THE IRS IS GENERALLY UNABLE TO LEVY LLC PROPERTY FOR A MEMBER’S PERSONAL TAX DEBT

In 1999, the IRS issued an Internal Legal Memorandum (ILM 199930013) written by the chief counsel of their General Litigation Division outlining what the IRS can and cannot do when attempting to levy LLC property which a tax debtor holds as a complete or partial membership interest. The fact that LLC property cannot usually be seized for the personal tax debt of its member(s) is something that PF Shield already knew; however hearing the IRS admit this is quite supportive.

Here are two links helping to explain the impact of this memorandum in layman's terms.

The first one is found on the Minnesota State Bar Association's website at:

Minnesota Bar  (Press Ctrl-F, and then type in "LLC" in the field. This will take you down to where it says "IRS May Not Levy on Assets of Single-Member LLC to Satisfy Tax Liability of Owner."

The Minnesota Bar web page was also saved to our site.

Also be sure to check the following URL:

Tax Law Center (Go to section 102.3 on page 36)

The substance of this memorandum concerns a taxpayer with membership interest (ownership) in an LLC, even a single member LLC, and the IRS is chasing after them because the IRS says you owe taxes. The IRS admits they cannot get to your LLC property. The IRS does have a couple remedies, although usually inadequate.

First, if you run your LLC improperly, e.g. you consistently write checks from your LLC bank account to pay for personal expenses (co-mingling of funds) the IRS can use the court and receive an "alter-ego" ruling wherein your LLC’s limited liability veil will be disregarded. Then your LLC membership interest (property) may be seized.

Secondly, although the IRS cannot attach LLC property, control the LLC, and become a member of the LLC (by law), they can take you to court and get rights to distributions of profit from the LLC that you would normally receive as a member of the LLC.

One way to sidestep this problem is to draft an operating agreement that entitles you or someone else to manage the LLC in the capacity of an independent contractor, and then charge the LLC a management fee. Thus, money is withdrawn from the LLC, but no profit distribution to member(s) is made. As a result the IRS ends up with nothing. It is important to note that this strategy has proven to be effective against all hostile creditors, not just the IRS.

It is important to note that the IRS needs to take you to court (a REAL court, not tax court*) to get rights to distributions of profit, or to get an alter-ego ruling against your LLC. The IRS rarely litigates against a middle-class individual of moderate net worth. In these cases the tax debt (and potential for collecting on the debt) is simply not high enough to warrant the expense of litigation. Therefore, even if you have an LLC and use it improperly, someone who places moderate amounts of cash or other assets in the LLC (maybe $50,000 or less) will have a certain amount of protection.

Nonetheless you would be well advised to structure your LLC so that it will stand up in court if it is litigated against.

In light of the above information, it is important to note it may or may not be appropriate to have a management and operating agreement for your LLC, although an operating agreement certainly never hurts, even for a single-member LLC (multi-member LLC’s should always have at least an operating agreement.)

PF Shield provides an excellent general-purpose management and operating agreement available at no extra charge to its existing clients. PF Shield has worked with an attorney to enhance these documents to meet asset protection needs.

If you are unsure as to whether or not you could benefit from an LLC operating and/or management agreement, please call us.

8 – Tax Court is really just a board of appeals that is excluded by law from participating in federal tax/debt collection procedure in §§3002(2), 3002(3)(b) of 28 USC, chapter 176.