Why You Should Not Transfer Assets to Avoid Paying Taxes to IRS

Transferring Assets to Avoid Paying Taxes to IRS is Dangerous

When a U.S. Person becomes subject to an IRS tax liability or penalty, there are various tools that the Internal Revenue Service can use to try to collect money, property, and assets sufficient to satisfy the tax liability. The IRS may withhold a refund, issue a tax levy against the taxpayer’s bank accounts or wages, seek a passport denial or revocation, seize properties (in more limited situations), and/or issue a Notice of Federal Tax Lien. As a result, an (understandable) immediate knee-jerk reaction of some taxpayers is to transfer the assets to a third party. The problem is that by transferring assets to a third party, the Taxpayer may find themselves at the receiving end of a much worse penalty from the IRS and even potential criminal implications — as well as putting the third party at risk. Here are a few reasons why you should not transfer assets to avoid paying IRS taxes.

Transferring to a Third Party is a Form of Fraud

When a person has an IRS tax liability against them and in order to avoid paying the taxes, they transfer assets to a third party —  it is considered a form of fraud. That is because the person is not transferring the assets as a result of a Fair Market Value exchange or a gift with no strings attached. Rather, the person is transferring assets for the sole purpose of avoiding creditors — only in this instance the creditor is the IRS. Penalties for fraud can be much higher than they are for other types of violations and taxpayers should be very careful when transferring assets to third parties to avoid paying taxes to the IRS.

Willfulness and Lead to Criminal

If it turns out that the IRS determines a taxpayer transferred assets solely to avoid paying tax, the IRS can take the position of the taxpayer had acted willfully in avoiding paying taxes that are legitimately due. In this type of scenario, the IRS may try to issue additional penalties for willful violations similar to fraud (which can be significant, especially if international assets are involved), as well as possibly refer the matter out to the IRS Special Agents for a criminal investigation. That was because if it turns out the taxpayer lied under oath/penalty of perjury, the IRS can pursue a criminal investigation and penalties.

It Puts the Third Party at Risk

It should also be noted that if the third party was aware that the Taxpayer was transferring assets to avoid paying taxes to the IRS, then the IRS may then go after the recipient of the asset as well. In other words, if the third party is aware that they are receiving assets from the Taxpayer because the Taxpayer seeks to avoid paying taxes to the IRS — and they accept receipt of those assets — and they are helping perpetuate the fraud. The IRS may go after the third party for various different fines and penalties — and depending on the extent of the third party’s knowledge and actions they took to help the taxpayer conceal assets, it may result in a criminal investigation as well.

Golding & Golding: About our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure and compliance.

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