In a number of our posts, we have highlighted how people lament the power of the IRS to collect taxes from them. This power is rooted in federal law, and can lead to taxpayers having their wages garnished and property being taken in extreme circumstances. If that is not bad enough, the IRS may have the power to collect taxes from you even though they were originally meant for someone else.
How is this possible? This post will briefly explain.
Essentially, the IRS can make life miserable for unwitting taxpayers because of the doctrine of transferee liability. This occurs when a person who owes taxes on an item (or income) attempts to avoid such taxes by transferring the item (or income) to another person. The person owing taxes is considered the "transferor" and the person eventually pursued for the debt is the "transferee."
To pursue a transferee, the IRS must prove that the person fits the definition of Section 6901(h), and that the transferee is substantively liable for the transfer. The second prong is basically the trigger for tax liability since a person may be considered substantively liable if he or she did not receive reasonably equivalent value for the transfer, and the person or entity making the transfer was made insolvent or was left in a precarious financial condition.
So while a taxpayer may feel like they are getting a gift from someone who has their best interests at heart, it may turn into a terrible tax situation. If you have questions about transferee liability, an experienced tax attorney can help.