Source: https://procedurallytaxing.com/category/levy/
Timestamp: 2019-04-22 16:42:20+00:00

Document:
In this post I will discuss Thompson v US, an opinion from the Northern District of California that explores the limits to an exception to the 10% penalty on early withdrawals from tax favored retirement plans when the distribution is used to pay an assessed federal tax liability on account of a levy.
The Thompons paid the tax and filed a claim for refund, arguing that they were not subject to the early distribution additional tax under the Section 72(t)(2)(A)(vii) “on account of a levy” exception.
After IRS rejected the claim and the Thompsons sued for a refund in federal court, the government filed a motion to dismiss, arguing that the Thompsons’ withdrawal was voluntarily made and thus not “on account” of a levy and thus outside the exception in 72(t)(2)(A)(vii). The Thompsons in response did not deny that there was no actual levy, but instead argued that the government “took all the legally required steps to set in motion a levy, issuing Final Notices/Notices of Intent to Levy on December 12, 2012.” In addition, facing the threat of a Notice of Federal Tax Lien, which posed a “threat to Mr. Thompson’s business, his livelihood and his ability to generate funds sufficient to pay the balance of the liability over time,” meant that the withdrawal was not truly voluntary and and therefore should not be subject to the penalty.
For support, the Thompsons pointed to Murillo v Comm’r, where there was a distribution from a retirement plan that arose due to a forfeiture order and the Tax Court held that the taxpayer was not subject to the penalty, and to an earlier case, Laratonda v Comm’r, where the Tax Court, prior to the statutory exemption for levies now found in Section 72(t)(2)(A)(vii), found that a taxpayer whose funds from a retirement account were withdrawn pursuant to an IRS levy was not subject to the penalty.
Plaintiffs rely on the court’s emphasis on the involuntary nature of the withdrawals in Murillo and Laratonda in support of their assertion that they have stated a valid claim. Yet the limited facts alleged here are distinguishable from both Murillo and Laratonda in a crucial respect. Here, Plaintiffs’ retirement account was not, in fact, levied and the distribution was triggered not by any act of the IRS but by Plaintiffs’ own acts. In other words, Plaintiffs were actively involved in the distribution.
For good measure the district court noted that the legislative history to Section 72(t)(2)(A)(vii) explicitly referred to the exception as not applying to voluntary withdrawals to pay in the absence of an actual levy, as well as a 2009 Tax Court case, Willhite v Comm’r, which held that a taxpayer who had withdrawn funds from a retirement account following receipt of a notice of intent to levy was subject to the 10 % penalty.
In finding for the government and granting dismissal of the complaint, the district court did, however, throw a lifeline to the Thompsons. It noted that cases like Murillo suggest that there “may be circumstances other than a levy (for instance, a forfeiture) where a withdrawal is involuntary and therefore does not trigger the 10% penalty under § 72(t).” While noting that the Thompsons did not allege facts to support a plausible inference that the exception applies, it dismissed the complaint without prejudice, meaning that the Thompsons can file an amended complaint, which could include facts that would support such an inference.
I suspect that the Thompsons may have a difficult time navigating the narrow exception that Murillo supports. The issue of avoiding the 10% additional tax based on the levy exception is one Keith discussed most recently here, when he updated readers on Dang v Commissioner, involving a taxpayer who requested that IRS levy on his retirement account to ensure that the 10% tax did not apply. That post generated thoughtful comments, and Joe Schimmel suggested that perhaps IRS should draft a revenue procedure that allows the taxpayer to elect a levy on a retirement account. If the IRS listened to Joe that would have allowed the Thompsons to avoid what seems like a fairly punitive result of paying what amounts to an additional fairly harsh penalty for their tax troubles–admittedly of their own doing.
One other issue that the Thompons apparently did not raise is whether Section 72(t) is a penalty for purposes of Section 6751(b). As one might expect, another of our longtime readers and pioneer on this issue, Frank Agostino (joined by Malinda Sederquist) has weighed in on this in the latest issue of the Monthly Journal of Tax Controversy. Frank and Malinda point to analogous authority in the bankruptcy context, which has held that Section 72(t) is a penalty for purposes of determining priority status, and they recommend that taxpayers challenge the Section 72(t) 10% addition under Section 6751(b). Frank and Malinda do note that there is a summary non precedential Tax Court opinion holding that Section 72(t) is not a penalty for purposes of Section 6751(b) and they also acknowledge El v Commissioner, a 2015 opinion that held that Section 72(t) is not a penalty for purposes of Section 7491(c).
