Nominee and Alter Ego Liens: When the IRS Goes After Property in Someone Else's Name

A family member calls me holding a notice of federal tax lien with their own name on it, followed by the words "as nominee of" and their brother's name. They do not owe the IRS anything. But the house they hold title to, the one their brother lives in and pays for, is now encumbered by his tax debt.

That is a nominee lien. Its cousin, the alter ego lien, does the same thing with a business entity. Both let the IRS look past who holds legal title to who really owns the property.

The legal foundation

The federal tax lien under IRC 6321 attaches to all property and rights to property belonging to the taxpayer. If the taxpayer is the real owner of property titled to someone else, the lien attaches to it. A special condition notice of federal tax lien gives public notice of that claim and protects the lien's priority against other creditors.

IRM 5.17.14 describes the theories. The nominee theory allows collection from specific property held in the name of the taxpayer's nominee, where a third party holds the property while the taxpayer retains benefit, use, or control. The alter ego theory allows collection from all the property of the taxpayer's alter ego, where the taxpayer and the entity are so intermixed that their affairs are not readily separable. A transfer of legal title is not required for either theory.

Nominee factors the IRS looks at

IRM 5.17.2.5.7.2 lists factors that typically appear in nominee situations. No single factor decides it:

• The taxpayer previously owned the property.
• The nominee paid little or no consideration for it.
• The taxpayer retains possession or control.
• The taxpayer continues to use and enjoy the property just as before the transfer.
• The taxpayer pays all or most of the property's expenses.
• The transfer was made for tax avoidance purposes.

Common Texas fact patterns: a homestead deeded to an adult child for ten dollars after the IRS started calling; a truck titled to a girlfriend but driven and paid for by the taxpayer; a bank account in a parent's name that holds the taxpayer's paychecks; a ranch held in a family trust the taxpayer controls and uses.

The nominee lien attaches only to the specific property identified. It does not make the nominee liable for the taxpayer's whole debt or reach the nominee's other assets.

Alter ego factors

IRM 5.17.2.5.7.1 lists the alter ego factors, which will look familiar to anyone who has heard of piercing the corporate veil:

• Commingling of entity and personal finances, and using entity funds for personal expenses.
• Unsecured, interest-free loans between the entity and the owner.
• The taxpayer is an owner, director, or officer, or otherwise has substantial control.
• The entity is undercapitalized relative to its business risks.
• Failure to observe formalities such as records and meetings.
• Respecting the entity would produce an injustice or fundamental unfairness.

Alter ego works in both directions. Reverse piercing lets the IRS reach an entity's assets for the owner's personal tax. Traditional piercing lets it reach the owner's assets for the entity's tax. The manual notes that IRS Counsel's position is that federal common law, rather than state law, governs alter ego status, while nominee questions often turn on state law. Texas has its own statutory limits on veil piercing for private creditors in Business Organizations Code section 21.223; how those interact with a federal alter ego claim is a question where a Texas business litigator and federal tax counsel should work together.

The process: Counsel review and your rights

Revenue officers cannot file these liens on their own say-so. IRM 5.17.14.7.1 states that Area Counsel approves special condition liens and levies in nominee and alter ego situations. That review takes time, and it means the IRS has already built a factual file by the time the lien appears.

For property that is a principal residence, the manual notes a suit should be filed, because judicial approval is required to seize a residence. More generally, the government can sue under IRC 7402 and 7403 to establish that property held by a nominee or alter ego belongs to the taxpayer and to foreclose the lien. A suit gives the third party a full chance to contest the claim in federal court.

Third parties have administrative options too. A person whose property is wrongfully levied can file an administrative claim under IRC 6343(b) and, if necessary, a wrongful levy suit under IRC 7426. Those deadlines are short and strict. Someone named as a nominee can also ask for a certificate of discharge under IRC 6325(b)(4) by depositing or bonding the value of the government's claimed interest while contesting it. IRS Publication 783 describes the discharge process.

How to respond if you are named

If you are the third party, gather proof of genuine ownership: what you paid, where the money came from, who pays the mortgage, taxes, and insurance, who lives there or uses it, and why the property is in your name. A real purchase at a fair price with your own money is the strongest defense.

If you are the taxpayer, understand that the IRS is telling you it believes you hid assets. That changes the tone of every negotiation that follows. It can also overlap with fraudulent transfer claims and transferee liability. The fastest way out is usually a resolution of the underlying debt that accounts for the property, not a fight about title.

And if you are thinking about putting property in someone else's name because you owe the IRS, stop. You will not hide it, and you will drag a family member into your tax problem. My guide on IRS liens on Texas property explains what the lien does to property you own outright. Let's talk about real options instead: 813-229-7100.