The IRS and most state tax agencies have the authority to levy (attach or garnish) your property for your failure to pay a tax liability. A series of notices will be issued before the enforcement takes effect. Once it does, getting the levy released will be a challenge – particularly if you have unfiled tax returns. That is why it is so important not to ignore an IRS notice of intent to levy!
For the IRS, taxpayers have very specific appeal rights, but there are timeliness requirements for invoking those rights! If you do not timely file the appeal, you will lose the right to stop the IRS from enforcing its collection.
Levies on bank accounts, investment accounts and other property in possession of third parties are generally similar in practice to a snap-shot photograph. Whatever the third party has in its possession that belongs to you (like a deposit in a bank account) at the time they receive the levy will be taken from you and sent to the tax agency after a mandatory waiting time (generally, 21 days).
By contrast, a levy served on an employer or payor of commissions, etc will be continuous. This means that an individual or company who receives a levy must send all current sums owed to you PLUS future sums to the IRS or State agency until the levy is released, or the amount they have sent totals the amount shown on the levy. This is a small exempt amount for IRS levies – but it is not much! The California Franchise Tax Board, by contrast, will get about 25% of your take-home. Their levy (wage attachment order) hurts – but is not as catastrophic to your financial situation as the IRS levy!
FYI, a Seizure is where a tax agency takes property in your possession – such as a car, boat or home. The IRS must follow specific rules – including the filing of a Federal Tax Lien – before it hauls away your property to sell at auction.
Here is a court case relating to a continuous levy that makes for interesting reading. It involves a doctor who formed his own corporation. The company that made payments to the doctor received an IRS levy. The tried to get out of the withholding requirement based upon a number of premises. None worked and they were made liable for having to pay the IRS the amounts that they should have withheld! Ouch! This case demonstrates how the Court confirms the long reach of the IRS in its levy powers:
Payments made to S corporation owner were subject to continuous wage levy
Mission Primary Care Clinic, PLLC v. Director, IRS (CA 5 3/25/10), 105 AFTR 2d ¶2010-671
The Court of Appeals for the Fifth Circuit has ruled that a professional limited liability company (PLLC) failed to honor an IRS levy on the salary, wages, and other income of one of its members, when it decided not to remit certain payments to IRS that it made to the member after receiving notice of the levy.
Facts. Mission Primary Care Clinic, PLLC (Mission) is a Mississippi company providing medical care services in Vicksburg. Each of Mission’s members is a corporation or limited liability company (LLC) owned exclusively by a practicing physician. Mission operates by collecting fees for medical services provided by its members. It then remits them to the member who earned the fee, less operating and overhead expenses. Members receive payments from Mission only from their individual patients based on the work performed specifically by that member.
Mark Stanley is a licensed physician practicing in Mississippi, and is the president and sole shareholder of Vicksburg Primary Care Team, Inc. (VPCT), a Mississippi Subchapter S Corporation. After establishing VPCT, Stanley or VPCT became a member of Mission.
On Mar. 19, 2007, IRS issued a Notice of Levy of Wages, Salary, and Other Income to Mission against Stanley. Stanley allegedly owed more than $330,000 in personal income taxes. Mission received the notice on March 23, but it did not remit any payment to IRS. Instead, Mission continued distributing funds to Stanley.
Background on continuous wage levy. Individuals with steady jobs who fail to pay their federal income taxes may have their wages and other income seized by IRS. These garnishments are called tax levies and are administered by IRS under its tax collection authority. A levy generally extends only to property possessed and obligations existing at the time levy is made. However, an exception to this rule applies under Code Sec. 6331(e) for a continuous levy on salary and wages. The levy on salary or wages that is payable, or is to be received by a taxpayer, is continuous from the date the levy is first made until the levy is released under Code Sec. 6343 .
