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Third-Party Levies by the IRS and How They Violate Due Process

 

IRS Violates Due Process Law & Should be Illegal

blog 18As the IRS is a very complicated agency, there are many limits to what they can do and who they can take money from. As for IRS collections against alter egos and nominee liability, the system has taken it too far– violating the due process clause. If a person owes the IRS money, something they could do to protect themselves is put their property into a corporation name so that the IRS cannot take it away from them when it comes time to collect.

The Problem

The absence of a notice goes against the Fifth Amendment. This is not only unjust, but unconstitutional, as everyone is entitled to their rights. The IRS creates unnecessary hardship for many people they go after through the collections process. What this means is that a business can put their property into a corporation name, even if the corporation does not hold an actual presence, to protect themselves from the IRS. The business then becomes your alter ego, and the IRS will take whatever is in that businesses name to fulfill your tax debt. This gives the IRS a way to come after you. Sometimes, it’s without a notice. This is a wrongful and abusive way to collect tax debts and the actions lack due process. It’s a violation of the Fifth Amendment. Moreover, there’s no right to go to the Tax Court to contest the matter. The lien leaves a cloud on the third-party’s property, so the client must file a lawsuit to a wrongful levy suit. This is very costly and inconvenient for the client. So, what are people supposed to do? Sit back and watch as their property is being taken from them within an instant? This has to change. Maybe if more people were notified, they would have a way of doing something about it. It is suggested to contact the Taxpayer’s Advocate System (TAS) so that there can be some sort of reform, as taxpayer’s have had more success getting them involved rather than IRS appeals.

What the Due Process Clause means

Due Process of Law: A fundamental, constitutional guarantee that all legal proceedings will be fair and that one will be given notice of the proceedings and an opportunity to be heard before the government acts to take away one’s life, liberty or property. As I just stated, in the case where someone is attempting to take your property, they have to provide you with notice and an opportunity of hearing before they take your property. There is no IRS appeals process for this. The IRS does not look at the underlying procedures in these cases. This should not be allowed by ANY means. There are many examples of how this is a violation of the Fifth Amendment, which says that the government may not deprive citizens of “life, liberty, or property” without due process of law. This means that the government must follow rules and established procedures in all that it does. It cannot skip parts of trials or deny citizens their rights that are protected by law and by the Bill of Rights. This is exactly what the IRS has done. They have deprived citizens of property without due process. In most cases, if a taxpayer (such as a corporation or other entity) that owes taxes has insufficient assets to pay the liability, the IRS may attempt to collect the liability from a third party, using these theories: -The third party is a nominee, who holds title to the property on behalf of the taxpayer, who in effect still owns the property. -The third party is the alter ego of the taxpayer and can be held responsible for the taxpayer’s debts. -The third party is a transferee of the taxpayer’s property and should have to give up the property.

What a Collection Due Process Hearing is

A collection due process hearing is the right to file an appeal. This is available to you if you have received a Notice of Federal Tax Lien or Notice of Intent to Levy. It may be your last chance to resolve a tax controversy with the IRS short of tax litigation. However, this process is only available if you have received a notice. If you are a third party, since you are not considered the “taxpayer,” you do not have the right to do this. This is part of the normal appeals procedure, which is stripped from those who are considered third parties. Why should this be allowed? This only adds on to the reasons why the IRS needs severe reform.

The only way to fight this…

The nominee or alter-ego cannot challenge the underlying tax liability. The only way for a person to fight this is to file a lawsuit in district court and sue the government of a wrongful levy. This is to release the property of the third party from the government’s collection device. This is a very expensive process, and in most cases, the taxpayers cannot afford it. There’s a lot of money at stake, as well as time and expenses. This is how it should change. The IRS should take initiative in these cases, instead of the government. The IRS should be the ones to prove you are responsible for your debt. Why should people have to sue the government when it is the IRS who is after them? Enforcement in Nominee and Alter Ego Situations Usually in these situations, what happens first is that the taxpayer’s liability to be collected from the IRS will be held by the nominee or alter ego taxpayer’s property. The IRS will go about this using administrative collection procedure. The supposed transfer is ignored and the IRS can rely on an assessment made against the taxpayer and lien filed in the taxpayer’s name. A notice of federal tax lien based on the assessment against the taxpayer should be filed in the name of the nominee or alter ego. Although, in many cases, this does not happen. This is wrong. To issue an alter ego or nominee lien or levy, Area Counsel approval is required. Collections should always work to develop the full facts and background of each particular case. Although it may be hard for the IRS to develop real facts to establish which theory best fits the case, they may take the position that a taxpayer has transferred the property by a third party by means of fraudulent transfer, or that the taxpayer’s property is held by a nominee or alter ego. This is the default method.

Reason for Change

This method of collecting is a blatant violation of the principles that make up our country. It should NOT be permitted, by any means, to go about and treat people this way. The government as well as the IRS is stripping people of their freedoms. What does that say about America? Congress should extend Collection Due Process rights to amended third parties affected third parties, known as nominees, alter egos and transferees. Something needs to be done immediately. As I mentioned above, the only way to go about protecting your rights is to file a lawsuit against the IRS of wrongful alter ego and nominee liens. In some cases, everything is taken—a business, even your property and residence. This should not be allowed, especially without notice. If IRS collections has come after you as a third party alter ego or nominee, action should be taken now. Give us a call, or send us an email.

Venar Ayar, Esq.

Venar Ayar, Esq.

Attorney-at-Law, Master of Laws in Taxation
Principal and founder, Ayar Law

Venar is an award-winning tax attorney ranked as a Top Lawyer in the field of Tax Law. Mr. Ayar has a Master of Laws in Taxation – the highest degree available in tax, held by only a small number of the country’s attorneys.