If the IRS files a tax lien against your property, the lien will actually stay attached to the property when you transfer it to a third party. This makes it possible for the IRS to actually repossess transferred property from whoever you transfer it to. However, if you transfer property after a tax liability has accrued but before the IRS files a lien, it may be too late for the IRS to repossess the property from the transferee.
Who can be Liable as a Transferee?
Under state law, the IRS has the ability to collect a delinquent tax liability from a taxpayer through a transferee of the taxpayer's property. If you transfer property to a third party, the IRS has the ability to collect your tax liability through taking the property you transferred. This means that the actually transferee will be liable for the taxes of the taxpayer to the extent of the value of the property transferred.
In some cases, a transferee will be liable from the fraudulent actions of the taxpayer to transfer property out of the hands of the IRS. When a taxpayer knows the IRS will eventually repossess property and the taxpayer transfers the property to a third party in an attempt to avoid this, the transferee actually becomes liable for this fraudulent transaction.
Once the IRS determines that the transferee is liable for the property that was transferred, the IRS will begin collection attempts in the same manner they would for any other case. If you are the transferee of property that was subject to a lien, the IRS will begin the collection process against you as soon as possible.
Defining a Transferee
According to the IRS, a transferee is "one who takes property of another without full, fair and adequate consideration to the prejudice of creditors". This basically means that if you paid full, fair and adequate consideration for property, you would not be considered by the IRS to be a transferee and therefore not liable for that tax liability of the person that transferred the property to you.
Some situations where you would be a transferee would be if you inherited property from someone in your family. Whether or not you knew about the tax liability is irrelevant, the IRS will attempt to collect the property from you.
Another situation that would make you liable as a transferee would be if you were a joint tenant with right of survivorship. This usually happens when someone dies and the remaining interest in a specific property is transferred to the surviving partner.
If you were gifted property and that property was gifted in an attempt to avoid a tax lien, the IRS will attempt to collect the property from you. It does not matter if you were aware or not of the situation affecting the person that gifted the property to you, you will still be liable as a transferee.
How to Protect Yourself from Transferee Liability
Below we will list some of the things you as a taxpayer should do if you are ever in a situation to acquire property from a third party.
1. Write a contract if you are dealing with a commercial transaction or a significant personal transaction. You want everything in writing in case the IRS needs to know every detail of what took place between you and the person that transferred you the property.
2. Every county in the United States files up to date tax liens. Make sure to check your counties clerk of court to find out if there are any tax liens against the property you are about to receive or are considering purchasing.
3. Ask the person that you will receive the property from for an option to return the property if it is discovered that transferee liability exists. This should be in writing and signed by both parties to the transaction. Always get everything in writing.
4. Ask for assurance in the contract that there are no tax liabilities that could potential make you liable as a transferee. Again, always have assurance put in writing in case you ever need to go to court.
5. Always be wary of deals that sound too good to be true, in most situations they are. It is better to walk away if something does not seem right, than to be subject to transferee liability by the IRS.