Liquid Assets in Tax Relief Cases

In the context of Internal Revenue Service (IRS) tax relief and liability resolution, the term liquid assets refers to the value of those assets, holdings, deposits, and investments that may be immediately applied to a taxpayer’s tax liability as part of a resolution of the liability.

The general rule in determining an asset value for collection purposes is quick sale value. Quick Sale Value is an estimate of the price a seller could get for the asset in a situation where financial pressures motivate the seller to sell in a short period of time, usually 90 days or less. Generally, the quick sale value is calculated at 80% of fair market value. A higher or lower percentage may be appropriate depending on the type of asset and current market conditions. Internal Revenue Manual Section 5.15.1.16 (05-09-2008). An exception to the general rule of using quick sale value to determine a delinquent taxpayer’s asset value are assets that the IRS deems liquidable.

A taxpayer’s access to liquid assets is a primary question that must be determined before an income and expense analysis has any significance for tax resolution purposes. Hence, an initial question in any tax collection interview completed by the IRS is whether the taxpayer has the ability to satisfy their tax liabilities by accessing cash, or converting other assets to cash, to pay the taxes that are owed. Internal Revenue Manual Section 5.15.1.2 (10-02-2009).

Although there are many types of assets that the IRS may consider to be liquidable, there are several asset types that are common to most taxpayers:

Cash Assets

Cash assets are not subject to a quick sale reduction and generally include currency on hand, bank account balances, and securities belonging to the delinquent taxpayer. Careful attention is needed to skillfully and accurately present the true value of cash assets for the purpose of an IRS collection review. Taxpayers with significant cash holdings should seek tax resolutions that either apply their cash assets to their liability, or resolutions that do not require disclosure of such holdings.

Whole Life Insurance Policies

Whole life insurance policies are treated by the IRS as an investment that may be quickly converted to cash. The IRS will seek application of the cash surrender value of the policy and/or the loan value that may be obtained against the value of the policy. Therefore, careful review of the current state of the taxpayer’s policy is important in determining the liquidity of a taxpayer’s whole life insurance policy.

Retirement or Profit Sharing Plans

Funds held in a retirement or profit sharing plan are considered an asset and may be reachable by levy. Internal Revenue Manual Section 5.15.1.23 (05-09-2008). However, the liquidity or treatment as income of such accounts by the IRS are specific to the terms of the specific investment plan and the circumstances of the taxpayer. Account funds that can be borrowed against or accessed are treated as liquidable by the IRS. However, allowable reductions in the total asset value must be presented and advocated to the IRS.

Furniture, Fixtures, and Personal Effects

A taxpayer’s furniture, fixtures, and personal effects are an exception to liquidable assets even though they usually can be converted to cash. With the exception of articles of extraordinary value, such as: antiques, artwork, jewelry, or collector’s items, the IRS usually doesn’t pursue conversion of these items by the taxpayer to satisfy the delinquent tax liability. The IRS has recognized the impracticality of liquidating such assets by setting exemptions for such items that are subject to collection and are updated on a regular basis.

Income-Producing Assets

Income producing assets are usually in the form of vehicles, tools, real properties, and commercial properties. When determining the reasonable collection potential, an analysis is necessary to determine if certain assets are essential for the production of income. When it is determined that an asset or a portion of an asset is necessary for the production of income, it may be appropriate to adjust the income or expense calculation for that taxpayer to account for the loss of income stream if the asset were either liquidated or used as collateral to secure a loan. Internal Revenue Manual Section 5.15.1.18 (05-09-2008). However, should the taxpayer be able to sufficiently demonstrate that the asset is necessary for the production of income, the IRS normally does not require that such asset be liquidated.

Real Estate

The taxpayer’s use of real estate property holdings is determinative of the IRS’s treatment of a taxpayer’s real estate property. Subject to exceptions, the IRS normally does not require a taxpayer to vacate and liquidate their domicile or real estate property used for the production of income, to satisfy the tax liability owed. However, the IRS will require a delinquent taxpayer to access their equity in real property holdings regardless of its use classification. Hence, a taxpayer will be required to seek a loan against their equity in real properties, or demonstrate that they are not able to obtain any financing against their equity.

Vehicles

The IRS normally treats primary vehicles and vehicles used for the production of income as non-liquidable. However, the IRS does treat non-primary vehicles as excessive and subjects such vehicles to liquidation.

Conclusion

Treatment by the IRS of an asset as liquidable is dependent on the use and classification of the asset. Therefore, careful analysis and organization of a taxpayer’s assets must be completed before presenting a tax relief solution to the IRS. The tax attorneys at Montgomery & Wetenkamp provide tax relief representation and can assist taxpayers in resolving their tax headaches. For more information regarding IRS tax liabilities or other tax issues, contact Montgomery & Wetenkamp at (800) 454-7043 or mwattorneys@mwattorneys.com.