Whether this can be raised by the Thompsons in an amended complaint is unclear, as they would run into a likely variance challenge if they had not raised the 6751(b) issue in their original claim. I have no doubt, however, that Frank and friends and others will be pressing this issue.
In United States v. Brabant-Scribner, No. 17-2825 (8th Cir. Aug. 17, 2018) the Eighth Circuit affirmed the decision of the district court allowing the sale of taxpayer’s home and affirmatively determining that an offer in compromise request filed by the taxpayer has no impact on the ability of the court to grant the request by the IRS to sell the home or on the IRS’ ability to sell the home once the court granted its approval. In reaching this conclusion the Eighth Circuit analyzes the exemptions to levy in IRC 6334 and the relief those provisions do and do not provide.
Taxpayer owes the IRS over $500,000. The opinion does not discuss the actions by the taxpayer to pay or resolve her liability prior to the action by the IRS to sell her house. I imagine that the IRS considered her a “won’t pay” taxpayer. Before seeking to sell her home, the IRS had seized and sold her boat and levied on her bank accounts.
The 1998 Restructuring and Reform Act added IRC 6334(e)(1)(A) to require that prior to seizing a taxpayer’s principal residence the IRS must obtain the approval of a federal district court judge or magistrate in writing. Before the passage of this provision, the IRS could seize a taxpayer’s home with the same amount of prior approval needed to seize any other asset owned by the taxpayer. No approval was necessary to seize any asset of the taxpayer. Prior to 1998 collection due process did not exist. Prior to 1998 the 10 deadly sins did not exist one of which calls for the dismissal of an IRS employee who makes an inappropriate seizure. So, the landscape regarding seizures, and especially personal residence seizures, changed dramatically after 1998; however, the amount of litigation regarding seizure of personal residences is low and the Brabant-Scribner case offers a window on one aspect of this process.
As the IRS initiated the process of seizing her personal residence by obtaining the appropriate court approval, the taxpayer filed an offer in compromise. She filed an effective tax administration offer of $1.00, but the amount and sincerity of her offer do not really matter to the legal outcome of this case. The timing and the amount of the offer may have influenced the thinking of the judges and made them more inclined to dismiss her argument but her possibly bad faith effort to stop the approval and execution of the sale should not have affected the outcome here.
To convince the court to allow the sale of a personal residence, the IRS must show compliance with all legal and procedural requirements, show the debt remains unpaid and show that “no reasonable alternative” for collection of the debt exists. Taxpayer argued that her offer was a reasonable alternative; however, the court spends three paragraphs explaining that an offer does not matter in this situation. The relevant language in the applicable regulation is “reasonable alternative for collection of the taxpayer’s debt.” The court explains that the word “for” holds the key to the outcome.
“For” refers to an alternative to the sale of the personal residence such as an installment agreement or the offer of funds from another source to satisfy the debt. An offer in compromise is not an alternative for collection but an alternative “to” collection.
Since the IRS properly made its case for seizing and selling the home and the taxpayer did not rebut that case, the Eighth Circuit affirms the decision of the district court to approve the sale. The decision provides clear guidance for district courts faced with the request by the IRS to seize and sell a personal residence. Personal residence seizures by the IRS remain rare at this point. Taxpayers faced with such a seizure, almost always taxpayers the IRS characterizes as “won’t pay” taxpayers, will find it difficult to stop the seizure and sale based on this decision. I do not think this decision will motivate the IRS to increase the number of personal residence seizures but it will make it a little easier to accomplish when it decides to go this route.
In an earlier post, I wrote about an order in the case of Dang v. Commissioner remanding a Collection Due Process (CDP) case back to Appeals. Taxpayer opposed the remand requested by the IRS arguing that the Tax Court should just grant the taxpayer’s request for relief without the need of a remand. In a recent order, it looks like the Appeals employee took little time after the remand to reach the conclusion proposed by the taxpayer although the matter is not quite finally settled.
