Yes, Place a Lien on Your Children’s Property
This May Be An Effective Tax Planning Tool
We represent taxpayers who have tax problems. They often owe the IRS thousands of dollars. They may have lost their job, had a serious medical issue, or had suffered some other financial hardship which prevented them from paying their taxes. As is often the case in such situations, they may have borrowed from parents, children, and friends to make ends meet.
Eventually the IRS comes knocking on their door (literally and figuratively) and demands payment of past taxes due, interest and penalties. The interest and penalties often increase the amount owed to the IRS by 50% of the taxes due. One option open to the IRS is to place a lien on the properties held by the taxpayer. When those properties are sold (or seized by the IRS) to satisfy the tax debt, those loans from friends and family members will often not be repaid. Your friendly creditors are the losers and the IRS is the winner.
When monies are lent between friends and family, it is often consummated with an oral promise and a handshake. There is the lack of formality.
Did you know that there is a legal way to ensure that family and friends get to the front of the line (ahead of the IRS) when property is sold?
When property with liens on it is disposed, generally the oldest liens are satisfied first. This is why the mortgage company is protected because its lien is attached to the mortgaged property when it is purchased. The mortgage company could care less who files liens after it does because it is first in line.
So how do you protect your friends and family? You need to engage the services of a good business attorney. As a guideline, knowing what the IRS will demand to see, we suggest the following steps:
- Make the loan by check (not cash) and the lender needs to maintain that documentation as proof that a loan was made. Substantiation is very important when dealing with the IRS.
- Execute a loan agreement between the debtor and creditor. Again, consult with an attorney. Check with your tax professional to ensure that the IRS minimum interest rate test is met. Have the loan agreement witnessed and notarized.
- The loan needs to be secured by the property of the debtor. The loan agreement needs to specify the property that is securing the loan. More than one piece of property can secure the loan.
- The attorney needs to make a UCC filing so that there is a public record.
Often when we recommend this action to our clients who have yet to have an IRS lien filed on their property, they say that they could never ask family or friends to do this. After all, “you don’t ask friends or family to enter into a formal loan agreement because they may take offense”.
Really? If the taxpayer who owes the IRS explains to the other party that this arrangement protects the lender, why would they take offense? If the IRS were to seize the property, the lender may never see a nickel repaid to them. If they follow the recommended steps discussed above and the property is sold, they have a chance of being repaid in full, or if not in full, partially.
There is another possible benefit to this strategy. If the taxpayer’s property is encumbered, the net realizable proceeds from the sale of their property will decrease. This may put them in a better position to file an offer in compromise.
It is important to note that a legal agreement should never be backdated. The attorney you engage to assist you with this would agree. We also believe that the attorney would agree that if the loan was made years ago, there is nothing to stop you from taking the above steps today.
If you would like to learn more about our premier tax resolution services, please visit us at www.stopmytaxproblems.com or call us at 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.