When an IRS tax levy is outstanding on the marital estate
Overview and context
If the IRS determines a taxpayer has not paid its fair share of tax and has made periodic requests for payment that have gone unsatisfied, the IRS has the right to issue what is commonly referred to as a tax levy. When the IRS issues a tax levy the IRS has the right to seize and sell your property to satisfy the outstanding tax debt. If you have received a bill from the IRS that is titled “final notice of intent to levy and notice of your right to a hearing” you should immediately contact the IRS to make arrangements to pay the liability. This may prevent the IRS from moving towards attaching a tax levy on your properties. A tax levy is similar to, but different from, a property lien made by a contractor or someone else. The primary difference is the IRS would take precedence over any other liens that exist on your properties.
Examples of the types of property the IRS can seize are:
- monies in one or more financial accounts
- real estate
- other assets owned by the taxpayer
How did the Tax Cuts and Jobs Acts of 2018 change IRS levies?
Through the Tax Cuts and Jobs Act of 2017 (TCJA), the IRS extended the time limit that a taxpayer can file an administrative claim against the IRS. An administrative claim implies the IRS was inaccurate with its decision making process to assess the tax to the taxpayer. Under the prior law, the time frame to file such a claim was nine (9) months. Under the new law, a taxpayer has up to two (2) years to file this claim.
How does the extension of time to file an administrative claim against the IRS impact a divorce?
If a marital estate has a tax levy attached to one or more of its properties the married couple has a lot of uncertainty how to divide the marital estate. Why? A number of things could happen.
- The IRS could claim your administrative claim is invalid resulting in further interest and penalties
- The divorcing parties already came to an agreement how the assets will be allocated yet did not take into account the tax levy that could seize one or more of their assets now in one or both names
- The administrative claim could result in a partial settlement with the IRS whereby additional monies or properties need to be divided up at a later point in time
- Both parties could remain liable for the tax levy, up to the total amount outstanding, regardless of each party’s new filing status from MFJ (married filing jointly) to MFS, Head of Household or single (Capital S in Single?)
- The IRS may not levy the property yet keep one or both parties still liable requiring additional estimates to be paid in the current year which were not addressed in the settlement structure
- The IRS may have inadvertently already sold one or more properties placing the marital estate in a compromised position
- If the IRS deems it was incorrect in its calculations and one or both taxpayers have paid money towards the outstanding liability verses having properties seized the couple needs to define how any interest earned will be divided later on
It is worthy to note there are a number of ways to move forward in a divorce process and define the financial settlement structure even through there is an IRS levy outstanding and unsettled. Outlining those options are beyond the scope of this article.
Other complications can arise if the couple decided to wait to finalize their divorce such as changes in the market value of certain properties and the decision needs to be weighed against the risk of the tax levy on the properties in question. The parties may want to be careful as interest and penalties will likely accumulate from the time the tax levy was assessed which could further complicate the situation too.
About the Author
Larry Smith is a Founding Partner of Divorce Outcomes, a specialized professional services firm that manages all of the financial aspects in a divorce process. Since 2003 he has worked as a trusted financial advisor, financial advocate, divorce architect and technical financial expert; he is not an attorney. He is an alumni of KPMG and Andersen with expertise in technical accounting, forensics, sophisticated taxation, management consulting, risk management, advanced process engineering, business combinations, divorce management, multi-party negotiations, advanced quality analytics and cognitive performance technologies. Since 1986 Larry has been advising individuals and organizations about innovative financial solutions to resolve complex financial challenges that arise in life and in business.
For both personal and business divorces, Larry is considered an expert in divorce strategies, divorce process management, financial divorce architecture, financial risk management, taxation for divorces, financial divorce forensics, advanced divorce analytics, financial divorce negotiations and mediation, business valuations and sophisticated equity structures. He helps clients shape complex financial decisions, manage communication risks and ever-changing negotiating positions to strategically preserve or grow wealth from these types of transactions.
If You Have a Question
If you have a question, feel free to contact me at [email protected] or 617-680-5222. The call is free. I will spend 30–60 minutes with you. I will provide you an honest assessment as to where I think you are positioned in your divorce process or answer any questions you have. I may provide you some guidance, insight or advice that you can take with you as you wish. There is no obligation to move forward. The phone call is designed to ease your fears, provide you some options to pursue and a potential road to run on that can lead you down a path to achieve a successful outcome.
About Divorce Outcomes
Divorce Outcomes is a specialty services firm that helps people both domestically and internationally manage all of the financial decisions that arise in their divorce process. We are not attorneys. We are financial experts who partner with our clients as their personal financial advocates. We help our clients manage their divorce process, uncover hidden financial risks, architect divorce solutions, manage ever-changing negotiating positions, communicate complex financial matters and close the divorce process as soon as possible with a goal to arrive at the best outcomes possible. Throughout the process we evaluate the current state of our clients’ financial lives with an objective to best reposition their future. We do not sell any products. We simply raise issues that are in our clients best interest. Our clients share with us we:
- unfold, analyze and repackage their financial life so they are well positioned after their divorce
- preserve the value of their business or marital estate
- continuously strive to provide a return on our services
- build balanced financial solutions grounded in evidence
- find ways to make our client, and at times both parties, money through the process
- design their divorce to work for them and their family’s life
- provide mental clarity to make decisions
- reduce the total process time from start to close
- minimize the stress and unpleasant memories that can last a lifetime
As we reach an agreed upon settlement structure, we help our clients identify a fitting attorney who can leverage the financial solution to draft and record the requisite legal documents. Where outcomes are at risk from a traditional process, we function as expert financial negotiators or financial mediators to turn around the situation and achieve our client’s desired outcomes.
This communication is for general informational purposes only which may or may not reflect the most current developments. It is not intended to constitute formal advice or a recommended course of action as every person’s situation is unique and different. The information here is not intended to be, and should not be, relied upon by the recipient to make a decision without professional guidance.