At issue in this case was the taxpayer’s request that the IRS levy on his retirement account in order to satisfy the outstanding tax debt. The revenue officer refused to do so and the Appeals employee said that the CDP hearing did not provide such a remedy. The taxpayer requested that the IRS levy on the retirement account because he was not yet 59 and 1/2. If he pulled the money out of the retirement account as requested by the RO and the SO, he would have to pay tax on the money withdrawn and a 10% excise tax under IRC 72(t)(1). If the IRS levies on the retirement account, the 10% excise tax does not apply because of IRC 72(t)(2)(A)(vii).
Among other arguments, the taxpayer argued that requiring him to pull the money out violated the Taxpayer Bill of Rights since it would cause him to pay more than the correct amount of tax. Requiring him to pull out the money just seemed downright stupid and unfair which no doubt motivated the Chief Counsel attorney to request the remand at the outset of the case. The second time around, Appeals seems to get the concept. The case suggests that some training might be needed and maybe a change in the IRM to make it easier for ROs to levy on a retirement account when requested to do so by the taxpayer. Without such a request, ROs must seek high level approval to levy on a retirement account. Removing the layers of approval when the taxpayer seeks the levy would make it easier for ROs to acquiesce to such a request.
The approval levels provide a barrier that explains why the employees would not readily acquiesce in what seems like a reasonable request by the taxpayer and why their behavior was grounded in logic twisted by the approval levels. The approvals levels necessary to levy on retirement accounts were created to protect taxpayers. So, Mr. Dang’s problem in getting the IRS to levy finds its roots in a procedure designed by the IRS to help but when coupled with the elimination of the penalty offered by IRC 72(t)(2)(A)(vii) ends up hurting certain taxpayers. It’s good to see that the IRS was able to work though the problem in the remand.
Because the case appears on a path to agreement, we will not have the opportunity to see what the Tax Court would do with the TBOR argument made by the taxpayer and whether the use of TBOR in this context might provide a path to remedy.
The IRS has recently updated several matters that impact taxpayers in collection. This post pulls together some of the newly available information. The areas discussed in this post are the financial standards, the updated offer in compromise booklet, the impact of the new law on amounts exempt from levy and the impact of the new law on the time to file wrongful levy claims.
On March 26, 2018 the IRS issued new financial standards to be used in collection cases. The new standards provide guidance to individuals seeking to prepare a collection information statement in order to convince the IRS to grant an offer in compromise, an installment agreement, to make a currently not collectible determination or to otherwise decide the appropriate course of action in a collection case. The financial standards have their roots in information published by the Bureau of Labor Statistics. Congress also makes them applicable in bankruptcy cases for certain purposes.
PAYING FOR YOUR OFFER – There is better highlighting of the Low-Income Certification option, with emphasis that low income certification means no money need be sent with the offer.
Because the IRS will not work an offer if a taxpayer has not complied with tax laws by filing all necessary returns, many taxpayers file returns immediately prior to the filing of an offer in compromise. The IRS does not always process past due returns with haste because it puts more focus on processing the currently due returns. The new requirement that a taxpayer attach returns filed within 60 days of the submission of the offer allows the IRS offer group to avoid rejecting cases for lack of filing compliance and to get a view of the liabilities the taxpayer owes in advance of the actual assessment.
The warning about waiting for the resolution of outstanding audits or claims should be considered in the context that an offer in compromise acts as a closing agreement resolving all matters concerning the years covered by the offer. A taxpayer cannot go back and seek a refund after obtaining an offer and the IRS cannot go back and seek an additional assessment. It is important to resolve all issues for the years covered by the offer but many taxpayers do not appreciate the scope of the offer with respect to the years it covers.
Low income taxpayers continue to receive a benefit when applying for an offer because they do not have to pay a fee for the offer or remit a percentage of the offer. Almost all practitioners know this but many individuals filing offers pro se may not appreciate this benefit and the new booklet tries to make it clearer.
Each of the changes seem appropriate and helpful.
From $12,700 to $24,000 for married individuals filing a joint return and surviving spouses.
The Act also suspends personal exemption deductions. Both changes, the increase in the standard deduction and the suspension of the personal exemption, are effective for taxable years beginning after December 31, 2017, and before January 1, 2026. These two changes impact how a recipient of a levy will figure the amount of income exempt from levy. Prior to the change in the law, the amount that was exempt from levy was calculated by taking into consideration both the standard deduction and the total exemptions of the payee. With the elimination of personal and dependency exemptions, a new method for determining the amount of income exempt from levy was needed.
