Bad parents and a tax levy

[DrF]

My parents are very bad with money. In their 50s they started a business in the industry my dad had been working in for the past ~25years and never paid any taxes on any of the business income.

Needless to say, they have quite a substantial levy against all earnings. The thing is, they no longer work. My dad gets social security (with no other assets) and they live with family rent free.

The twist here is that my dad worked long enough for one company to get a pension payout in the low 6 figures. From what I gather, this money is fair game for the IRS.

Here's the question for all the tax mustachians. Is there a way to protect this money from the IRS levy? One idea that has come up is to gift as much as possible to my siblings and then put it all into a trust account. Would this work?

If there is no way to protect the money, my parents plan on blowing through the whole amount before they file taxes this year (extension). Kinda shiesty, but that's the reality. I'd rather the money be around to help them in their meager retirement, rather than being spent on dinners and worthless garbage.

[GizmoTX]

Social Security can be garnished to pay a tax liability, usually 15%. It's insane to blow a pension just so the IRS won't get it.

[shotgunwilly]

So... they were thieves, and now they want to figure out how to be clever thieves... Yea, shiesty.

[dandarc]

How large is the debt?  Sounds like a possibly larger-scale version of my FIL's issues.

[DrF]

How large is the debt?  Sounds like a possibly larger-scale version of my FIL's issues.

Not sure how large the debt is. For obvious reasons I have distanced myself considerably from this and other interactions. From my understanding the debt is greater than the pension payout.

[CheapskateWife]

They aren't my parents so it is really easy for me to say this....but they need to pay what they owe. 

Will they become a burden to you if the IRS does take the pension?

[ncornilsen]

It sounds like they're going to have an all expenses paid retirement at the cost of the US Tax payer, when they throw them in jail for not paying all these years...

[Pigeon]

Before they do any of these questionable things, they should talk to a tax attorney.  Personally, I wouldn't mess with the IRS.

[dandarc]

Agreed they should probably talk to a tax attorney - might very well be a crime to deliberately blow through a lot of money when you owe the IRS.

I seriously doubt that gifting it would work.

[Another Reader]

They are asking for prosecution if they blow through it and the IRS will claw back anything that is given to the kids.  A good tax attorney might be able to settle for the amount of the pension and then they could go back to leading a normal life.  A tax attorney will also explain the possible consequences of their proposed actions.

[Tyler]

If your parents are actively antagonizing the IRS, you need to stay as far away as possible. The last thing you want to do is to accept a gift that will bring the same scrutiny on you.  The best course of action is to help them find a tax attorney and then keep a healthy distance financially.

[frugalnacho]

Hypothetical question: What happens if they gift the money to someone that has no idea about their tax problems with the IRS?  Like they just decided to gift me $20,000 just because, and it was not some scheme to defraud the IRS (at least on my part).  I would be pissed if the IRS showed up and wanted to take money back that was gifted to me.  What's to stop the IRS from clawing back anything that has been given to me as a gift through the years?  I'm not defrauding the IRS, but if someone else was and also gave me a gift, can they really just show up and take those gifts from me?  How can I be sure any of the money ever gifted to me is actually mine?

[Frankies Girl]

Hypothetical question: What happens if they gift the money to someone that has no idea about their tax problems with the IRS?  Like they just decided to gift me $20,000 just because, and it was not some scheme to defraud the IRS (at least on my part).  I would be pissed if the IRS showed up and wanted to take money back that was gifted to me.  What's to stop the IRS from clawing back anything that has been given to me as a gift through the years?  I'm not defrauding the IRS, but if someone else was and also gave me a gift, can they really just show up and take those gifts from me?  How can I be sure any of the money ever gifted to me is actually mine?

I'm not an expert by any stretch of the imagination, but it seems to me that gifting you money that was basically stolen; of course the authorities can come and take it from you. Just like real property - say a good friend gave you a diamond ring that later turned out to be stolen... you'd have to give it back if discovered it is in your possession. It doesn't matter if you knew or not, as soon as you're made aware, it's not yours to keep and you'd lose any battle to keep the stolen items.

I'm sure actual money is more nuanced, but it's got to be similar.

And OP, absolutely steer very clear of this fiasco and advise the parents to see the tax attorney. They are playing with fire and facing possible jail time, and the idea of dragging their whole family through a huge mess they created is just about as stupid as it gets.

[Cathy]

Transferring money to avoid it being collected by a creditor may be a fraudulent transfer.

