II. Prejudgment: Protecting the Government's Ability to Collect Taxes
A. Introduction: Preserving the Status Quo
A collection case may take months, if not years, to progress to judgment. In order to prevent dissipation of assets during this time period and preserve the Government's priority against competing claimants, the trial attorney should evaluate the collection potential of a case even before suit is brought, and continue to consider collectibility during all stages of the case prior to obtaining a judgment.
Generally when the IRS requests the Tax Division to initiate a collection suit and the IRS is aware of assets that may be easily dissipated or moved beyond the Government's reach, the IRS will request that the Tax Division initiate litigation to preserve the status quo, including at times obtaining a Temporary Restraining Order (TRO). On occasion, however, a Tax Division trial attorney may learn of the existence of a fraudulent conveyance or the existence of taxpayer's beneficial interest in property where legal title is held by a nominee/transferee/alter ego of the taxpayer that was not known to the IRS. In that case, the trial attorney, after consulting with the section chief, should request the IRS to consider filing a nominee lien and should seek the IRS's views as to whether the Tax Division should file suit to set aside the fraudulent conveyance or determine that certain property is subject to our tax lien because legal title is held by a nominee, transferee, or alter ego of the taxpayer.
B. The Importance of the Notice of Federal Tax Lien
When we are reducing an assessment to judgment, either in a collection suit initiated by the United States as plaintiff or by way of counterclaim in a refund suit involving a divisible assessment, notices of federal tax liens should already have been filed2. In many cases where the 10-year statute of limitations is about to expire, the notice of tax lien will need to be refiled. Careful attention should be paid to ensure that the IRS does this. Notices of lien should be carefully reviewed because many notices state that they are self releasing if not refiled by the date shown on the notice. If the lien expires, a new notice of federal lien can be filed, but it may affect the Government's priority against competing liens.
When bringing a suit to set aside a fraudulent conveyance or to determine that real property is held by a nominee or alter ego of the taxpayer, the trial attorney should determine whether the IRS has filed a nominee lien notice, which serves to prevent the title holder from transferring the property beyond the Government's reach and also preserves the Government's priority position. If notices of federal tax lien have not been filed, the attorney should consider requesting the IRS to file them, bearing in mind that the filing will trigger the taxpayer's right to a post filing administrative hearing pursuant to I.R.C. § 63203.
C. The Presuit Letter and the Complaint
It is good practice to caution the taxpayer at the earliest opportunity that the United States will be seeking to recover all available costs of collection. As explained more fully below (see § III.D., infra), the United States is entitled to recover a ten-percent surcharge on the final judgment if certain conditions are met. Accordingly, if the trial attorney sends the taxpayer a presuit letter prior to bringing a collection suit, the following language about the surcharge should be included:
We will also seek to recover the 10% surcharge under 28 U.S.C. § 3011 in the event that we are required to use any of the remedies in subchapter B or C of the Federal Debt Collection Procedures Act (28 U.S.C. §§ 3101-3206) to collect this debt.
Simply mentioning the existence of the surcharge provision in a presuit letter may be enough to cause a prospective defendant to pay the underlying debt in full.
Similarly, in drafting complaints and counterclaims seeking money judgments you may want to specify that, if the United States must use any of the remedies in subchapter B or C of the FDCPA, then it will seek the ten-percent surcharge.
D. Lis Pendens
In all suits involving real property, the trial attorney should determine whether it is necessary to file a notice of lis pendens (pending litigation) promptly after filing the complaint. A notice of lis pendens should be filed if the property is not encumbered by a notice of federal tax lien. For example, if the taxpayer has an interest in the property but the property is held in the name of another and there is no nominee lien filed, a notice of lis pendens should be filed. If possible, the notice should be filed on the same day or within one or two days of filing the complaint, to ensure that the notice is filed before the complaint is served on the record owner of the land.
A properly filed notice of lis pendens, like a notice of federal tax lien, places anyone who might consider purchasing or acquiring an interest in property that is the subject of pending litigation on notice of the rights of the seller's adversary, and the purchaser would take the property subject to whatever valid judgment is entered in the litigation4. Without a notice of lis pendens (or notice of tax lien or nominee lien), the current record owner may be able to transfer or mortgage the property, possibly giving the transferee or mortgagee a claim prior to that of the Government.
E. Prejudgment Remedies Under the Federal Debt Collection Procedures Act5
The Federal Debt Collection Procedures Act, 28 U.S.C. § 3001 et seq., provides expressly for prejudgment remedies, such as attachment (§ 3102), receivership (§ 3103), garnishment (§ 3104), and sequestration (§ 3105), which the United States may seek in conjunction with its complaint or at any time after filing a civil action on a claim for a debt. 28 U.S.C. § 3101. The usual grounds for a prejudgment remedy are that, with the effect of hindering, delaying or defrauding the United States, the debtor is about to leave the United States, has or is about to conceal or destroy property, has or is about to convert property into money or securities to the prejudice of the United States, or has evaded service of process or temporarily left the United States. 28 U.S.C. § 3101(b)(1). Another potential basis for obtaining a prejudgment remedy is that the prejudgment remedy is required to obtain in rem jurisdiction within the United States, when the debtor resides outside the United States6. Prejudgment remedies require notice to the debtor and any person believed to have possession or control of property subject to the remedy, although the hearing may be postseizure7.
If the taxes and statutory additions involved in a collection suit exceed $50,000 and the United States applies for a prejudgment remedy, the United States may conduct prejudgment discovery regarding the taxpayer's financial condition in the same manner in which postjudgment discovery is authorized by 28 U.S.C. § 3015(a) and Fed. R. Civ. P. 69. 28 U.S.C. § 3015(b).
F. Injunctions and Receiverships
A broad range of equitable actions is available pursuant to I.R.C. §§ 7402(a) and 7403 to preserve a taxpayer's assets for collection, including an injunction to freeze or turn over assets8, repatriation of assets9, a writ of ne exeat republica to restrain a taxpayer from leaving the country10, or appointment of a receiver11. Where necessary, the Government can seek a temporary restraining order and preliminary injunction to preserve assets while litigating the merits of a permanent injunction.
G. Preparing for Collection by Obtaining Copies of Tax Returns
At the outset of the litigation, the trial attorney should consider obtaining copies of the taxpayer's income tax returns for all years commencing with the first year in suit (or for some more recent years) to determine potential sources of collection, since by the time the litigation is concluded the IRS may have destroyed some or all of the returns in accordance with its document-retention policy. Income tax returns should routinely be obtained in any case where the liability exceeds $25,000.12