As part of the Tax Cuts and Jobs Act, Congress amended §6334 to provide that from January 1, 2018 through December 31, 2025 employers and other recipients of levies would exclude from levy $4,150 per dependent per year in addition to the amount excluded based upon the standard deduction for the filing status of the person subject to levy. The amount exempt from levy each pay period is calculated by dividing the total amount exempt from levy for the year by the number of pay periods. Publication 1494, Table for Figuring Amount Exempt from Levy on Wages, Salary, and Other Income has been updated. Changes are also being made to Forms 668-W(c), 668-W(c)(DO), 668-W (ICS) and Form 668-W, Notice of Levy on Wages, Salary, and Other Income, along with the instructions. Due to the increase in the standard deduction amount, in most cases, the taxpayer will have more take-home pay that is exempt from levy.
Employers or others receiving levies will need to figure the amount of income exempt from levy. To do so the recipient must determine what the payee’s filing status will be (The amount exempt from levy is based upon the standard deduction for that filing status); the frequency of payments, Daily (260), Weekly (52), Bi-Weekly (26), Bi-Monthly (24), Monthly (12); and lastly, the number of dependents that the payee will claim. In this example, the employer knows that the employee will claim the married filing joint standard deduction and has two dependents.
STEP 1: Determine the filing status of the payee.
STEP 3: The taxpayer is entitled to exclude $4,150 per year per dependent. This chart shows the amount that can be excluded each pay period based upon pay frequency. The amount from far the right-hand column for the correct pay frequency will need to be multiplied by the number of dependents to arrive at the total amount exempt from levy that is attributable to the payee’s dependents.
Add the amount exempt per pay period based upon the payee’s filing status, plus the amount exempt per pay period per dependent to arrive at the total amount of take-home pay that is exempt from levy. A taxpayer that is married, files jointly, is paid $1,500 bi-weekly, and claims two dependents will receive $1,242.32 and will have $257.68 ($1,500-$1242.32) levied.
IRC § 6343(b) previously required taxpayers to make a wrongful levy claim within nine months of the taking of the property. For some people, this time frame was too short because they did not even learn about the taking during that time. In response, Congress increased the amount of time taxpayers have to seek the return of property when they believe the IRS has wrongfully taken their property while trying to collect from a taxpayer.
Public Law 115-97, the Tax Cuts and Jobs Act extends the period for making an administrative claim to two years and if the taxpayer makes an administrative claim during that period the time to bring suit is extended for 12 months from the date of filing of the claim or for six months from the disallowance of the claim, whichever is shorter. The change applies to levies made after December 22, 2017, and to levies made prior to that date if the nine month period under the prior law had not yet expired. The IRS issued IR-2018-126 to discuss the change and has revised Publication 4528 to reflect the change.
Last year, we posted on the Tax Court’s decision in Lindsay Manor v. Commissioner, 148 T.C. 9 (2017). The taxpayer appealed the decision to the 10th Circuit, which has not only dismissed the appeal as moot but also vacated the Tax Court’s decision.
The Tax Court, in a precedential opinion, decided that a corporation could not avail itself of the hardship exception in IRC section 6343(a)(1)(D) holding, in support of Treas. Reg. 301.6343-1, that only individuals may avoid levy based on hardship.
On appeal, the government moved to dismiss the case as moot because Lindsay Manor no longer operated nursing home facilities. The 10th Circuit agreed because Lindsay Manor lacked a “personal stake in the outcome of the lawsuit.” The only issue on appeal was the applicability of IRC section 6343(a)(1)(D) to corporate taxpayers. Lindsay Manor had argued that it qualified for hardship relief only “because imposing the levy would leave it unable to ‘provide adequate care for its patients.’” Since Lindsay Manor no longer has patients this ground for relief does not exist anymore.
In dismissing for mootness, the 10th Circuit looked into the facts surrounding the nursing home Lindsay Manor operated. It turns out that another creditor had a receiver appointed six months before the Tax Court published its opinion. So, the case was moot before the Tax Court published its opinion. In the Tax Court, the IRS filed two motions for summary judgment. The second motion was filed on October 14, 2015 with the response from petitioner on October 28, 2015. The opinion was rendered on March 22, 2017 – about 17 months later. So, Lindsay Manor was operating the nursing home at the time of the last action by the parties prior to the issuance of the opinion. Obviously, neither the petitioner nor the IRS alerted the Tax Court to the change in circumstance.
