The Federal Tax Levy
Posted on: February 11, 2014 | By: dunn_access | Civil Tax Controversies
By Stephen J. Dunn
The IRS has an awesome levy power, enabling it to seize property without a judgment. The IRS uses the power primarily to get the attention of a noncompliant taxpayer.
The IRS effects a levy by issuing a notice of levy to a third party holding a taxpayer’s property. For example, the IRS might issue a notice of levy to a bank holding the taxpayer’s bank account, or to a brokerage firm holding the taxpayer’s brokerage account. The IRS could also issue a notice of levy to the taxpayer’s employer for the taxpayer’s wages, or to a company for which the taxpayer performs services as an independent contractor. A levy of wages or other periodic income continues until released or the tax obligation is satisfied. The IRS sends a copy of a notice of intent to levy to the taxpayer.
The IRS may not levy property without first conducting a “thorough investigation,” including (1) verification of the taxpayer’s liability; (2) an analysis of whether the levy is uneconomical; (3) consideration of alternative collection methods; and (4) for levies of noncash property (rare), a determination that the equity in the property is sufficient to yield net proceeds from sale to apply against the tax liability.
Before levying, the IRS must send the taxpayer a notice of its intent to levy. On issuance of a notice of intent to levy, the taxpayer’s representative should call the telephone number on the notice. When an IRS employee comes on the line, the taxpayer’s representative should fax completed Form 2848, Power of Attorney and Declaration of Representative, to the IRS employee. If the taxpayer will full-pay the account, or enter into an informal installment agreement to pay it over six months, then financial information will not have to be submitted to the IRS. Otherwise, Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, or Form 433-B, Collection Information Statement for Businesses, as the case may be, must be submitted to the IRS. The IRS will then inform the taxpayer what it will require from the taxpayer by way of an installment agreement, or that it will post the taxpayer as currently not collectible (“CNC”). If the taxpayer has delinquent tax returns, the IRS will require them to be filed. Upon making such arrangements, the IRS will remove the taxpayer’s accounts from levy status.
If a notice of levy has already issued against property of the taxpayer, the IRS will release it upon making of the above arrangements. However, the IRS will keep any property already attached by the levy, such as bank account balances or accrued wages.
Once the collection action or threat thereof has been relieved, the taxpayer’s representative should call the IRS Practitioner Priority Line and request the taxpayer’s account transcripts for each period in controversy. These will show when, if ever, the taxpayer filed a tax return for that period, what tax and penalties have been assessed against the taxpayer for that period, and what payments, if any, have been made against the assessment. The taxpayer’s representative should request tax return transcripts or supplemental assessment documents, as appropriate, to ascertain the details of tax assessments. If the taxpayer needs to file an income tax return for a given year, the taxpayer’s representative should request wage and income transcripts identifying income and income tax withholdings reported to the IRS for the taxpayer for that year.
If penalties have been assessed against the taxpayer, the taxpayer’s representative should discuss them with the taxpayer, searching for grounds of abatement. The taxpayer’s representative should then prepare and an appropriate letter to the IRS requesting abatement of the penalties. After the taxpayer has reviewed and approved the letter, the taxpayer’s representative should send it to the IRS.
The IRS may have prepared “substitute for returns” for the taxpayer, the taxpayer should prepare and file actual returns. A substitute for return presumes no deductions or exemptions, and computes the highest possible tax for the taxpayer. Moreover, a substitute for return does not start running the three-year statute of limitations on assessment against the taxpayer, nor the ten-year statute of limitations on collection of the assessment.
If there are known, material errors in an income tax return filed by the taxpayer, the taxpayer should consider filing an amended return to correct them.
Property Exempt from Levy
Before levying a taxpayer’s principal residence, the IRS must bring a proceeding in U.S. District Court, and prove that (1) the underlying liability has not been satisfied; (2) the requirements of any applicable law or administrative procedure relevant to the levy have been met; and (3) no reasonable alternative for collection of the taxpayer’s debt exists. The four “reasonable collection alternatives” recognized by courts are payment in full; installment agreement; offer in compromise; and currently not collectible posting.
The IRS may not levy of property used by an individual taxpayer in trade or business, except in two circumstances: (1) the taxpayer’s other assets subject to collection are insufficient to pay the amount due, together with expenses of the proceedings, and the IRS District Director personally approves the levy; or (2) collection of the tax is in jeopardy.
The IRS must release a levy which is causing a hardship for the taxpayer. A levy is causing a hardship if it prevents the taxpayer from paying his or her reasonable basic living expenses. In determining basic living expenses, the IRS considers unique circumstances of the individual taxpayer. Unique circumstances, however, do not include the maintenance of an affluent or luxurious standard of living.
The IRS must suspend all enforcement action, including collection action, against an eligible service member or support personnel serving in a combat zone, plus a period of continuous hospitalization outside of the United States as a result of injury sustained while serving in the combat zone, plus 180 days following such service.
Contesting a Levy
A taxpayer may contest a levy administratively before the IRS and thence in U.S. Tax Court. The taxpayer may contest the merits of the underlying tax liability in Tax Court only if the taxpayer did not previously receive a notice of deficiency authorizing litigation in Tax Court.
A property owner may also challenge a levy in U.S. District Court. District Court action may not challenge the merits of the underlying assessment, such as that the assessment was in the wrong amount, or was made after the assessment statute of limitations had expired. District Court action may contest only the procedural regularity of the levy, such as that the assessment was never made against the plaintiff, or that the collection statute of limitations has expired on the assessment. A person who successfully challenges a levy in U.S. District Court may also recover attorney fees and litigation costs. Such cases are decided by a U.S. District Judge sitting without a jury.