IRM § 5.17.14 contains a detailed overview of the IRS's legal positions on fraudulent transfers and also describes the techniques it uses to deal with them. It may be a good place to start learning about this topic.


(For people who read my posts often: I am going to start abbreviating references to sections of the Internal Revenue Manual with "IRM §", rather than writing it out in full.)

[Doulos]

This story yet again makes me want a simple straight income tax law.
All tax is income, and it is a flat % no matter what, who, etc.

Then IRS is just an enforcement agency.  Bruisers, like the mafia has.

[Cathy]

I don't think the IRS is doing anything wrong in this situation. If you accept that there should be an income tax, there need to be methods to collect it. Regardless of how high or low the tax is, it needs to be effectively collectible, otherwise there's pretty much no point in having the tax.

It does not sound like the OP's parents ran into trouble because of the complexity of the tax laws. It sounds like they just declined to pay tax.

[Doulos]

Sorry, let me rephrase that for you.

I think the IRS should be Bruisers.  Go out and get the job done, like bookies do.

Tax code should be made much simpler.  Easy to understand.  100% income only tax is very easy to understand. 
-  Did you make money this year in any way shape or form?
-  If you make a mistake, some bean counter sends you a kind reminder bill with a generous due date.
-  You; Pay your taxes. or you call that bean counter to work something out before the due date.
-  If you dont, IRS bruisers show up like Repo men and take it.

This whole super complicated tax paying vs tax evasion travesty should just go away.

Here is the moral of my story.
These parents should never have been allowed to get into this terrible situation in the first place.

[frugalnacho]

This story yet again makes me want a simple straight income tax law.
All tax is income, and it is a flat % no matter what, who, etc.

Then IRS is just an enforcement agency.  Bruisers, like the mafia has.

How is this an improvement?  They didn't not pay taxes because of some convoluted tax code, they just didn't pay them.  How would a flat tax have made them pay? 

Isn't the IRS already an enforcement agency?  I am assuming they will send someone out to physically collect the tax due or jail them eventually.

[Doulos]

Problem is that taxes are so complicated the IRS can miss something like this for 20 years.
Because they cannot keep up with the massive amount of work it is to figure out each and every person's taxes.
It should be so easy that the IRS can check 100% of the population's statements every year.
It should be easy enough that people who are terrible with money can still figure it out.

Sorry if I am just being super merciful and optimistic here, but I see the problem as...

• These people are terrible at managing money; could not figure out that the business owed taxes. 
• Not that they intentional screwed over the citizens of US by stealing tax money every year.

[rmendpara]

My parents are very bad with money. In their 50s they started a business in the industry my dad had been working in for the past ~25years and never paid any taxes on any of the business income.

Needless to say, they have quite a substantial levy against all earnings. The thing is, they no longer work. My dad gets social security (with no other assets) and they live with family rent free.

The twist here is that my dad worked long enough for one company to get a pension payout in the low 6 figures. From what I gather, this money is fair game for the IRS.

Here's the question for all the tax mustachians. Is there a way to protect this money from the IRS levy? One idea that has come up is to gift as much as possible to my siblings and then put it all into a trust account. Would this work?

If there is no way to protect the money, my parents plan on blowing through the whole amount before they file taxes this year (extension). Kinda shiesty, but that's the reality. I'd rather the money be around to help them in their meager retirement, rather than being spent on dinners and worthless garbage.

Since they have a levy, I'm assuming you mean the IRS is holding them responsible for back taxes in some way?

Pension money, and even social security after a certain amount, is considered taxable income during retirement. If they do not file taxes and list that income, they are yet again failing to even declare the income and file it... let alone pay it.

Failing to pay is less of an issue than failing to declare/file income and taxes owed.

I wouldn't get within a mile of this. Gifting money to people does not get deducted from your income in any way. Even if they "gift" 100% of the income from the pension plus social security.

From the IRS's perspective, ignorance is not a suitable defense. Presumably, if you are mentally competent and not insane, you are supposed to know that you should file your taxes and do so accurately... otherwise risk paying both back taxes owed plus penalties. The criminal stuff won't really come into play unless it's shown they willfully and knowingly withheld information during that time. Not sure if that's the case, but I wouldn't rule it out...

[Frankies Girl]

Problem is that taxes are so complicated the IRS can miss something like this for 20 years.
Because they cannot keep up with the massive amount of work it is to figure out each and every person's taxes.
It should be so easy that the IRS can check 100% of the population's statements every year.
It should be easy enough that people who are terrible with money can still figure it out.