I looked for a Tax Court Rule obligating the parties to notify the Court but could not find one. I know that the IRS feels under an obligation to tell the Court when something happens that impacts jurisdiction and provides instructions to Chief Counsel attorneys for notification in the situation presented by this case, bankruptcy filings, etc. The IRS would not necessarily have known about the appointment of the receiver or at least not in a way that would naturally make its way to their Counsel. If petitioner’s counsel knew that his client had been replaced by a receiver, he probably should have notified the Tax Court although I could not file a Rule obliging him to do so. If either party had notified the Court, I expect that the notification would have caused the Tax Court to not issue the opinion in the first place. Although the 10th Circuit talks below about what the Tax Court should have done, absent notification from one of the parties the Tax Court would have no reason to know of the change in circumstances. A quicker opinion might have averted the problem but this case was one of several with similar issues. I find the criticism of the Tax Court on this point misplaced. I was ready to place blame on petitioner’s counsel for not notifying the Court since he was the person most likely to know of the change in circumstances forming a basis for the vacatur but any criticism of petitioner’s counsel would require that they had notice of the receiver coupled with a duty to inform the Court.
So, we have a sneak peek at what the Tax Court thinks about the regulation but the case itself no longer provides precedent for the position sustaining the regulation that economic hardship does not apply to corporations.
I do not often write an introduction to my own blog post but am making an exception today. Today’s post is short and it is about a taxpayer right’s victory. I want to use the extra space to celebrate some other victories. Of course at PT we are excited about Villanova’s basketball victory for any of you who missed the game. Basketball is a unifying force at the school and a great source of pride. I miss going to the campus gym every morning and walking through the lobby which is a museum of their victories. Villanova had another great victory announcing the selection of Christine Speidel as its new tax clinic director. In addition to joining Villanova to run its tax clinic, Christine is joining procedurallytaxing as a member of our blogging team. She has written several guest posts over the years. Look for many posts by her in the future. As a law student she worked in the Consumer Law Clinic of the Legal Services Center where I now teach. She will bring a lot of new energy to the blog.
On December 2, 2016, I wrote a strongly worded post about the inappropriate language in Letter CP 504. The CP 504 letter the IRS was sending at the time said that the if the taxpayer did not pay the tax listed on the form the IRS could levy on their property and listed a litany of types of property on which the IRS could levy. The problem with the letter was that the CP 504 letter does not give the IRS that right. The statements made in the letter were legally wrong and could have inappropriately led taxpayers to the wrong conclusion about the action the IRS could take to collect the unpaid assessment of taxes.
In addition to blogging the issue, I had discussions with the appropriate persons at the IRS explaining why I thought the letter was wrong and should be changed to eliminate the language stating that the IRS could levy on a taxpayer’s property. The IRS listened and it made a commitment that it would change the letter to make it accurate. The persons with whom I spoke indicated that the change would not occur until January 2018 – a period approximately one year after committing to the change. I knew that changing an important letter in the collection notice stream would take time and waited.
Recently, one of my clients received the new and improved CP 504 letter. The IRS made the promised changes and no longer tells taxpayers that it can levy on their property in the manner stated in the prior version of this letter. You can see a redacted version of the new letter here. You can find a copy of the prior letter in the earlier post if you want to compare the letters and note the changes.
The IRS deserves credit for changing the letter and appropriately responding to criticism. The collection notice stream is an important part of the collection process. Getting the language in the letters sent during that stream to be accurate as well as persuasive is an important part of the collection function at the IRS.
The bankruptcy court in Maine has granted relief from the automatic stay to allow the IRS to collect from Mr. Bailey’s pension accounts and Social Security benefits. While the IRS has the power to go after these accounts, its exercise of this power is governed by the issues discussed in the first two parts of this series. This is another defeat for Mr. Bailey in his efforts to protect his assets from the collection of federal taxes. I wrote previously about Mr. Bailey’s filing of the bankruptcy petition after suffering a massive loss in Tax Court.
