IRS Sues Adult Children to Collect Their Parent's Tax Debt and FBAR Penalties

Tax debt is notoriously hard to get rid of. The IRS is a zealous creditor with some tax liabilities even surviving bankruptcy. If you owe significant unpaid taxes, the IRS has a variety of ways to collect on that debt. But could those collections affect your children? Find out what happened when the tax sins of the mother were held against her children.

One Year’s Tax Debt and FBAR Penalties Result in $1.9 Million in Lawsuit

In November 2007, according to an Amended Complaint filed by the Department of Treasury on behalf of the IRS, Patsy Weatherly was in Miami Florida when she signed documents opening a bank account at Stanford International Bank. The bank itself was located in St. John’s Antigua. Patsy put the account in the name of Nature Trade, Inc., a Panama corporation. She and her two children, Todd and Pamela Weatherly were listed as beneficial owners and authorized depositors.

It was a large account. It included an express account and over 70 certificates of deposit. Patsy held a credit card for the account, made deposits and withdrawals, and used the account for personal expenses. On December 31, 2008, the account was worth $3,654,840.40.

But Patsy didn’t disclose that account on her 2008 tax returns, and she didn’t file a federally mandated “Report of Foreign Bank and Financial Accounts” (FBAR, FinCEN Form 114). Instead, the government says Patsy filed federal income tax returns claiming over $600,000.00 in income, and no tax liability.

That tax return triggered an audit. After Patsy refused to cooperate with the IRS investigation, the government assessed $199,215.00 in tax debts, which together with interest and penalties totaled nearly $350,000 by the time the government filed its lawsuit to collect. In addition, the IRS assessed a willful FBAR penalty for failure to file the FinCEN Form 114. Altogether, as of May 1, 2019, the government said Patsy Weatherly owed $1,902,496.27 in tax debts and FBAR penalties.

U.S. Sues Adult Children to Collect Parent’s Tax Debts

The Treasury Department filing a lawsuit to collect unpaid tax debts isn’t unusual. However, including a taxpayer’s adult children as parties isn’t nearly as common. Still, when the Treasury Department filed its tax collections lawsuit in Florida in 2019 (after Patsy had agreed to an extended collections period), her children Pamela and Todd were added as defendants.

The government didn’t say that Pamela and Todd did anything wrong (though its First Amended Complaint did allege that Todd worked in the family business and was aware of his mother’s financial situation, foreign accounts, and tax liabilities). Instead, the Treasury Department was attempting to collect on assets it said Patsy had improperly transferred to her children to avoid tax collections.

Children Received Fraudulent Transfers, Treasury Department Says

The government’s case centered around a revocable trust Patsy created for herself and her two children in 2014 -- after the IRS learned of the missing FBAR report. The Treasury Department said that Patsy was intentionally and fraudulently disbursing her assets to avoid paying her tax debts by transferring two Florida properties into the trust and using it as a way to distribute the sales of the accounts to her children along with substantial direct cash transfers.

According to the First Amended Complaint, all transfers from Patsy to her children after she incurred the 2008 tax debts and FBAR penalties in 2009 were suspect, especially those that occurred after the IRS put Patsy on notice that her account was being audited in September 2013. Todd -- who acted as the revocable trust’s beneficiary -- received:

• $100,000.00 in January 2013
• $65,666.00 in February 2013
• $226,596.16, as one half the net proceeds from the sale of the Pine Avenue property in October 2013
• $394,251.90, as most of the net proceeds from the sale of the River Road property in January 2014
• $73,000.00 in February 2014

In total, between January 2013 and July 2014, the government said Patsy transferred $859,262.16 to Todd. Meanwhile, Pamela received:

• $8,791.00 in January 2013
• $104,962.10 in February 2013
• $226,596.16, as one half the net proceeds from the sale of the Pine Avenue property in October 2013

In total, the government said Patsy transferred $340,349.25 to Pamela over the same period.

The government said it was entitled to sue Todd and Pamela to collect their parent’s tax debt based on federal and state “transferee liability” for fraudulent transfers. It claimed this was appropriate because:

• The transfers were made to her children as insiders
• Patsy concealed the assets by using a trust
• Patsy received no equivalent value in exchange for the transfers
• She transferred a substantial portion of her assets
• The transfers happened after she incurred the tax debts
• Some transfers happened while Patsy was being audited
• Patsy was left with an unreasonably small amount of assets compared to her tax debt

Patsy’s children filed a motion to dismiss the claims against them for their parent’s tax debt. However, while the Florida judge said the original complaint needed to be supplemented with additional facts, he refused to dismiss the claims of fraudulent transfers. If the judge eventually determines that the children owed transferee liability to the U.S. government it could be up to them to produce hundreds of thousands of dollars each to pay back their parent’s tax debt.

Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you have questions regarding family members’ obligations regarding IRS tax debt collection efforts, contact Joe Viola to schedule a consultation.