Tuesday, June 21, 2011

Will Bankruptcy Protect Against An IRS Lien on Your IRA

It happened this busy season. As you may know, we do our share – and then some – of tax representation work. I would say that, despite our size, we do as much representation work as many firms in Cincinnati.

So what happened? A client wanted to know whether the IRS could lien her IRA.

Do you know the answer?

I’ll give it to you momentarily

I was looking at a tax case called Miles v Commissioner. Corrie Miles ran up past due taxes. The IRS filed liens for 1997 and 1998 which attached to her IRA.

Note: Under Section 6321 if a taxpayer fails to pay a liability after notice and demand, the IRS can file a lien on taxpayer’s property and rights to property.

If it goes to the next step, the IRS is allowed under Section 6331 to seize and sell the property (unless it is exempt) subject to a federal tax lien.

Corrie Miles filed for bankruptcy in 2003. Her 1996, 1997 and 1998 taxes were discharged.

Remember: Taxes more than three years old can be discharged.

Can the IRS go against her IRA?

What is your answer? Did Corrie keep her IRA?

This case went through Appeals and the Supreme Court has just refused to give it cert. But it did go that high up the chain. The IRS won. Why? Although Corrie went through bankruptcy, the IRS had a priority position going in to bankruptcy. The bankruptcy will not wipe out the lien. The IRS could proceed against Corrie’s IRA to the tune of $142,000 – the balance in the IRA before she went into bankruptcy.

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