Sorry if I am just being super merciful and optimistic here, but I see the problem as...

• These people are terrible at managing money; could not figure out that the business owed taxes. 
• Not that they intentional screwed over the citizens of US by stealing tax money every year.

But the thing I think most of us are getting stuck on is the fact that once the parents were informed that they made a (huge) mistake, the first thing they should have done is consult a tax attorney and figure out how to pay what they owe without messing up further.

Instead, it sounds like they either were vaguely aware they owed the money and have now decided they can outsmart the IRS, and are now trying to figure out (illegal) moves to hide or otherwise avoid paying what is rightfully owed. You can use whatever cutsy word you want  (sneaky/shiesty/whatever) but it's still against the law and they will probably get caught and will lose more than what they owed, in addition to possible jail time. For frog's sake - tax evasion is what got Al Capone put away!

This is not being terrible with managing money; this is fraud and probably criminally actionable. They are aware they owe the money, they just are trying to figure out a "clever" way to not pay it. So what they are terrible at is being responsible for their own actions. The idea that they would drag their adult children into the mess just says how lacking in basic character they really are. (using their children to funnel funds - brilliant way to get them closely scrutinized and questioned too! Thanks, mom and dad!)

Bottom line - they owe the money, they should stop dicking around and set up a payment plan.

[Cathy]

The defence that you did not comply with the tax laws because the laws were too complicated is actually a legally valid defence in a criminal context, because tax evasion is a specific intent offense. See Cheek v. United States, 498 US 192 (1991). Just because it's legally sound doesn't mean it will actually secure an acquittal though; you still have to sell it to the jury (or more precisely, the jury has to have a reasonable doubt about whether your failure to comply with the tax laws was due to their unreasonable complexity).

Of course, in a civil context, that defence is irrelevant and does nothing to extinguish the debt.

[Wile E. Coyote]

I believe that they can levy against the payment itself, unless the money is require to meet basic living expenses. I think there may also be a percentage limitation.  As mentioned, they should speak to and attorney and see if they can settle their debt with the IRS. 

[DrF]

Asked and answered, thanks all. I'll pass along the face punches to be sure.

For the tax pro's here. I found this link helpful. http://howardlevyirslawyer.com/documents/all_things_irs_can_take.pdf

If the offense is deemed not flagrant, pensions and other retirement funds are often left alone, especially in cases where no money was added to the pension during the time of tax debt accrual.

Here's the little I do know. My parents had no business going into business and made a lot of mistakes. They had neither the training nor inclination to be business owners. They took out loans against their home to finance the losing venture, so they could not deduct the loan from business income. After expenses there was less and less money every year, and they thought (incorrectly) that there was no way they could owe any taxes. Call it naive or stupid, you'd be correct. Once they finally consulted a tax professional the business was gone and they had a huge tax liability.

My parents have always given me training in "what not to do". They have been exemplary in that regard.

[dandarc]

Here's the little I do know. My parents had no business going into business and made a lot of mistakes. They had neither the training nor inclination to be business owners. They took out loans against their home to finance the losing venture, so they could not deduct the loan from business income. After expenses there was less and less money every year, and they thought (incorrectly) that there was no way they could owe any taxes. Call it naive or stupid, you'd be correct. Once they finally consulted a tax professional the business was gone and they had a huge tax liability.

So the business was profitable, at least absent financing costs, just not profitable enough to pay back the home loans.  Repeat for enough years and you've got a big problem if you didn't pay taxes.

Sorry you're going through this - if they do try to give you a substantial sum of money, don't take it.  Otherwise not sure there's much you can do other than to try and convince them to find a legal way to deal with the problem / clear the debt.

[cbgg]

Your parents got themselves into hot water by not paying their taxes…they are about to come into some money and their plan is to AGAIN not pay their taxes? And you think that's KIND OF "shiesty"? 

No only is their plan of spending the money illegal, it's stupid.  I'm no tax expert, but I think it's pretty obvious that spending all of your money does not erase your tax liability on earnings.  Gifting large amounts of money to others also triggers a tax liability.

Sounds to me like your parents are a lot more than "bad with money."  Sounds like they are illegally cheating the tax system.  Surely they know this?  If I were you I would encourage them to start working with a reputable financial professional to clean up this mess.