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Can the IRS Seize Assets Gained by Tax Evasion?

Can the IRS Seize Assets Gained by Tax Evasion?

Paying taxes is never fun, but evading taxes can lead to serious consequences. The Internal Revenue Service (IRS) has broad powers to recover unpaid taxes, including seizing assets that were gained through tax evasion. However, the rules surrounding IRS asset seizure are complex and depend on the specifics of each case.

In this article, we’ll break down what happens when the IRS suspects tax evasion, how the IRS can seize assets, and what defenses a taxpayer may have. We’ll also look at some real-world examples of assets the IRS has tried to seize due to tax evasion.

What Triggers an IRS Investigation into Tax Evasion?

There are a few red flags that may prompt the IRS to take a closer look at a taxpayer’s returns to determine if tax evasion has occurred:

• Underreporting income
• Claiming excessive deductions or credits
• Hiding or transferring assets to evade taxes
• Having large amounts of unexplained cash transactions
• Not filing tax returns or filing fraudulent returns

The IRS has sophisticated computer programs that flag returns with anomalies for further scrutiny. Audits may uncover unreported income or suspicious activity. The IRS also runs the Automated Underreporter Program that matches 1099 and W-2 forms filed by employers and financial institutions against individual returns to catch discrepancies.

In criminal tax evasion cases, the IRS often relies on whistleblowers or cooperating witnesses to provide evidence of intentional wrongdoing. Once the IRS suspects tax evasion, they have broad authority to investigate.

IRS Tools for Investigating Tax Evasion

If the IRS suspects tax evasion, they have many tools at their disposal to build a case:

• Audits – The IRS can conduct civil audits looking for errors or fraud in past tax returns. This allows them to assess back taxes and penalties.
• Criminal Investigations – For more serious cases of suspected tax evasion, the IRS can open a criminal investigation and refer cases to the Department of Justice for prosecution.
• Summonses – The IRS can issue summonses to force taxpayers or third parties to provide documents and testify under oath. This helps establish evidence of tax evasion.
• Tax Liens – The IRS can place a lien on a taxpayer’s property to secure payment of past-due taxes. This also allows them to pursue assets later if needed.

Using these tools, the IRS builds detailed records tracing assets, income, and tax liabilities over multiple years to quantify any unpaid taxes.

When Can the IRS Seize Assets for Tax Evasion?

If an investigation confirms tax evasion, the IRS has the power to seize assets in two main scenarios:

1. Collection of Overdue Taxes – If a taxpayer owes back taxes, penalties, and interest from prior years, the IRS can seize assets to satisfy the unpaid balance. This includes assets connected to the original tax evasion or other assets the taxpayer owns.
2. Forfeiture – In criminal tax evasion cases, the IRS can seize assets through forfeiture, allowing them to take property connected to illegal activity. This is powerful because the assets can be seized even before the taxpayer is convicted.

However, there are important limits on IRS power to seize property:

• For overdue tax collection, they generally can’t seize assets that exceed the amount owed.
• In forfeiture cases, assets seized must be traceable to the tax evasion scheme.
• The IRS must follow required procedures giving taxpayers notice and due process.

Taxpayers also have defenses and ways to fight back against IRS overreach, discussed later. Overall, the IRS can’t indiscriminately take assets – there must be a clear link to established tax evasion.

How the IRS Legally Seizes Assets

If the IRS determines seizure is appropriate, there are specific legal processes they must use:

1. Levy – The IRS can levy bank accounts, wages, Social Security payments, and other income sources. This allows them to collect overdue taxes directly from third parties.
2. Seizure – For assets like real property, business assets, vehicles, and personal property, the IRS must issue a Notice of Seizure and then physically seize it. Seized property may be sold at auction.
3. Forfeiture – In criminal cases, the IRS can seize assets through civil forfeiture proceedings without needing to convict the taxpayer. This may allow them to seize property outside of tax debts.

There are specific processes the IRS must follow to provide notice, hearings, and due process around seizures. Taxpayers have the right to appeal at each stage.

Famous Examples of IRS Asset Seizures

Here are some real-world examples of assets the IRS has seized due to tax evasion:

• In 2021, the IRS seized over $3.5 million in cash and assets from two chiropractors in California accused of hiding millions in under-the-table cash payments.
• A Texas businessman had over $900,000 seized by the IRS after he was convicted of tax evasion related to concealing assets in offshore accounts.
• The IRS seized a Florida man’s $680,000 home that he purchased with profits from an illegal tax scheme designed help clients evade taxes.

These examples show the IRS will pursue not just the unpaid taxes but also assets connected to the illegal activity.

Defenses Taxpayers Have Against IRS Seizures

Taxpayers facing IRS seizure of assets do have some defenses and protection:

• Innocent Spouse Relief – For joint filers, one spouse may be able to avoid responsibility if the other spouse committed tax evasion without their knowledge.
• Statute of Limitations – The IRS generally must assess tax within 3 years, so old potential debts may be barred from collection.
• Improper Procedure – If the IRS doesn’t follow proper notice and due process, a seizure may be reversed.
• Excessive Fines – The 8th Amendment limits excessive fines, potentially protecting assets if tax debts are within reason.

Challenging an IRS seizure takes specialized legal help from a tax attorney or CPA experienced fighting the IRS. But taxpayers do have rights that may limit the IRS’ power in some cases.

Takeaways on IRS Seizure of Assets and Tax Evasion

Here are some key points to understand about the IRS’ ability to seize assets connected to tax evasion:

• The IRS has broad power to investigate suspicious tax returns and unearth evidence of evasion.
• In cases of overdue taxes, the IRS can seize assets up to the amount owed using levies, seizures, and tax liens.
• Criminal cases allow forfeiture of assets tied to illegal tax evasion schemes, even before conviction.
• Taxpayers have some protections through due process requirements and avenues to challenge excessive IRS actions.
• Specialized legal help is crucial for taxpayers facing IRS seizure of assets or criminal charges.

The bottom line is tax evasion is very risky, as the IRS often has the power to recover assets connected to unpaid taxes and illegal activity. The intricacies of IRS rules and procedures around asset seizure demonstrate why it’s unwise to get creative with your tax returns. While occasional mistakes will probably just lead to back taxes and penalties, purposeful evasion can prompt harsh IRS collection efforts extending to your property and bank accounts. For taxpayers in hot water, the best path forward is coming clean and seeking qualified legal advice to mitigate the damage.

References

https://www.irs.gov/businesses/small-businesses-self-employed/irs-audits
https://www.irs.gov/compliance/criminal-investigation/how-criminal-investigations-are-initiated
https://www.irs.gov/privacy-disclosure/article/0,,id=182098,00.html
https://www.irs.gov/businesses/small-businesses-self-employed/understanding-a-federal-tax-lien
https://www.irs.gov/businesses/small-businesses-self-employed/levy
https://www.irs.gov/businesses/small-businesses-self-employed/property-seized-for-taxes