Asset Protection and the IRS

In speaking with a potential asset protection client last week, two separate questions came up.  This post is intended to answer those questions, in case anyone else is facing the same issues.  Part of what we do as asset protection attorneys at Lodmell & Lodmell is to answer your questions, so please contact us if we can ever serve your asset protection and wealth preservation needs in any way.  Now, on to the questions . . . .

Are Funds Held by the IRS Protected Assets?

This is a good question.  Consider a hypothetical scenario: A regular guy named Al Capone is absolutely obsessive about paying his taxes.  In fact, he’s so paranoid about missing the April 15th deadline for filing that he makes taxes his number one priority in life.  To make sure he can pay the IRS each year, Al always overpays his tax bills and now has a net credit balance of $25,000 with the IRS.  Al is comfortable with that, because it will allow him to pay his taxes even if the entire monetary system collapses (though he’ll then be unable to pay the entire team of psychotherapists that should be working on him).

The question is this: If Al gets sued and is found liable to a judgment creditor, can the creditor obtain the $25,000 held by the IRS?  This is a very real question for many people with tax credits, and it’s a question that asset protection attorneys think about.

The good news for Al is that federal law prohibits civil judgment creditors from garnishing the Internal Revenue Service.  Why?  Because it almost a certainty that you will owe the IRS at some point in the future, and if there is one “super creditor” on planet earth–if there is one creditor that can get at any of your assets, it’s the IRS.  They play hardball, so pay your taxes.

What all this means is that you can protect cash by giving it to the IRS to cover future tax bills.  This can be done by overpaying taxes or by making advance payments to the IRS, though cash sitting in IRS coffers won’t appreciate in value.

What About Tax Refunds from IRS?

It should be obvious (at least it is to asset protection attorneys) that once you receive a tax refund, the money is no longer protected.  It’s not earmarked or otherwise exempt property just because it came from the federal government.  The same is true in the context of bankruptcy.  While distributed tax refunds are property of bankruptcy trustees, trustees cannot remove money from a debtor’s IRS account.  The money must first be issued to the debtor.

Now here’s a question for you, our readers: Given what you know about fraudulent transfers, could a prepayment to the IRS be “clawed back” if a claim, suit, or judgment is pending against the debtor?