There is a large segment of our population that owe back taxes to the IRS.
Whether you know of their situation, chances are good that you know someone who owes back taxes. Chances are good that you have unwittingly transacted business with an individual or business that owes back taxes. You may have even worked for a taxpayer who owed back taxes.
Did you know that this may subject you to liability for the unpaid taxes? The IRS has broad powers to pursue you to recoup the tax balances. All it has to do is file a nominee lien against you, which is a simple administrative process, and you can be ensnared in IRS problems.
This raises a number of questions, including how long does the IRS have to take these actions? The recent Boykin v. United States, No. 5:21-cv-00103 (W.D.N.C. 2021) case addresses this situation. It involves a situation where a taxpayer paid his administrative assistant and, nearly a decade later, the IRS sought to seize property purchased by the administrative assistant.
Facts & Procedural History
This case was decided in 2022. It concerns taxes that were owed from 1999 to 2006. The math on that is 23 years from 1999 to 2022. After 23 years, the IRS is attempting to collect the taxes from the taxpayer.
The taxes in question were owed by Mr. Balvich. Mr. Balvich owed the IRS over $4 million in back taxes.
The taxpayer was not a party to this law suit. The lawsuit was filed by the alleged “nominee” who was paid by the taxpayer.
The nominee in this case was first an employee of Mr. Balvich. The nominee worked for Mr. Balvich and eventually married him. The allegations are that Mr. Balvich started transferring assets to the taxpayer after 2010 and more assets when they were married in 2015.
The IRS filed nominee liens in 2019. The nominee filed a quiet title action in court in 2021 to obtain a ruling that the nominee liens are invalid.
The IRS argued that the nominee used proceeds from Mr. Balvich to purchase real estate. This case was filed by the nominee to try to stop the IRS from taking her real estate to satisfy Mr. Balvich’s back taxes.
IRS’s Time to Collect From the Taxpayer
The IRS generally cannot collect from the taxpayer after 10 years. There is an exception if the IRS obtains a judgement against the taxpayer. This can extend the 10 year period for another 10 years.
Section 6502 says that the IRS has 10 years to obtain a judgement against a taxpayer. The 10 year period starts running on the date the tax is assessed. Thus, the IRS only has to file suit against the taxpayer before this 10 year period expires.
The IRS obtained a judgement against the taxpayer in 2020 for his 1999 to 2006 taxes. This suggests that the taxpayer did not timely file tax returns as the statute for assessing and collecting the tax would have been expired by 2020.
This gives the IRS 10 years from 2020 to collect from the taxpayer. But what about the time for pursing the nominee?
What is a “Nominee?”
We have to first consider who counts as a “nominee.” A “nominee” is someone who appears to own property, but they do not really own the property. They merely hold the property.
Nominee issues come up in tax cases when a taxpayer tries to transfer property to a third party, but really retains control or even ownership of the property (nominee issues can also involve property transferred before an offer to settle taxes is submitted).
The IRS’s internal policy manual describes this as follows:
Attempting to avoid the imminent attachment of the federal tax lien, taxpayers have transferred their assets to legal entities that they or their friends or relatives control. This maneuver will generally be unsuccessful, because the federal tax lien extends to property held by a third party if that third party is either the alter ego or the nominee of the taxpayer. The factors which are relevant in determining whether such a situation exists are similar to the factors which are used in deciding whether a taxpayer has fraudulently conveyed property to keep it from the reach of creditors.
The policy manual goes on to set out several factors that show that someone is a nominee:
- The taxpayer previously owned the property.
- The nominee paid little or no consideration for the property.
- The taxpayer retains possession or control of the property.
- The taxpayer continues to use and enjoy the property conveyed just as the taxpayer had before such conveyance.
- The taxpayer pays all or most of the expenses of the property.
- The conveyance was for tax avoidance purposes.
These factors generally mirror the factors identified by the courts who have reviewed nominee tax issues. There are cases where the courts have concluded that the taxpayer was not a nominee, which are instructive. Here is an example where the court concluded that a revocable trust was not a nominee. Here is a similar case that reached the opposite conclusion on nominee status.
The IRS’s Nominee Lien
This nominee tax law is not found in the Code. It is found in court cases.
The court cases allow the IRS to file a nominee lien. The nominee lien is similar to the general IRS tax lien. However, unlike the general IRS tax lien, the nominee lien does not attach to all of the alleged nominee’s property. The nominee lien only attaches to the property listed in the lien notice.
This will usually just include property that the IRS believes the taxpayer, Mr. Balvich in this case, owned. This is the only property the IRS lists in the nominee lien notice.
The lien notice itself will be issued in the name of the nominee, and say that it is the “nominee for” and list the taxpayer’s name. This nominee lien notice puts the public on notice that the IRS asserts a claim to the property identified in the notice. This is needed as the general IRS lien notice for the taxpayer does not put the public on notice of anything about the nominee. It only applies to the taxpayer.
How Long Can the IRS Collect Against a Nominee?
This brings us back to the question in this case. How long does the IRS have to impose a nominee lien and to reduce the nominee lien to a judgment?
The IRS filed the nominee liens in May of 2019. The IRS did not file suit against the nominee. Instead, the nominee filed her quiet title suit in September of 2021 to invalidate the nominee liens.
The taxpayer cited state law which provides a 4 year collection statute. The court concluded that the IRS is not subject to the limitation in state law and, since the IRS obtained a valid judgment against the taxpayer, the IRS still had time to collect against the nominee:
because the United States is not subject to the four-year statute of limitation of the North Carolina Uniform Voidable Transaction Act and obtained a timely judgment against Mr. Balvich that remains enforceable pursuant to 26 U.S.C. 6502(a), the United States is not time barred from seeking a judgment against Defendant or her property to collect Mr. Balvich’s tax debt.
The collection limit for the nominee is based on the IRS’s ability to collect from the taxpayer.
This highlights the problem with nominee liens, generally. The nominee in this case probably was not a party to the proceeding that resulted in the judgment against the taxpayer. If she held the taxpayer’s property and the IRS really filed the suit to collect from her, it would seem that she was a necessary party to that prior proceeding. Without directly addressing it, the court in this case basically concluded that she could not collaterally attack the prior judgment.
The nominee is not without a potential remedy, however. The court addressed this issue on the nominee’s motion to dismiss. Given the holding, the nominee can still challenge whether she is a nominee in her quiet title suit.
Those receiving payments or property from a taxpayer who owe back taxes have to be cautious.
This may include those who are paid for services rendered to the taxpayer, as in this case. The nominee was the taxpayer’s administrative assistant and at least part of the payments the IRS was trying to recoup were likely wages paid for her services rendered to the taxpayer.
Those who could be subject to a nominee lien should take steps to ensure that the nominee factors are not met. This may include making sure that any transactions are arms length and that all business formalities are followed, for example. Needless to say, an experienced tax attorney should be consulted about these transactions.