Filing of IRS “Nominee” liens is a favorite practice of the IRS.  Oftentimes, however, the IRS does not follow the law when it does so.

The law generally defines a lien as a charge or encumbrance that one person has on the property of another as security for a debt or obligation.

Essentially, this concept can be reduced to a simple metaphor — i.e., a special “sticker” similar to what a moving company puts on the furniture, boxes, and other contents of a house when it takes the owner’s property from one place to another.  The lien (or “sticker” ) does not change the ownership or other qualities of the property to which it is affixed; it merely identifies the property as having some kind of claim against it.

To avoid the effects of the lien – some people wrongly decide to place assets in the name of a nominee.  Note – doing this can be a crime (Evasion of Tax).

A nominee is simply someone or something that is designated to act on behalf of another.    So a Federal tax lien extends to property “legally” in someone else’s name which is “actually” owned by the taxpayer.  This is often seen with family members, friends, or trusts.

Obviously, if this happens the IRS thinks that you are involved in fraudulent behavior – this is serious!

The list of considerations in determining whether a nominee situation exists is based on the following non-exclusive factors:

  1. The taxpayer previously owned the property
  2. The nominee paid little or no consideration for the property.
  3. The taxpayer retains possession or control of the property.
  4. The taxpayer continues to use and enjoy the property conveyed just as the taxpayer had before such conveyance.
  5. The taxpayer pays all or most of the expenses of the property.
  6. The conveyance was for tax avoidance purposes.

If the IRS determines that a lien is appropriate (note that approval from IRS Chief Counsel is required per IRS policy) then a lien will be filed against the specific piece of property in question.  The property must be specifically identified and described on the face of the notice of federal tax lien.

The primary recourse or solution is to bring an action to quiet title under 28 USC § 2410.  Other tools generally available to the underlying taxpayer are not options (such as an Offer in Compromise).

The IRS has the burden of proof to show substantial evidence in support of the nominee theory in the legal proceeding.  The IRS often does not follow the law when these liens are filed.  It is vital to gather facts and documents and to know your facts inside and out.  This often can lead to a quicker resolution.