Code Sec. 6331(e) does not specify the types of remuneration that are covered by the term “salary or wages.” Reg. § 301.6331-1(b)(1) says that for purposes of Code Sec. 6331(e) , the term salary or wages includes compensation for services paid in the form of fees, commissions, bonuses, and similar items. The reg doesn’t provide guidance on what types of payments constitute “similar items” of compensation for purposes of a continuous wage levy.
Taxpayer’s argument. Mission contended that payments made to a member of an LLC do not constitute items sufficiently similar to salary or wages for purposes of Code Sec. 6331(e) .
Court’s decision. The Fifth Circuit held that Mission should have remitted the payments to IRS. The Court said that the disputed funds were more akin to wages than to a pure distribution of profits. In reaching this conclusion, the court noted that the payments to Stanley were made periodically, rather than in a lump sum. Second, the disbursements to Stanley were directly proportionate to his own work product, and not to an ownership share. There was a direct correlation between Stanley’s labors and the payment he received. Additionally, the evidence indicated that Mission’s overall profitability did not directly impact the amount of Stanley’s receipts. The Court found that, in the absence of the work performed, Stanley would have received nothing from Mission.
Mission also asserted that because the disbursements to Stanley were made in advance of Stanley’s performance of actual services, they were loans not subject to the levy. However, Reg. § 301.6331-1(b)(1) specifically states that advances may be included in a continuous wage levy.
In addition, Mission asserted that it could not honor a levy against Stanley, since only his wholly-owned corporation, VPCT, was a member of Mission. However, the evidence indicated that none of the disputed funds ever went to VPCT. Indeed, each check from Mission was made payable to Stanley and was deposited into his personal bank account.
The Court found that Mission’s liability to IRS could not be reduced by Stanley’s obligation to pay child support because Stanley had not provided sufficient documentation to support his child support obligation until after Mission had failed to honor the levy. However, Mission’s liability to IRS could be reduced by a personal exemption that Stanley was entitled to.
Releasing a Levy
The U.S. Tax Court, in the case of Vinatieri v. Commissioner, 133 T. C. 892 (2009), held that the IRS is required to release levies even if all tax returns are not filed, provided it can be proven to the IRS that the levy is causing you an economic hardship. In other words, if the levy is not released, you will be unable to meet basic living expenses. There is a caveat. The IRS uses COLLECTION FINANCIAL STANDARDS in evaluating basic living expenses for taxpayers. That can limit the amount taken under consideration for such items as rent or car payments. Further, while the IRS typically tells taxpayers who have unfiled (delinquent) tax returns that they MUST file those delinquent returns before the levy can be released, the levy still MUST be released if the taxpayer is unable to pay basic living expenses with the levy in place. The IRS can also do a partial release of levy if that is all that is required to allow the taxpayer to survive.
Disqualified Employment Tax Levies
The IRS is generally required to give taxpayers notice of its intent to levy (or take) their property prior to it actually levying on the property. Congress amended the Code to provide the IRS with a new type of tax levy. This new levy is referred to as a “disqualified employment tax levy” and it enables the IRS to levy on property without first providing the taxpayer with any written notice.
A “disqualified employment tax levy” is a levy to collect employment taxes if the taxpayer (or its predecessor) requested a Collection Due Process (”CDP”) hearing for unpaid employment taxes in the past two years. The idea seems to be that taxpayers who have submitted a CDP hearing request within the past two years should not be entitled to a CDP hearing for subsequent or other quarter’s employment taxes. This raises some serious questions. Let’s look at the language used in the Code. New Code Sec. 6330(h) is as follows:
a disqualified employment tax levy is any levy in connection with the collection of employment taxes for any taxable period if the person subject to the levy (or any predecessor thereof) requested a hearing under this section with respect to unpaid employment taxes arising in the most recent 2-year period before the beginning of the taxable period with respect to which the levy is served. For purposes of the preceding sentence, the term ‘employment taxes’ means any taxes under chapter 21, 22, 23, or 24.’
