The U.S. Tax Code administratively grants the power of levy and distraint to the IRS to collect any tax. That means that the IRS, after certain legal requirements are met, may levy (take) the property of a delinquent taxpayer to satisfy that unpaid tax (including penalties and interest).
There is a very limited list of property that is exempt from the power. Some examples include, unemployment benefits, worker’s compensation payments, wearing apparel and school books. However, see Federal Payment Levy Program below.
In most cases, the IRS is required to issue a Final Notice of Intent to Levy and offer an opportunity for a hearing before the Office of Appeals at least thirty days before the levy. If a taxpayer owes for multiple years, any particular notice may or may not include all years. For example, a taxpayer may owe for multiple tax years and receive a separate notice for each year or all the years could be included on a single notice.
The notice will allow the taxpayer thirty days to file a request for a hearing before the Office of Appeals (use Form 12153, which should be received with the notice). If the taxpayer’s request is timely, the IRS cannot commence levy action (some exceptions apply) and the collection statute of limitations (normally 10 years) is suspended until the appeals process is concluded, plus 90 days (90 days will be added or tacked to the 10 year statute of limitations).
At the appeal hearing, the taxpayer is required to offer a “collection alternative” to the levy action. Such alternatives can include entering into a monthly installment payment agreement or submitting an offer-in-compromise. The hearing officer will not consider an alternative to levy action if the taxpayer is not in full compliance with any tax return filing requirement (any missing returns would need to be promptly filed) and must submit detailed financial information within certain specified time limits. Additionally, innocent spouse issues may be raised at this hearing.
If an agreement with the hearing officer cannot be reached, a Notice of Determination will be issued by that officer sustaining the levy action. That notice gives the taxpayer thirty days to file a case with the U.S. Tax Court to determine if the appeals officer abused his or her discretion.
VERY IMPORTANT: At the appeals hearing the taxpayer is allowed to challenge whether the underlying tax liability is actually owed. The taxpayer must substantiate that he or she did not receive the Statutory Notice of Deficiency related to that tax liability, or did not otherwise have an opportunity to dispute the existence of the tax liability.
Raising any issue concerning the legality of the tax owed at this hearing is crucial for two reasons. First, if the hearing officer agrees that the tax is not owed (either fully or partially) that officer can have the appropriate adjustments to the liability made. Second, and most importantly, raising the issue at the appeals hearing will preserve that issue for any follow-up judicial review. This is a jurisdictional issue. If the taxpayer fails to raise the issue at the appeals hearing, the Tax Court will not have jurisdiction to decide whether the tax is owed or not because the court will only review the administrative record of the case. Any new issue, not previously included on that record will not be reviewed by the court.
If the taxpayer files a late appeal (up to one year from the date of the notice), the IRS will still allow the case to be heard by the Office of Appeals. However, the IRS is not, by law, prohibited from taking levy action. Generally, the IRS will usually halt any proposed levy action until Appeals is finished with the case as a matter of policy.
After the notice period has expired (and no hearing was requested or the appeal was denied), the IRS is, of course, free to levy any non-exempt assets or income. However, banks and wages are a favorite target. In most cases, the taxpayer will become aware that their bank was hit when they get a letter from the bank (or checks begin to bounce, or they cannot get money out of an ATM) advising that their account is frozen. The bank is required to hold the funds in the frozen account for twenty-one days after which the money is sent to the IRS for application against the taxpayer’s delinquent taxes. These types of levies are “one time” levies. The taxpayer will be free to use the account after the levy is paid. The levy only attaches to money that is in the account at the exact moment the levy is served on the bank. However, many banks cannot seem to cope with this and end up freezing the account for a full twenty-one days. Also, the bank may erroneously send any money deposited in the account after the levy is received to the IRS. If the IRS wants to hit the account again in the future, they must issue another levy to the bank.
Salaries are also a favorite target for IRS levies. As with banks levies, wage levies immediately gets the taxpayer’s attention. The employer will notify the taxpayer that the levy was received and the taxpayer should be given an opportunity to list the filing status they are entitled to and the number of exemptions they are allowed for income tax purposes. This is how the exempt portion of the taxpayer’s salary is calculated (see IRS publication 1494). For example, currently a single person, with no dependents, receiving a weekly salary would be allowed to retain $182.69 per week. The rest of his salary is handed over to the IRS. This type of levy is “continuous” and it will remain in effect and continuously remit the taxpayer’s salary to the IRS until all the tax (including penalties and interest) is paid or until it is released.
The FPLP is an automated levy (or systemic) program that the IRS uses, usually to levy 15% of a delinquent taxpayer’s social security benefits. Under a 1997 law, the IRS was granted the power to impose continuous levies on specified payments due the taxpayers. The law defines these types of payments as any Federal payment other than a payment for which eligibility is based on the income or assets of the payee. Additionally, otherwise exempt payments, such as unemployment benefits, may be levied (up to 15%) by this process. Also, the IRS will not withhold this type of levy in the face of an Equivalent hearing appeal request.
The prior three types of levies (668-A, 668-W, and the FPLP) are usually issued to seize cash type assets such as bank accounts, mutual funds, IRA or 401(k) accounts, and salaries. When the IRS takes a car, house, boat, horse, jewelry, stock certificates, or any other type of non-cash assets, the IRS will serve a Levy Form 668-B on the taxpayer personally. Typically, a revenue officer will go to wherever the asset is located (taxpayer’s house, business, garage and so on) demand full payment of the tax from the taxpayer, and when full payment is not forthcoming, serve the taxpayer with the levy and a Notice of Seizure Form 2433. If the asset is located in or on private property, the revenue officer usually will ask for written consent to enter the property from the taxpayer. If the taxpayer refuses entry, the revenue officer should leave but will return in either hours or days with a Writ of Entry approved by a federal judge. The writ is a court order that allows employees of the IRS to enter upon private property for the purpose of seizing and securing the assets at issue.
Taxpayers can get their property back if they pay the amount on the levy prior to sale. If the taxpayers do not pay the levy, the IRS will offer the property for sale at public auction. The taxpayer will be given notice of a minimum bid price that the IRS will accept at the auction and the taxpayer has ten days to dispute the price (usually that it is too low). The law and procedure related to establishing a minimum bid price is in place to protect a taxpayer by helping insure that the IRS gets a decent price for his or her assets.
Generally, the IRS may release the property back to the taxpayer if he or she can pay over the minimum price, but this is not guaranteed. The IRS, as with most creditors, does not want to seize and sell assets. They much prefer receiving a check. Also, IRS sales can fail, meaning that nobody either comes to the auction or nobody enters a bid high enough to allow the IRS to sell the asset. However, if the IRS either releases the asset back to the taxpayer (because an agreement has been reached to pay the tax, the taxpayer pays off the levy, or just pays the minimum bid price) nothing prevents the IRS from seizing the same asset again.
The IRS will generally release a levy if some agreement can be worked out. For example, if the taxpayer promptly files all delinquent returns and agrees to enter into an installment agreement. Also, if the taxpayer files bankruptcy before the receipt of any money, the IRS is obliged to release the levy (in most cases).
Make sure your rights are protected. There are extremely beneficial and protective processes available to help taxpayers avoid being levied. Call for a consultation today to make sure that you are protected.