In my earlier post regarding Mr. Bailey’s Tax Court loss, I speculated that Mr. Bailey might achieve relief in bankruptcy because his Tax Court case resulted in the imposition of an accuracy related penalty rather than the fraud penalty. That may still be true; however, the type of penalty does not stop the IRS from pursuing his assets and that is what it is doing with a vengeance. The bankruptcy court starts off the opinion stating “This bankruptcy case is another chapter in the decade long struggle between the Internal Revenue Service and Mr. Bailey over taxes.” We have not previously written much about the ability of the IRS to take a taxpayer’s social security payments and pension accounts. In addition to the first two posts in this series, I briefly touched on it recently in a post about military pensions where I discussed the federal payment levy program. Mr. Bailey’s case provides the opportunity to discuss how and when the IRS will take these assets as the policies apply to a specific individual rather than the group of individuals studied by TIGTA.
Based on the pursuit of these assets in the bankruptcy case, it seems clear that the IRS has determined that Mr. Bailey meets its definition of having committed flagrant conduct regarding the payment of his taxes. I discussed, and linked to, the IRS definition of flagrant conduct in the first post in this series. Cases where the IRS makes the determination that the taxpayer’s conduct is flagrant are the ones in which you see the IRS using its collection tools to their full effect. You should always seek to have your clients behave in a way that keeps them from fitting into the flagrant criteria or, should their conduct fall into the flagrant criteria, have them work quickly to mitigate that behavior because that type of behavior can cause the IRS to use some tools at its disposal that it might otherwise keep holstered.
The IRS will routinely go after 15% of a taxpayer’s social security payments through the federal payment levy program. As discussed in the post referenced above, the IRS has filters that it applies, thanks to the National Taxpayer Advocate, which exclude from the FPLP taxpayers whose income appears to be less than 250% of poverty. Section 6343 requires that the IRS not levy on taxpayers when the levy would put the taxpayer into a hardship situation and the filters the IRS applies in the FPLP program recognize that a high percentage of the individuals with income below 250% of poverty would end up in a hardship situation if the IRS levied on 15% of their Social Security payments. Of course, individuals whose income exceeds 250% of poverty can come into the IRS and show that the levy places them in hardship status if the IRS takes 15% through this program. For a detailed description of FPLP, see part two of this series.
The IRS need not limit itself to 15% of a taxpayer’s Social Security payments and it can levy on the entire amount of the payments if it chooses and if doing so does not place the taxpayer into hardship status. The opinion does not say whether the IRS plans to take only 15% of his Social Security payments or all of them; however, I would be surprised if it is not planning to take them all. When it seeks to take all of a taxpayer’s Social Security payments, the discussion in the last part of part two of this series becomes important. Mr. Bailey’s case is or was prior to bankruptcy in the hands of a revenue officer. Now that he is in bankruptcy, there will also be a bankruptcy specialist working on his case and probably an attorney at the Office of Chief Counsel. These individuals will apply the policy decisions set out in the manual in deciding to take his social security payments. The only legal impediment, aside from the automatic stay, is IRC 6343 setting out the hardship exception to levy.
As discussed previously, taking social security payments does not stop when the statute of limitations on collection ends. The IRS lien attaches to the taxpayer’s right to the stream of payments. Because the taxpayer’s right to this stream is fixed, once the IRS levies on the taxpayer’s interest in the social security payments the levy attaches to the right to receive all of the payments. So, as long as the taxpayer lives and the tax debt remains outstanding, the IRS can continue to receive the social security payments.
From part one of this series you know that the IRS can also levy on interests that taxpayers have in IRAs or pension plans. Even though ordinary creditors cannot reach assets in pension plans because of restrictions put in place by ERISA, these restrictions do not apply to the IRS. The IRS has policies that cause it to pause and obtain approvals and certain levels within the agency in order to levy on pension plans but the law places basically no restrictions that prevent the IRS from levying on these plans. A levy on a pension plan does not accelerate payment from the plan, but just like the levy on the taxpayer’s Social Security payments, the levy on the pension plan does attach to all of the rights the taxpayer has in the plan even if those rights include future and not present payments. I can only assume that prior to seeking to lift the stay in Mr. Bailey’s bankruptcy case, the IRS and its lawyers have already made a determination that neither the policies in the manual or the provisions in IRC 6343 prevent levies upon his pension plan or social security payments.
