141 / Can the federal government reach the cash value of a taxpayer’s life insurance for collection of back income taxes?
Yes.
The law is well settled that state exemption laws cannot immunize the cash values of a taxpayer’s life insurance from federal tax collection. Moreover, the government can enforce its tax lien despite a gratuitous assignment of the policy with intent to avoid tax collection.1
Under a summary levy procedure, the IRS may reach the loan value of a policy subject to a tax lien, but the policy may be kept in force.2 The insurance company pays over the present loan value of the policy or, if less, the balance of the tax liability. The company also must pay the IRS the amount of any policy loans (other than automatic premium loans) made after the company had notice of the lien. The company is not liable, however, for policy loans made before it had notice of the lien, or for automatic premium loans made after it had notice if the automatic premium loan agreement was entered into before it had notice.3