Question re: Tax Levies and LLCs

I'm going to assume that it's a notice of lien that's been filed, not a levy. There's a huge difference. The statutory lien attaches to all of the taxpayer's property, so it attaches to his interest in the LLC. The house itself is the property of the LLC, so the lien does not attach to the house. The other owners are not at financial risk. "Levy" is the process which turns a lien interest into cash. In theory IRS could attempt to do so with his interest in the LLC, but I think the process would be somewhat complicated. I got out of the tax collection business before LLC's (there is a God), but I would think that a foreclosure suit would be required, and I'm not sure that even that could force a sale of the house, with only the taxpayer's share of the proceeds going to the government. Any chance of the delinquent taxpayer paying up and making all this go away? I'll close with a caution. If there's anything to be concerned about, it's not going to happen overnight. I'm not suggesting you're considering it, but don't get cute at this point of the story and try somehow to get him uninvolved with the LLC.

-- Phil Marti Clarksburg, MD

wrote

The LLC assets are not at risk. The IRS (and state if they are owed too) can lien on the shares and may direct the LLC to make any profit distributions (any physical checks) to them instead of the partner. So if/when the house gets sold, and the profits are to be distributed, his share goes to them if the debt is still there. My suggestion is to get this partner to get the IRS debt settled. While not a huge problem for the other 3 members of the LLC, it is something to be dealt with that is out of the norm.

-- Paul Thomas, CPA snipped-for-privacy@bellsouth.net

The IRS has the right to levy on the member's interest in the LLC, but at most can become a mere assignee of that interest and not a member of the LLC. As a result, the IRS is only entitled to the economic benefit of that interest under the terms of the LLC operating agreement, and has no right to exercise any of the non-economic rights of a member, e.g., voting rights or rights to cause a liquidation of the LLC. Finally, unless the operating agreement provides otherwise, state LLC laws generally provide that a membership interest in an LLC is personal property and does not give the member an ownership interest in any of the assets held by the LLC. As a result, while the IRS will be entitled to receive the affected member's share of any distributions the LLC makes to its members, the IRS cannot force those distributions to be made unless the operating agreement provides for mandatory distibutions in all events. Further, the IRS will not be able to cause the LLC to liquidate or to sell or distribute its assets, including the house. Essentially, the most the IRS can get is what's called a charging order against the economic benefits that flow from the membership interest, and can therefore merely take possession of any cash or other property that the LLC actually distributes out to the member in question.

The IRS might be able to levy on the membership interest, but depending on the state statute and the operating agreement that does not necessarily mean that the IRS can get to the underlying property or force any distributions.

snipped-for-privacy@gmail.com

Would the answer be the same were the entity a LLC with just a single member?

As a practical matter, so long as there are bank accounts and/or wages to levy, the IRS will ignore the personal property interest of the partner in the LLC entity. The IRS tends to follow the path of least resistance. Theoritically, the IRS could levy on the ownership interest in the LLC, but the resale value of such a minority interest in a family run LLC is so low (almost zero) that there is no economic incentive for the IRS to undertake the levy. Levies on bank accounts and wages work MUCH better for the IRS.

OTOH, if the LLC is regularly distributing income to the LLC members, there is a risk that the IRS will levy the distributions owed by the LLC to the member with the tax problem. Your family member really needs to get a payment agreement with the IRS to stop the whole levy issue.

I assume that the single member would be the person with the threatened lien/levy? If so, the answer is, it depends. If the LLC is set up properly and its separate legal existence is properly respected for all non-tax purposes; i.e., all corporate formalities are punctiliously observed, and if applicable state LLC law provides (as most if not all do) that the member has only a property interest in their membership interest, not in the assets of the LLC, then as a general rule the IRS will not be able to levy directly on the LLC's assets because the single member is not the owner of those assets for lien/levy purposes. It needs to be emphasized, as the IRS itself has recognized, that the treatment of a single member LLC for income and payroll tax purposes, i.e., by disregarding the LLC's separate existence, does not necessarily apply to lien/levy issues where, as a general matter, what controls is the existence or non-existence of property rights under applicable state law. See, e.g., Chief Counsel Advice