IRS Has a Right to Attach IRAs, Other Assets to Settle Taxpayers’ Delinquent Bills

Q. Can the Internal Revenue Service attach my individual retirement account to settle a delinquent tax bill? I am unsure what retirement assets the IRS can get to in such circumstances.

--S.W.

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A. According to Frederick W. Daily, a San Francisco tax lawyer and author of the book “Stand Up to the IRS,” the agency can attach any asset you can tap into directly on your own.

What does this mean? It means pension funds that are accumulating on your behalf but that you have no direct access to, such as a corporate retirement account, are beyond the reach of the IRS. The same holds with Social Security benefits accumulating on your behalf but not yet payable to you. However, just as individuals are able to tap into their 401(k), IRA, SEP (simplified employee pension plan) and Keogh accounts before official retirement age to settle back taxes, so too, technically, can the IRS. And once you start receiving Social Security payments, your funds could be attached.

But, Daily says, there is a difference between what the IRS is legally permitted to do and what it actually does. In fact, Daily says, the IRS generally does not seize retirement assets. And, he says, senior-level district approval is required before such attachments are made.

Nevertheless, be advised that the IRS is not beyond attaching--or threatening to attach--these accessible retirement funds in cases in which taxpayers refuse to cooperate with efforts to secure their compliance with our nation’s tax laws. The bottom line is that you should expect the IRS, even in its kinder and gentler incarnation these days, to push delinquent taxpayers to settle their bills.

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Q. I know that inherited assets are valued as of the donor’s date of death. But how do I determine that?

--D.W.R.

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A. Generally, the basis for inherited property is the donor’s date of death. However, if the executor of the estate chooses, the basis can be set as of a date six months after the donor’s death. But this is not the common practice. The method of arriving at the value is the same regardless of the date being used.

If there is an active market for the asset, such as the stock exchange, it is rather simple. In these cases, the value of the shares is determined by taking an average of the stock’s high and low trading prices on the date of death or alternative valuation date. A common misconception--one perpetuated here recently--is that the basis is set according to the stock’s closing price. Actually, it’s the average of the day’s trading range.

If the asset in question is real estate, for which there is currently a more active market, you should use recent sales figures for properties comparable in value to yours. You might be able to do your own research if you are familiar with the property, neighborhood and local sales climate. Otherwise, a real estate agent can be helpful. You can generally expect willing assistance if there’s a sales listing in the offing. If a sale isn’t on the immediate horizon, it is probably fairer to pay for the services of a professional real estate appraiser.

For artwork, jewelry and other collectibles, you should consider the services of appraisers and/or sales professionals, including auction houses if your inheritance is of that quality. The reference sections of some public libraries contain volumes listing the prices of artwork and collectibles sold at auctions.

Determining a tax basis is particularly important if you envision selling the asset in the future. If you would never consider selling your aunt’s gold watch, then establishing its tax basis is irrelevant. However, if you think you might sell it (or be forced to by circumstances), then you should establish its worth at your inheritance rather than trying to reconstruct its past value. This can save a lot of trouble and--if the asset is particularly valuable--what could be some sharp questions from the IRS.

Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053 Or send e-mail to carla.lazzareschi@latimes.com