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Could you be liable for another’s tax debt?

Legislatures have provided the IRS a tremendous amount of authority to collect taxes. The failure to pay taxes also can result in fines, wage garnishment, forfeiture of property and even imprisonment. What some taxpayers may not know is that the IRS can sometimes come after them regarding another person’s tax liability.

Such an event is possible through something called transferee liability. When an individual receives money or assets for less than the full and fair value from another taxpayer (a transferor), that individual then becomes a transferee. If the taxpayer owed back taxes, the IRS may in turn attempt to collect these taxes from the transferee.

These rules are in place in order to prevent individuals from avoiding paying taxes by transferring assets or income to somebody else. However, the IRS still must abide by a certain criteria put into the tax code before going after the transferee. According to the U.S. Supreme Court, the IRS must demonstrate that this individual is an actual transferee within the definition of Code Section 6901(h). And if this individual proves to be a transferee, this person must still be “substantively liable” regarding the transfer under the law.

Michigan taxpayers do need to understand that they have rights when it comes to IRS tax collection efforts such at this. In most circumstances, the IRS must show that the transferor was insolvent in transferee liability cases. There are also other conditions the IRS must meet before the agency can pursue the transferee. And even if the IRS proves liability, the transferee cannot be liable for more than the value of the assets received.

If you have questions regarding a tax debt, the advice from experienced legal counsel can prove extremely useful.

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