Can the IRS take your home? Find out what you can do to fight back

Written by MLHA Team

November 24, 2021

Today, I want to respond to several questions that I am frequently asked. It seems like everyone wants to know some of the same things.

So, here goes:

Whenever someone comes to my office, I normally have to ask them what kind of business entity they use.

I expect them to say that they use a C corporation, an S corporation, a partnership, a limited partnership, etc.

Almost without exception, I am told they are using an LLC, but they have no idea what that really is or why it matters for tax purposes.

Folks, an LLC is just a state-created entity that limits your liability for claims made against you. It is not a typical “federal” type of entity. As a result, it has to elect how it wants to be taxed under federal tax law. So, when the entity is formed and the first tax return is filed, the LLC must make an election as to how it wants to be taxed under the federal tax laws.

For example, if the LLC wants to be taxed as a sole proprietorship, then it will file a Schedule C with your normal Form 1040. If it wants to be taxed as a C corporation, then it must file a Form 1120, as would any other C corporation. And so it goes.

So, let me say that again. An LLC is simply a state-created limited liability company that must make an election with the Internal Revenue Service as to how it wants to be taxed for federal tax purposes.

That’s really all there is to it.

More:Don’t think like a victim when fighting the IRS

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Almost without exception, wives ask me whether or not their homestead can be sold by the Internal Revenue Service to pay the taxes that they owe. Typically, this is not the primary concern of the husband but it definitely is of the wife, especially if there are children involved.

The formal legal answer is yes, the IRS can seize and sell your homestead to pay income taxes. It can do so administratively, but more often it has to go into court to do so. There are defenses to this, including hardship defenses, which can be very effective.

However, the practical answer is no; the IRS will rarely attempt to seize and sell a home. There are a number of difficult factual and legal hurdles that the service must overcome before it can do so. It would much prefer to work out an administrative resolution without litigation.

Also, seizure and sale can be especially difficult if only one of the spouses is liable for the taxes. For example, this can occur where separate returns are filed, or the tax is for unpaid payroll taxes, etc. This can be a real problem for the IRS in a community property state.

I typically ask clients to bring their spouses to the first conference. The reason for this is I have a lot of confidence in being able to work out a resolution that’s favorable and I want both spouses to know that and exactly what is happening.

Sometimes there is a failure of accurate communication between spouses. One spouse may very well feel like the danger is much greater than what the other spouse is telling them. So, I want them to hear it directly from me unfiltered, and not through the other spouse.

So, folks, here’s the deal. If you owe taxes to the IRS, know that the house likely can be saved and bring your spouse to your first conference with your tax representative. And if a business is involved, know what kind of entity your business is being taxed as.

David Leeper is a board certified federal tax attorney with 40 years of experience. He may be reached at 915-581-8748, davidp@leepertaxlaw.com and leepertaxlaw.com.

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