The use of the language “person subject to the levy (or any predecessor thereof)” is curious. The Code provides a very broad definition for this term. This can raise some interesting questions. For example, what happens when a corporation – which is included in the definition of the term person — buys another corporation? Would the acquiring corporation be subject to a disqualified employment tax levy if it acquires the stock of a target corporation that had filed a CDP hearing request for an employment tax liability? What if the company merged with another corporation that had filed such a request?
The use of the term “requested” is also curious. Taxpayers often submit CDP hearing requests. The IRS can refuse to grant the taxpayer a CDP hearing – either because the hearing request was not timely, or even because the request was lost by the IRS. The Code does not require the taxpayer actually be given a CDP hearing in order for the taxpayer to be subject to the new disqualified employment tax levy. This raises the question of whether the taxpayer is subject to this new levy procedure if it submits a CDP hearing request but the IRS loses or otherwise denies the request.
There is an interesting timing issue that this new type of levy raises. Imagine that a taxpayer submits a CDP hearing request in response to a notice of intent to levy. Imagine further that the IRS does not process the CDP hearing request until a year after the taxpayer submitted the CDP hearing request. If the taxpayer then has an employment tax liability that arises in a subsequent tax period, it appears that the taxpayer may be subject to the new disqualified employment tax levy.
This would result in the taxpayer eventually getting a CDP hearing prior to a levy for the first tax period and a CDP hearing after the levy for the second tax period – even though the underlying issue may be the same. Given that the IRS will not consider collection alternatives (such as payment agreements or offers in compromise) without considering all tax periods where there is an unpaid tax debt, IRS employees may need to manually flag the second tax year in its computer system to prevent this type of levy.
The question then is what do the taxpayer and the IRS employee to do if, unbeknownst to the taxpayer and the IRS employee, another IRS function (such as the Automated Collection System) processes this type of new levy while the IRS employee is working the case. Does the IRS employee then have to recalculate the taxpayer’s reasonable collection potential, interest, penalties, etc. before it can work out an alternative to collections? Does the taxpayer have the right to appeal the IRS decision if it turns out that the levy occurs while the IRS is working the case and IRS fails to recalculate these figures? This type of procedural timing issue may be very difficult for the IRS to avoid.
As a policy matter, the IRS already has the ability to impose a frivolous submission penalty on taxpayers who use the CDP hearing process to unreasonably delay the tax administration process and the IRS can use its jeopardy powers to levy on property if necessary to collect the tax. If the CDP hearing request is not frivolous and collection of the tax is not in jeopardy, one might wonder why the government would need to have an expedited levy process. My feeling is that they are trying to address the issue with repeat offenders – businesses that habitually fail to timely pay their payroll taxes.
Here is the Internal Revenue Manual discussion of these troublesome levies:
Disqualified Employment Tax Levy
- A disqualified employment tax levy (DETL) is comprised of these three components:
- Its a levy served to collect an employment tax liability;
- The levy is for taxes owed by a taxpayer who previously requested a CDP levy hearing;
- The prior CDP hearing involved unpaid employment taxes that arose in the two-year period before the period for which the levy is served.
Even if a taxpayer’s employment tax liabilities meet the criteria for a DETL, this action is discretionary. The Service has the option to issue a pre-levy CDP notice for DETL periods, if the situation warrants. For example, the issuance of a pre-levy notice might be advisable if no IRC 6331(d) notice has been issued or there has been no contact with the taxpayer within the last 180 days.
- The prior request refers to a timely, processable CDP hearing request. Refer to IRM 188.8.131.52.2.1 for information regarding the timeliness and processability of CDP hearing requests. Even if the request is subsequently withdrawn, it qualifies as a prior hearing request.
Requests for an EH or untimely requests for CDP hearings do not satisfy the requirement of having had a prior hearing request. Thus, if the taxpayer requests an EH or submits an untimely request for a CDP hearing, that request cannot be used as a basis for a DETL.
