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

The IRC says the tax levy is satisfied if the insurer pays over “the amount which the person against whom the tax is assessed could have had advanced” to that person by the insurer on the date prescribed by law for the satisfaction of the levy (plus any amounts advanced by the insurer after knowledge of the lien other than under a preexisting automatic premium loan provision in the policy).⁴

The IRS can reach funds in an annuity contract under the same summary levy procedure mentioned above.⁵ Further, the IRS also can reach insurance commission payments with a tax lien. For example, where several life insurance agents assigned their commissions to another agent and that agent, in turn, assigned the funds to an irrevocable trust, the IRS was able to reach the commissions to satisfy a tax lien against several of the agents.⁶