Here is a familiar move: the IRS is closing in, so the house gets deeded to a brother-in-law, the boat gets titled to a girlfriend, and the business assets get moved into a new LLC. Everything else stays the same. The taxpayer still lives in the house, sails the boat and runs the business.
It rarely works. IRM 5.17.2.5.7 says attempts to transfer assets to entities controlled by the taxpayer or friends or relatives "will generally be unsuccessful, because the federal tax lien extends to property held by a third party if that third party is either the alter ego or the nominee of the taxpayer." And the IRS has a specific tool to put that on the public record: the special condition notice of lien.
Why the lien follows the property
The starting point is section 6323(h)(6). Only a purchaser who pays "adequate and full consideration" is protected against an unfiled lien. IRM 5.12.7.6 explains that when a taxpayer transfers property without receiving adequate consideration, the transferee is not a purchaser, does not qualify for the protection of section 6323, and competes against the statutory lien based on the assessment date rather than the notice filing date. In plain terms: if you gave it away after the tax was assessed, the lien probably came along.
Even without a transfer, the lien reaches property that is really the taxpayer's. The Supreme Court's framework in Drye v. United States, 528 U.S. 49, asks what rights the taxpayer has under state law and whether those rights are property under federal law. Bare legal title in someone else's name is not the end of that inquiry.
Four kinds of special condition notices
IRM 5.12.7.6 identifies four: nominee, alter ego, transferee and successor in interest.
Nominee
IRM 5.17.2.5.7.2 defines a nominee as someone designated to act for another, generally a third party who holds legal title to the taxpayer's property "while the taxpayer enjoys full use and benefit of that property." Nominees are usually individuals or trusts. The manual lists typical factors, none of which is decisive alone:
- The taxpayer previously owned the property.
- The nominee paid little or no consideration.
- The taxpayer retains possession or control.
- The taxpayer continues to use and enjoy the property as before.
- The taxpayer pays all or most of the property's expenses.
- The conveyance was for tax avoidance purposes.
IRM 5.12.7.6.1 adds circumstances revenue officers consider, such as the taxpayer paying maintenance expenses, using the property as collateral for loans, or paying state and local taxes on it.
A nominee notice names the title holder as nominee of the taxpayer. The manual's example name line is "My Brother-In-Law or My Trust, Nominee of TP." Because the nominee theory usually concerns specific assets, the notice usually identifies the specific property it attaches to.
Alter ego
IRM 5.17.2.5.7.1 describes alter ego as a "second self," a doctrine that disregards an entity's separate identity. If a corporation is the taxpayer's alter ego, its assets can be used to pay the individual's tax ("reverse piercing"), and vice versa. Typical factors include commingling of corporate and personal finances, corporate funds paying personal expenses, unsecured interest-free loans between the company and the owner, the taxpayer's control, undercapitalization, failure to observe corporate formalities, and an element of injustice if the separate entity is respected. The name line reads, for example, "ABC, Inc., as Alter Ego of TP." Unlike a nominee notice, the manual says an alter ego notice is not limited to identified property. The manual also notes that, generally, an alter ego should not be asserted in transactions involving only individuals.
Transferee
Where property was transferred for less than adequate consideration, a transferee notice identifies the specific property on its face, according to IRM 5.12.7.6.
Successor in interest
Where state law makes a successor primarily liable for a predecessor's debts, a successor-in-interest notice may be filed, and like the alter ego notice it is not limited to identified property.
Built-in safeguards
These notices are serious, and the IRS treats them that way internally:
- Counsel approval. IRM 5.12.7.6 says a special condition notice "may not be filed without the written approval of Area Counsel."
- Purpose. The manual says a special condition notice is generally intended as a foundation for enforcement action such as levy, seizure or a suit to foreclose the lien.
- Not always needed. If a regular notice was filed against the taxpayer before the transferee sold or encumbered the property, the IRS's lien is already perfected and a special notice may not be required.
- Timing of the transfer. IRM 5.12.7.6 says that generally no fraud is indicated if the transfer was made when no tax liability had accrued or was anticipated, or the taxpayer kept no use or control of the property.
If you are named as a nominee or alter ego
You are not the taxpayer, so some taxpayer remedies do not belong to you, but you are not without options.
- No CDP hearing. Treasury Regulation 301.6320-1(b), Q&A-B5, says a nominee or a person holding the taxpayer's property is not entitled to a CDP or equivalent hearing, but may seek reconsideration by the IRS office that filed the notice.
- Collection Appeals Program. IRM 5.12.6.4 says CAP is available to third parties named as nominees, alter egos, transferees or successors in interest to dispute the filing of a special condition notice.
- Withdrawal. IRM 5.12.9.3.4.1 says the person subject to a special condition notice may request withdrawal under any of the section 6323(j) grounds. Where the situation has been resolved, for example the specified property was sold and the IRS received an amount equal to its interest, withdrawal of the special condition notice will generally be granted under the best interests ground.
- Nonattachment. If it is determined that you are not a nominee or alter ego, or the special notice was filed in error, IRM 5.12.10.13 says a certificate of nonattachment may be considered. See the certificate of nonattachment.
- Substitution of value. Section 6325(b)(4) lets the owner of property subject to the lien, who is not the taxpayer, obtain a certificate of discharge by depositing money equal to the government's interest or furnishing an acceptable bond, and then contest the matter in an action under section 7426(a)(4). That can free a specific asset while the dispute is resolved.
Evidence matters most. Show what you paid, where the money came from, who pays the expenses, who lives there, who uses it, and when the transfer happened relative to the tax.
Transfers before the tax was assessed
Timing cuts both ways. IRM 5.17.2 describes the IRS's position on unrecorded conveyances as limited to bona fide conveyances made before the assessment that extinguish all of the taxpayer's interest, and says a conveyance is not bona fide if the taxpayer retains control over the property. A genuine sale or gift completed long before any tax problem, where the taxpayer walked away from the property, is a very different case from a deed signed the week a revenue officer called.
If you are the taxpayer thinking about a transfer
Do not. A transfer after the assessment generally does not escape the statutory lien, and a transfer that looks like an attempt to hinder collection invites a nominee or alter ego notice, a fraudulent conveyance claim, and closer scrutiny of everything else. The better path is to deal with the lien directly: payment arrangements, withdrawal where available, or a certificate of discharge or subordination for a specific legitimate transaction. Start with the secret lien versus the public notice and liens on jointly owned property.
A new name on the title does not change who really owns the property. The IRS looks past the paperwork.