This Blog could be one sentence long: “Asset protection does not protect you from the Internal Revenue Service!”
Since some will doubt me, and many have tried to beat the Collector (the most powerful arm of the U.S. government targeted at citizens rather than terrorists), here are 10 reasons why asset protection is useless against the government.
First, the homestead exemption does not apply to the IRS. Most states have a homestead statute that protects some or all of your primary residence from creditors. States like Texas protect your entire home, no matter its value, while states like New Mexico protect only $35,000 in equity.
Because these are state statutes, they do not apply to the federal government. Therefore, the IRS can seize and sell your home to satisfy a tax debt.
Second, the cash value in a life insurance policy is not protected from the IRS. If you owe money to the IRS, the Collector will require you to borrow against your whole or universal life insurance policy to satisfy the debt. If you refuse to do so, the IRS can levy your policy, forcibly taking the cash value.
Third, some retirement accounts are not protected from a levy. The IRS can seize Qualified Pension, Profit Sharing, and Stock Bonus Plans under ERISA, IRAs and Retirement Plans for the Self-Employed (such as SEP-IRAs and Keogh Plans)
For a detailed list of accounts that can be levied, see the IRS website at: http://www.irs.gov/irm/part5/ch11s06.html.
Fourth, a payment plan (installment agreement) or other arrangement with the IRS to stop collections is not a right. When you owe money to the Collector, the IRS can levy your paycheck and bank accounts (take most of your paycheck and all of the money in your bank), until you and the IRS agree on how much you can afford to pay each month.
If you have no assets, and your income and allowed expenses indicate you can pay the IRS $1,000 per month, it does not matter how much you owe…$30,000 to $300,000…you will pay $1,000 per month until the debt expires. A detailed article on this topic is on its way!
If you have assets that you refuse to turn over to the IRS, such as life insurance, retirement accounts, money sitting in corporations, etc., and the IRS is not willing to go after them in court, the Collector simply denies your installment agreement and grabs what it can. Court battles and seizures of homes make the news, but they are in fact very rare. Most of the time, the Collector simply makes your life miserable until you pay.
Fifth, the IRS is willing to litigate and money is no object. The Internal Revenue Service has an army of lawyers in every state and employs about 1,500 tax attorneys in total. If you are going to go to battle with the Collector, be sure you have the talent and budget to do so!
Sixth, time is not of the essence…the IRS has the memory of an elephant and time to collect. There are a number of important statutes of limitations that apply to the IRS, and they are often very long. For example, the IRS usually has 3 years to audit you, and sometimes 6 years for a substantial understatement. The IRS has 6 years to charge you with a crime, and 10 years to collect money from you after a debt has been assessed. In special circumstances, this collection period can be extended another 10 years.
Seventh, your most important asset may be sitting in jail. While you can create a complex offshore structure that hides your assets from the IRS, the Collector might respond by finding a judge willing to hold you in contempt until you repatriate the assets. While in jail, most citizens find their lost assets and pay the government.
Eighth, filing bankruptcy doesn’t help most who owe money to the IRS. In order for a tax debt to be discharged in bankruptcy, your tax returns must have been filed for at least 2 or 3 years (various statutes apply). This usually means that the IRS gets to grab what it can for 2 or 3 years before you file bankruptcy. Very few who qualify for bankruptcy can withstand this assault long enough to wait out the collection period.
Ninth, if you leave the United States, you give up your Social Security, Medicare, top quality medical services, and the other benefits of living in one of the richest nations in the world. If you have a tax debt, have not committed a crime (or are not prosecuted for a crime), and select the right country in which to live (certainly not the U.K. or France), the IRS might not be able to find your assets and might not be able to collect.
In 8 years as a tax attorney, I have had many clients consider leaving the country. In the end, they all decided to stay and pay their taxes. Going on the run from the Collector is a life choice that very few are willing to make.
Again, moving out of the US to hide from the IRS assumes you are not charged with a crime…I am not considering fraudulent conveyance statutes or extradition in this article. If you do leave, be sure to file your US tax returns. Failure to file a tax return is a crime. Even if you are not prosecuted, you will have trouble renewing your U.S. passport if you do not file your tax returns.
Tenth, everyone runs scared from the IRS. Most governments and banks around the world want nothing to do with the Collector and will not protect you when times get tough. If the U.S. escalates your case to a criminal investigation and puts a real effort behind collecting from you, they will succeed! It will not be “cost effective” for a bank to lose a U.S. securities license or their ability to transact in U.S. dollars, in order to protect you. Considering the amount of money the U.S. spreads around these days, the same is true of most governments around the world.
I hope you find this information helpful. The bottom line is that asset protection is meant to protect you from civil creditors and not the federal government.
ABOUT THE AUTHOR:
Chris Rusch is a California licensed attorney who has represented clients before the IRS in many states. His practice is focused on international taxation, foreign corporate formations, and resolving complex tax controversies.