Tax Lawyer's Blog

WebCPA reports that Joe Francis of “Girls Gone Wild” fame has filed a lawsuit against the IRS for illegal collection activities (emphasis added):

[S]hortly after the judge accepted his plea deal, the IRS filed a lien for $33,819,087.14 for three years of back taxes, from 2001 to 2003 (see IRS Files $34M Lien Against ‘Girls Gone Wild’ Founder).

Francis claims in his lawsuit that the IRS moved to freeze his assets within three hours after he left the courtroom, according to TMZ.com. He claims that the only circumstances under which assets can be frozen are if the taxpayer is preparing to flee the country, if the taxpayer is attempting to move assets out of the reach of the IRS, or if the taxpayer appears to be going bankrupt.

Francis contends that the only reason the IRS would be trying to freeze his assets is revenge and he is asking the judge to unfreeze his bank account.

Purpose of federal tax lien

Internal Revenue Manual § 5.12.2.1 titled Purpose and Effect of Filing a Notice of Federal Tax Lien (NFTL) states:

Internal Revenue Code Section 6321 provides that three conditions must be met before the IRS can issue a federal tax lien:

A Federal Tax Lien (FTL) is created by statute and attaches to a taxpayer’s property and rights to property for the amount of the liability. This is the “statutory” or “silent” FTL.  The following must occur for the FTL to arise:

1. An assessment must have been made.

2. A demand for payment must have been made.

3. The taxpayer must have neglected or refused to pay. (As a matter of IRS policy the taxpayer is normally given 10 days from notification to pay the amount due.)

There simply is no requirement that the IRS show that the taxpayer is “attempting to move assets out of the reach of the IRS or [that he] appears to be going bankrupt.”

Exhaustion of administrative remedies as condition precedent for IRS lawsuit

Upon receipt of an IRS levy a bank is required by law to hold the taxpayer’s funds for a period of 21 days before remitting them to the IRS.

If the IRS erroneously issued a levy on Mr. Francis’ bank account, he should have immediately requested a Collection Due Process (CDP) hearing to get the matter reviewed administratively by an IRS appeals officer.

If Francis failed to ask for a CDP hearing, he may not be able to confer jurisdiction on the Court because the law requires that a taxpayer exhaust all administrative remedies before filing a lawsuit for damages against the IRS.

Stay tuned.

UPDATE: A reader named Scott Nix made the following observation:

This is a jeopardy assessment, a jeopardy FTL and jeopardy levy. From a procedural standpoint, the IRS must show that collection is in jeopardy. This is collect first and ask questions later. If Mr. Francis has $100 million in the bank and he is not a flight risk, then the IRS will lose. Really, the IRS should lose if collection is not in jeopardy.

I partially agree with Mr. Nix. If the assessment and levy were done under the jeopardy collection rules, Mr. Francis might have a case.

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