Transferee liability situations can arise where a taxpayer transfers assets to another (the “transferee”), while owing taxes to the Internal Revenue Service (IRS), and the the IRS pursues those transferred assets in order to satisfy the transferor’s tax obligation. A transferee can be an heir, a recipient of a gift, or a shareholder of a dissolved corporation. See Internal Revenue Code (IRC) §§ 6901-6905.
Once an IRS tax lien attaches to the taxpayer’s assets, that lien will remain on those assets if transferred to a transferee. However, if the IRS has no lien on those assets, it may not be able to secure those assets to satisfy the taxpayer’s obligation. An IRS lien will attach once a taxpayer’s liability has been assessed, a Notice and Demand for Payment has been sent to the taxpayer, and the taxpayer has failed to make the necessary tax contribution. Once the lien attaches, it will survive transfers of assets to transferees, and the IRS’ ability to levy on those assets to satisfy outstanding tax obligations will remain.
There are two types of transferees liable for the transferor’s tax obligation; a transferee at law and a transferee in equity. Transferees at law are legally responsible for the transferor’s tax obligation as the result of a contract, typically by assumption or guaranty agreement. Internal Revenue Service, Internal Revenue Manual, available at https://www.irs.gov/irm/part4/irm_04-011-052.html. Transferees at equity result where a person or entity receives the transferor’s assets for less than “full, fair and adequate consideration,” and where as a result of that transfer, the transferor is insolvent and unable to pay the tax liability. In such cases, the IRS will levy on any of transferees assets to the extent of the tax liability even where no contract exists.
Transferees seeking to avoid transferee liability will have to conduct due diligence regarding the contracts they enter into, the property they inherit, and even the property they possess during their lifetime. For example, an heir to an estate may be considered a transferee for tax levy purposes, and a joint tenant in an estate with a right of survivorship may also be considered a transferee, since the share of the deceased tenant will automatically transfer to the living tenant by operation of law. Finally, fraudulent attempts to transfer assets in order to avoid tax obligations may also be subject to recovery on a transferee liability theory.
Those seeking to learn more about the potential for transferee liability should contact an attorney experienced with federal tax law, and ensure they are not subject to an IRS levy on account of their relationship to other tax debtors.
Please keep in mind the information and advice presented in this blog is not intended to be used as formal legal advice. Contact a tax professional for personalized tax advice pertaining to your specific situation. While we try and answer all parts of the question when we write our blogs, sometimes there may be some left unanswered. If you have any questions about your problems with the IRS, SBOE, FTB, or BOE, or tax law in general, call RJS Law at (619) 595-1655.