Client Overpays Estimated Taxes Used To Shield Money From Potential Creditors In IRS Account
Often new clients describe asset protection tools they implemented before they first meet me. Their asset protection solutions are usually based on a book they read, a seminar they attended, or even things they read on my own website. Usually, the client's asset protection strategies will not work because they lack knowledge or experience with important issues, but sometimes I meet people whose own asset protection plan includes creative and possibly effective strategies. As an example, last week a new client described to me how he has already protected approximately $75,000 of cash by overpaying his estimated tax payments. His IRS account showed a positive and refundable balance of $75,000. The client assumed his creditors could neither discovery nor recover his money held by the IRS. At first, I told the client his plan would not work because his credit with the IRS was a non-exempt asset and would have to be disclosed. But upon further investigation, his ploy may be effective.
First, the IRS credit would have to be revealed to a judgment creditor who could examine the client about all assets in a deposition under oath. In a bankruptcy proceeding, I have no doubt that the bankruptcy trustee would demand the client ask the IRS for the money and upon receipt turn over the money to the trustee. A bankruptcy court would enforce the trustee's turnover request with its contempt power. Outside of a bankruptcy proceeding it may be difficult for a creditor to recover the money.
A judgment creditor outside of bankruptcy needs to use available tools of collection to get a debtor's non-exempt assets. The creditor can't simply demand payment; he must recover the judgment using appropriate legal and equitable remedies. An overpayment to the IRS is a non-exempt asset. The question is how does a creditor get the money from the IRS; what is the appropriate collection tool?
I posed this question to a prominent and very experienced collection attorney in Orlando, Fl. He wrote back that he did not know whether there is a tool by which a creditor could attack a debtor's IRS deposits. His response, paraphrased is, he did notknow whether a creditor can garnish the IRS for money owed by the IRS. He could not can't find anything that permits it, and therefore, he thought it possible that a judgment creditor cannot reach it. The collection attorney said he searched Westlaw and Google and could not find an appropriate remedy to reach the deposit. He told me that even if there is a way to get the money the remedy would be very difficult for the creditor.
This is not the first time a client has asked me about the protection of IRS overpayments outside of bankruptcy. If a reader knows the appropriate creditor remedy to levy upon the IRS money please send me an email. Even though an IRS overpayment is not exempt, and may be deemed a fraudulent transfer to hinder or delay creditors, it still may be an asset protection device if creditors do not have a cost-effective tool to recover the funds.