A post-levy request for a CDP hearing made in response to a Letter 1058-D, Notice of Levy and Notice of Your Right to Hearing, regarding a post-levy CDP notice, a state refund levy or a jeopardy levy also can constitute a prior CDP levy hearing request as a basis for a DETL.
- The following can be helpful in determining if the taxpayer requested a prior CDP levy hearing involving unpaid employment taxes.
- First hand knowledge of a prior CDP levy hearing. In most instances involving pyramiding trust fund taxpayers, the RO assigned the case will be aware of previously requested hearings.
- Case history.
- A TC 971 AC 630 on prior modules indicates a prior timely levy hearing request. The TC 971 AC 630 is generated when a timely CDP levy hearing request is added to the CDPTS.
- By contacting Appeals at 559-456-5931 to see if they have record of a prior hearing request received in Appeals.
- In addition to seeing if the taxpayer requested a CDP levy hearing from a pre- or post-levy CDP notice, check to see if the hearing request involved employment taxes arising and ending within the two-year period before the beginning of the taxable period for which the DETL is served. The two-year look back period is measured from the beginning of the period for which the DETL is served. If the taxpayer requested a CDP levy hearing for employment taxes arising during a calendar quarter that ended during the two-year period, the module meets the criteria for a DETL.
- Example 1: The taxpayer requests a timely CDP levy hearing for Form 941 taxes for quarter ended 12/31/2007. The taxpayer accrues an additional employment tax liability for the quarter ended 06/30/2008. This additional liability qualifies for DETL levy because the taxpayer requested a prior levy hearing for a quarter that ended (12/31/2007) within the two-year look back period (04/01/2006 thru 04/01/2008)
- Example 2: The taxpayer requests a timely CDP levy hearing for Form 941 taxes for quarter ended 03/31/2007. The taxpayer is assessed an additional employment tax liability for the quarter ended 12/31/2005. This liability does NOT qualify for a DETL levy because the taxpayer requested a prior levy hearing for a quarter that ended (03/31/2007) outside the two-year look back period (10/01/2003 thru 10/01/2005)
- If a DETL is served, the post-levy CDP notice is sent with the taxpayer’s copy of the levy. This should be done as soon as possible but no more than 10 days after the levy. Letter 1058-D, Notice of Levy and Notice of Your Right to a Hearing is used to provide post levy CDP rights. If using the mail to deliver the post-levy CDP notice, it should be sent to the taxpayer’s last known address by certified or registered mail. Use Letter 1058-D, Notice of Levy and Notice of Your Right to a Hearing. Include a copy of the levy, Form 12153, Pub 594 and Pub 1660 with the letter. Note: If the taxpayer received a pre-levy CDP notice for the period being levied, do not issue a post-levy CDP notice.
- Process the post-levy DETL hearing request in the same way as other hearing requests. If a timely filed post-levy CDP hearing request is filed, the CSED is suspended. Document, for the benefit of Appeals, either in the case history or on Form 12153-A, whether continued collection action is planned.
- A DETL may be served during a timely requested pre- or post-levy CDP hearing or judicial review of such hearing to collect employment tax liabilities (DETL tax periods) subject to the hearing. For example, a DETL may be served during a hearing or judicial review if collection is at risk (e.g., taxpayer’s business is deteriorating or taxpayer is pyramiding).
- If the DETL is to take place during the hearing, check IDRS for actions that may prohibit levy action, i.e., TC 480 or TC 971 AC 043. If there are no apparent TC codes, then contact the Appeals Team Manager of the assigned hearing officer, preferably via e-mail, to inform Appeals that levy action will be taken. Determine whether Appeals has information that prohibits levy or may affect the decision to levy.
- If the DETL is to take place during judicial review, contact the Counsel attorney assigned the case to advise him or her of the planned levy action and to determine if there is any new information that may affect the decision to levy.
In determining if a DETL is permitted during the hearing or judicial review to collect employment taxes subject to the hearing, the request giving rise to the hearing cannot be used as a basis for the DETL.