the rules that apply when there is an unpaid tax debt or one is expected. If you owe a federal tax and have the property that you need to transfer, you should seek out the assistance of a tax advisor. We help taxpayers who owe unpaid taxes. Call us today if you want to know more about your rights and obligations.