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How far can the IRS look back in fraudulent transfer cases?

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The number of fraudulent transfer cases prosecuted by the IRS since the financial meltdown in 2007 has dramatically risen. This is especially true concerning individuals who filed for bankruptcy protection.

Forbes.com notes that a recent cases document the power the IRS has in pursuing such claims. Under federal law, U.S. Code § 6502 provides the IRS 10 years to collect taxes through levies or court ruling following the assessment of such a tax. However, under state law for many different states the statute of limitations for such enforcements is much shorter than that under federal law. So which statute of limitations applies? State or federal?

A U.S. bankruptcy court in August released a decision called In re Kipnis, 2016 WL 4543772 (Bankr. S.D. Fla. Aug. 31, 2016). This case involved a tax judgment debtor accused of transferring certain assets to his wife soon following an appeal of a taxing ruling in favor of the IRS. The trustee in the lawsuit attempted to pursue these assets in order that the IRS receives payment regarding the judgment.

The spouse of the debtor brought a motion to dismiss this claim. She argued that the IRS could not pursue the debt due to the statute of limitation having run under state law. However, the court denied her motion. The court did not follow one particular federal case disallowing a 10-year lookback period. Instead, the court followed four other decisions that did allow the 10-year lookback period. The bankruptcy court ruled that "the trustee in this matter is stepping into the shoes of a creditor that has sovereign immunity" (in this case, the IRS).

We don't know yet the ultimate impact of In re Kipnis will have for Michigan taxpayers as this is an extremely recent action. However, this matter does demonstrate the authority the IRS has in collecting tax debt. It also does speak to the complexity of tax matters and how tax considerations can impact other areas of law such as bankruptcy.

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