The IRS is one of the most effective debt collectors thanks to various collection tools. Two of these tools are the tax lien and tax levy, which allow the IRS to seize assets – and sometimes, the IRS may even go after property in a trust or held in someone else’s name.
However, the IRS is only allowed to do this in special cases, most notably when the taxpayer retains control over the property or transfers the property with the intent to evade taxes.
In this article, we’ll go into detail on when and how these situations can occur and what could happen if you get caught trying to hide property from the IRS. If you have questions about the IRS accessing property you’ve placed in a trust or transferred to another person, schedule a free consultation with the Damiens Law Firm, PLLC by calling 601-873-6510 or using our online contact form.
Key Takeaways
- Control over property – The IRS can often seize property in a trust or held in someone else’s name if the taxpayer retains control and/or use of the trust property.
- Transfer timing – If property is transferred before the tax debt is incurred, then it’s more difficult for the IRS to seize that property.
- Fraudulent transfers – Regardless of when property is transferred or how much control the taxpayer has over the property after the transfer, the IRS can take the property if the transfer took place to avoid paying taxes.
- Nominee lien – The IRS can place a lien on property owned by a nominee of the taxpayer if the IRS believes a fraudulent transfer occurred.
- Professional tax advice – The consequences for getting caught with a fraudulent transfer can be severe, so it’s recommended to consult with a tax attorney in these situations.
How Trusts Work
To better understand how and why the IRS can sometimes seize property in a trust, we need to first explain what a trust is, why they exist, and the different types.
What Is a Trust?
A trust is a legal relationship where a person transfers property to someone else for the benefit of a third person. A trust consists of four elements:
- Grantor: Also known as a “settlor,” this is the person who creates the trust.
- Trust property: This is anything of value put into the trust where the law recognizes a legal right of ownership.
- Trustee: Also called the “fiduciary,” this is the person who carries out the goals of the trust as written out in the trust agreement.
- Beneficiary: This is the individual (or group of people) who benefits from the trust. The trustee is required to carry out their trust-related duties on behalf of the beneficiary.
Within the context of taxes and the IRS, the taxpayer could be the grantor, trustee, beneficiary, or all three. Which role or roles the taxpayer takes helps determine if the IRS can take property that’s been placed in a trust.
Why Do Trusts Exist?
Although trusts are commonly used for estate planning purposes, they have other uses, such as:
- Privacy: In an irrevocable trust, the trust owns the property, not the grantor.
- Tax planning: Income generated by an irrevocable trust is owed by the trust, not the grantor.
- Qualifying for government benefits: For example, a Medicaid asset protection trust can be used to help qualify for Medicaid.
- Asset protection: Property in certain trusts is much harder for creditors (like the IRS) to reach.
What Are Some Common Types of Trusts?
There are numerous types of trusts, but the four most common are:
- Revocable trust: This type of trust can be modified or revoked after being created.
- Irrevocable trust: An irrevocable trust is one that can’t be changed or revoked after its creation (subject to limited exceptions).
- Living trust: Also called an inter vivos trust, this is a trust that’s created while the grantor is still living.
- Testamentary trust: This is a trust that’s created when the grantor dies.
Deciding If the IRS Can Seize Trust Assets
Whether the IRS can seize property in a trust depends primarily on two things: the terms of the trust and the reasons for creating the trust.
The Trust’s Terms
The more control a taxpayer has over trust property, the more likely the IRS is to go after that property for unpaid taxes. Therefore, if the taxpayer uses their property to create a revocable trust, you should assume the IRS can seize the property placed into that trust.
In many revocable trusts, the grantor is also the trustee and beneficiary, meaning they make the decisions about how the trust property is used and they’re the only ones who can benefit from that property. The grantor can also decide whether to end the trust or take back the property.
With an irrevocable trust, things can be different. At a minimum, the grantor doesn’t have the right to end the trust or change the terms of the trust agreement. Irrevocable trusts usually have additional differences in that the grantor fully transfers property to the irrevocable trust, so the trust is the legal owner of that property.
If a taxpayer creates an irrevocable trust and relinquishes ownership and control of the property placed in that trust, then, as a general rule, the IRS can’t go after it when trying to collect a tax debt belonging to that taxpayer. Yet the one major exception to this rule is if the taxpayer creates the trust to escape their tax responsibilities.
Why the Taxpayer Created the Trust
When a person transfers property to prevent a creditor (such as the IRS) from getting the property, it may be considered a fraudulent conveyance. The IRS can conclude a fraudulent transfer has occurred in either of the following two situations:
- Constructive fraud: The taxpayer transfers the property to another (trust, individual, business, etc.) without receiving fair compensation for the property.
- Actual fraud: The taxpayer transfers the property with the intent to delay, hinder, or stop a creditor from collecting a debt it’s legally entitled to collect.
If constructive fraud exists, the IRS can set aside the transfer of property to the trust, business, or third-party individual if the transfer occurs after the creation of the tax debt.
If actual fraud exists, the IRS can set aside the transfer of property regardless of whether the transfer occurred before or after the creation of the tax debt. In either situation, the trust property isn’t safe from the IRS.
The key thing to remember is that the intent to defraud the IRS is the pivotal fact in deciding whether the IRS can seize property in a trust or in someone else’s name. This is the single biggest difference between a legitimate tax avoidance strategy and a fraudulent conveyance.
Using a Nominee Lien to Recover Trust Property
If the IRS seeks to recover property subject to a fraudulent transfer, a commonly used tool is the nominee lien.
