If I Owe The IRS, Can I Transfer Assets Without Getting In Trouble?
We have been asked this enough times lately that I thought I should formally answer the question. To answer this question correctly, one has to have an understanding if the transfer occurred before a tax lien was filed before the transfer or after.
Transfers After the IRS Lien Has Been Filed
The IRS’s lien generally arises automatically once a federal tax is assessed, this generally happens shortly after the tax return is filed. It is important to note, the IRS does not have to file a lien with the taxpayer’s county reporter’s office for a lien to be valid and it attaches to ALL assets the taxpayer owns. A publicly filed tax lien, typically filed in the county of residence of the taxpayer, is a notice to ALL parties that the IRS has an interest in the taxpayer’s property.
So long story short, too late! If you owe a federal tax, you cannot legally transfer property to another party to avoid paying the IRS.
Transfers Before the IRS Lien Is filed
So after the above discussion you’re probably wondering if the asset is transferred BEFORE the tax is assessed and the federal tax lien arises are there still consequences? Under this set of circumstances, like other creditors, the IRS may be able to file suit against the taxpayer thereby asking the courts to set aside the transfer, pursuant to 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 intent to defraud. It applies if the taxpayer transfers property for less than full consideration or equivalent value. It may also apply if the transfer makes the taxpayer insolvent.