Legal Blog: ‘RHONJ’ Teresa & Joe Giudice Face $551,563 Tax Lien

When Uncle Sam calls, you take action and do the best that you can. The Internal Revenue Service (IRS) has hit “Real Housewives of New Jersey” stars Teresa and Joe Giudice with a $551,563 tax lien, according to court documents.

A federal tax lien is, for all intents and purposes, a legal claim to a taxpayer’s property.  It arises by operation of law when federal tax is assessed against the taxpayer’s property, and remains unpaid after demand for payment by the United States.  A federal tax lien attaches all property and interest in property owned by the taxpayer at the time it arises.  Associated with tax liens are interest, penalty fees and lots of notices from the IRS before the lien is actually filed.

In this case, the tax lien, filed with the Morris County Clerk on Oct. 21 in both Joe and Teresa’s names, reveals unpaid tax bills for nine years spanning from 2000 to 2013. These include the years for which Joe Giudice was previously charged for failing to file his taxes as part of a 41-count indictment in 2013. 

Teresa and Joe previously pleaded guilty to mail, wire and bankruptcy fraud. Joe Giudice also pleaded guilty to tax fraud.  (Teresa did not face tax charges.)  Joe Giudice acknowledged that he did not file taxes on income of more than $990,000 between 2004 and 2008. 

READ: GUILTY: Teresa And Joe Giudice Are Convicted Felons

A lien is a very public declaration of the IRS’ claim to property in relation to the Giudices’ other creditors.  The lien will appear on credit reports and the agency can appropriate houses, cars, income and bank accounts. Because the IRS holds a lien against all of an individual’s property and assets, it may seize property at any time to satisfy the debt.  Creditors use liens as a way of securing or enforcing a debt. If the debtor does not pay the debt secured by the lien, the creditor may be able to force payment through the courts.  Typically the party who is delinquent is notified months in advance that the government is going after property if he or she neglects or fails to pay a tax debt.

READ: EXCLUSIVE: Get in Line! Creditors Set to Collect From Giudice Mansion Foreclosure

Once the IRS files a lien, it can begin collecting on the debt by levying the Giudices’ bank accounts and property, such as homes and automobiles, and garnishing their wages, or seizing accounts receivable, if they own a business.  (The implications of how a corporate structure may impact tax responsibilities will be discussed in detail below.)

The tax lien was filed the day before the Community Bank of Bergen County issued notice that it was ending its foreclosure proceedings on the Giudices’ Towaco, New Jersey home. Under the law, property tax liens are granted first lien status and are superior over other liens, including mortgages, regardless of whether the mortgage was recorded before or after the tax lien. The notice issued by the Community Bank of Bergen County allegedly said that the couple had made good on their missed monthly mortgage payments.  But the reality TV couple’s legal headaches are far from over.

The reason the aforementioned discussion about the mortgage on the Towaco, New Jersey property is relevant is because if the Giudices’ mortgage lender forecloses on their home in the future due to the couple’s failure to pay the mortgage, and the home carries a tax lien, the lender must give the IRS 25 days’ notice, at a minimum, that it intends to foreclosure before it can clear the tax lien and seize the property. The IRS’ security interest does not clear for a total of 120 days, thereby giving it the right to pay off the mortgage and “reclaim” the property from either the lender or the new owner. This wrinkle in the law makes foreclosed homes that carry federal tax liens very difficult for lenders to sell.

Once Mr. and Mrs. Giudice learned of this tax delinquency, do you think they had a check for the full amount hand-delivered to the IRS?  To get rid of a lien, you have to satisfy your tax debt in full. You can do this by paying the debt or allowing the IRS to seize your property.  Once the tax debt is satisfied, the Giudices will have to ask the IRS to remove the lien by filing a form.

Future lenders and creditors can view the outstanding tax lien whenever they pull the Giudices’ credit files. This can adversely affect their ability to qualify for financing, credit or insurance. 

Is there an “out” for the Giudices? The IRS might not seize all the property they need to satisfy the debt if it is agreed that the Giudices are suffering severe or unfair “economic hardship.”  Economic hardship is defined as a seizure that would hinder one’s ability to meet “basic, reasonable living expenses.”  Moreover, the agency is more likely to look sympathetically on someone who admits they are off track and wants to work it out than someone who is being evasive and not responding to the IRS. 

If the Giudices are transparent and honest about their overtures to negotiate a payment plan, that approach will bode well for them.  Also, all federal tax liens have a 10-year life span. After 10 years, the lien expires and, although this would not exonerate the Giudices from the tax debt they owe, it would prevent the IRS from forcibly seizing any assets in lieu of payment.

Could there be more jail time in store for the Giudices?  While jail is unusual, it is always a possibility. If the government deems that the Giudices have willfully failed to file or filed fraudulent returns, the IRS could see it as an attempt to defraud the government. Predictably, those cases where the IRS observes that a lot of income is being hidden and there is a pattern of wrongdoing, the IRS will pursue a jail sentence.

Some posters are understandably curious about corporations created by the Giudices and whether those corporations can be impacted by this particular tax lien.  Property owned by a limited liability company, or LLC, can have a lien placed against it by a creditor.  However, a major advantage of organizing a business as an LLC or an S Corp is that you can protect your personal assets from the creditors of your business. These business models provide some protection but not a 100% guaranteed safety net. If the Giudices establish a business as a Corporation or LLC, the IRS must take specific measures to pierce the corporate veil – a legal term of art – to assess the Giudices personally with a portion of the tax debt. 

Debts accrued by the business do not pass through directly to the owners in a Corporation or LLC situation. Thus, even the IRS must respect the legal protections created by the formation of a Corporation or LLC.  While it is generally true that assets in the name of an LLC or S Corp may not be levied upon to satisfy something like the Giudices’ personal debt, it is all too common for the creditor to pierce the corporate veil and argue that the Giudices’ business are one in the same. Where the corporation is being used to protect a wrongdoer from liability for his or her actions, the courts will reach behind the curtain – piercing the corporate veil – in order to hold accountable the individuals who are abusing this legal privilege for their own ends.  If successful, the creditor will be able to go after any assets that are in the name of the business, in addition to the Giudices’ personal assets. 

It should be noted that generally courts have a strong presumption against piercing the corporate veil, and will only do so if there has been serious misconduct like the intermingling of personal and corporate assets or undercapitalization at the time of incorporation.  

A tax lien is the first step the IRS takes to begin the forcible collection of tax debt. It secures the government’s right to your personal property, which could be housed somewhere deep inside an LLC or S Corp. Grab your gavel, join the conversation, and tell us what you think about the latest tax woes to impact the cast of characters on the Garden State edition of the “Real Housewives” series.

 

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