A nominee lien is a lien on property that’s owned by a third party and not the taxpayer. However, the taxpayer has control and enjoyment of that property such that the IRS can consider the third party an alter ego or “nominee” of the taxpayer.
For instance, the IRS could use a nominee lien to encumber a house that the taxpayer is living in, but is owned by a trust or another individual.
There’s no test for deciding if a trust should be a nominee for tax collection purposes, but the IRS will look to see if one or more of the following factors exist:
- The taxpayer was the previous owner of the trust property.
- The taxpayer has possession and/or significant control of the trust property.
- The taxpayer enjoys the benefits of the trust property.
- The taxpayer’s use of the trust property is similar to the taxpayer’s use of the property before the transfer.
- The taxpayer is responsible for most or all of the trust property’s maintenance or administrative costs.
- The taxpayer transferred the property after the creation of the debt or in anticipation of the debt.
Keep in mind that the above factors will also apply if the property transfer was to an LLC, corporation, friend, or family member. In these situations, an additional factor will be whether the taxpayer received adequate compensation for the transfer.
If the IRS places a nominee lien on the trust property, then the IRS will treat that trust property as if the taxpayer legally owns the property.
What Happens If You Try to Hide Assets From the IRS Using a Trust?
If the IRS finds out you moved assets into a trust, to another person, or to another entity (like a corporation or LLC) to avoid paying taxes you owe, the IRS could choose to have its Criminal Investigation Division open an investigation for tax evasion. If this investigation finds sufficient evidence, the IRS may refer your tax case to the U.S. Department of Justice for criminal prosecution. A conviction could result in hefty fines, as well as jail time.
Proving criminal intent can be difficult, so even if a crime has occurred, the IRS may choose not to pursue criminal sanctions. Instead, the IRS might seek civil remedies, such as filing a fraudulent transfer action to unwind the fraudulent transfer. If you transferred property to someone else, the IRS could also pursue a judgment of liability against that person.
Consider Talking to a Tax Professional
Deciding to create a trust for legitimate tax or estate planning purposes can be a complicated decision on its own. But if you’re currently dealing with IRS tax collection notices or the possibility of an IRS collection enforcement action, you need to be extra careful. It’s typically a better strategy to resolve the tax debt (with something like a payment plan, offer in compromise, or penalty abatement) or challenge the debt itself with an appeal, as opposed to trying to move assets away from the IRS.
If you’re facing the possibility of a nominee lien or other aggressive tax enforcement actions by the IRS, you should consider hiring a tax professional. You want someone with experience navigating complicated state trust laws and federal tax laws, as well as defending against accusations of tax fraud. A tax attorney, like one from Damiens Law, offers the skills necessary to handle all of these potential scenarios. The more quickly you take action, the better we can help you. You can call us at 601-873-6510 or reach us online.
IRS Seizure of Trust Property FAQs
Does putting my home in a trust protect it from the IRS?
If you put your home into an irrevocable trust before getting into tax trouble and you give up all rights to your home (including ownership and use), then your home will likely be protected. However, if you continue to have control and use of your home, and/or you put your home into the trust to keep the IRS from getting it, then the IRS might be able to seize your home.
All that being said, understand that the IRS tries to avoid taking someone’s residential home to satisfy a tax debt. Not only does it create bad publicity, but the IRS understands that paying off a tax debt becomes a low priority for a taxpayer if they don’t have a place to live.
In the rare instances the IRS goes after a home, it’ll usually be a vacation or investment property of the taxpayer.
Could the IRS go after my child’s bank account if it has my money in it?
It’s possible, under certain conditions. For example, if you’re a joint owner of that account or you put your money into that account that was already subject to a federal tax lien, then the IRS may have the legal right to take that money.
Can I go to jail for transferring assets into someone else’s name?
The mere act of transferring property into someone else’s name isn’t a crime. But doing so with the intent of avoiding a tax liability could be considered tax evasion, which is illegal and subject to criminal prosecution.
What if I transferred assets to someone else to increase my chances of obtaining a form of tax relief from the IRS, such as an offer in compromise?
The IRS could decide to include the value of those assets as part of the reasonable collection potential.
What can the IRS go after with a nominee lien?
Basically, anything the IRS can use a regular lien on, such as joint bank accounts, homes, cars, personal property, and business interests.
Sources
– https://www.irs.gov/pub/lanoa/pmta01567_7393.pdf
– https://www.irs.gov/irm/part5/irm_05-017-012#idm139733926679424
– https://www.irs.gov/irm/part5/irm_05-017-002
– https://www.irs.gov/businesses/small-businesses-self-employed/abusive-trust-tax-evasion-schemes-questions-and-answers
– https://www.irs.gov/irm/part4/irm_04-011-052
– https://www.irs.gov/irm/part8/irm_08-023-003
– https://www.irs.gov/businesses/small-businesses-self-employed/information-about-bank-levies
– https://www.irs.gov/irm/part5/irm_05-017-003
– https://www.taxpayeradvocate.irs.gov/wp-content/uploads/2020/08/ARC15_Volume1_MLI_07_Civil-Actions.pdf
– https://www.irs.gov/irm/part5/irm_05-005-003
– https://www.irs.gov/compliance/criminal-investigation/how-criminal-investigations-are-initiated
– https://www.consumerfinance.gov/ask-cfpb/what-is-a-revocable-living-trust-en-1775/