These IRS rights to pursue Social Security and pension plan payments play out in Mr Bailey’s bankruptcy case in the context of the automatic stay. The automatic stay comes into existence the moment a debtor files a bankruptcy case and works to prevent creditors from taking most assets of the debtor and of the estate. Bankruptcy code section 362(a) lists eight separate matters covered by the automatic stay; however, creditors can apply to the bankruptcy court to lift the automatic stay to permit the creditor to go after an asset otherwise protected by the stay. That is what the IRS has done in Mr. Bailey’s case. The bankruptcy court must then determine whether to lift the automatic stay to permit the IRS to collect from these assets while the bankruptcy case proceeds.
The concern of the IRS is that if Mr. Bailey receives these payments he might spend them. Each time he spends the payments from Social Security and the pension plan, he dissipates an asset on which the IRS has a lien interest and allowing him to receive the payments can only occur if he provides adequate protection to the IRS that its lien interest will not be harmed by his receipt of these payments. The bankruptcy court notes that he has the burden of proof on all issues connected with the motion of the IRS to lift the stay except on the issue of the equity in the Social Security and pension benefits. The IRS must show these assets have equity to which the federal tax lien has attached. Showing that equity exists in social security and pension plan payments is very simple.
By the time the IRS filed the motion to lift the automatic stay, Mr. Bailey had already received his chapter 7 discharge. The discharge lifted the automatic stay with respect to collection against him personally but the stay would continue with respect to assets of the bankruptcy estate until the estate was closed. The claims of the IRS survived the discharge in the chapter 7 case according to the bankruptcy court but the court does not provide specific information as to why they survived. It appears that even if some or all of the IRS claims were not excepted from discharge under bankruptcy code 523, the federal tax lien continued to attach to property belonging to Mr. Bailey which he kept after the chapter 7. After the conclusion of the chapter 7 case, Mr. Bailey filed a chapter 13 bankruptcy case. This maneuver is sometimes called a chapter 20.
The court finds that the IRS lien interest in the Social Security and pension payments is not adequately protected. Mr. Bailey said he needed to use the payments from these sources to fund his chapter 13 case and therefore he should get to keep them; however, that is exactly what the IRS fears since in using them to fund the plan he will spend the money from these plans and as he does so he destroys the lien interest of the IRS. The court points out that though it rules for the IRS in this summary type proceeding, Mr. Bailey can challenge the lien claim of the IRS in another proceeding should he seek to do so.
Mr. Bailey continues in his second bankruptcy case to do what many taxpayers before him have tried to do and use bankruptcy to wriggle free from federal tax debt. While it is possible to do that in certain circumstances, where the IRS has perfected its lien, debtor has assets to which the lien attaches, and the IRS is diligent in protecting its rights, the debtor will basically always lose. That does not mean the IRS will ultimately collect the $5 million dollars owed to it, but it does mean that while some or all of that debt remains due and owing, the IRS will continue to have open season on his assets including his Social Security and pension assets.
In Part 1 of this series of posts on levies, I wrote about the ability of and the restrictions on levies on retirement plans by the IRS. In this post, I will discuss the ability of the IRS to levy upon a taxpayer’s social security payments, the choice the IRS has in how to do that, and the restrictions the IRS places upon itself as it decides to impose these levies. The big difference between levying on retirement accounts and on social security derives from the source of the funds. Retirement accounts rest with private parties while it is the government itself that makes the social security payments while at the same time being the party owed the unpaid taxes. In many ways, taking all or a part of a taxpayer’s social security payments is a form of offset; however, the Code does not treat it as an offset the same way it treats the offset of a refund in one year and a liability for a prior period.
IRC § 6331(h)(2)(A), as prescribed by the Taxpayer Relief Act of 1997, Pub. L. No. 105-34, § 1024, authorizes the IRS to issue continuous levies on certain federal payments. The Bureau of the Fiscal Service (BFS) (formed from the consolidation of the Financial Management Service and the Bureau of the Public Debt) is the Department of Treasury agency that processes payments for various federal agencies. Payments subject to FPLP include any federal payments other than those for which eligibility is based on the income or assets of the recipients. With a regular offset, the IRS simply programs its computers to check for any liabilities before it sends the refund to BFS for payment to the taxpayer. With social security, the IRS sends notice of the liability to BFS and the taking of the funds occurs at that level outside of the IRS since the funds, although coming from the federal government, come from another agency.
IRC Section 6334(a)(11) exempts from levy certain needs based payments such as Supplemental Security Income payments to the aged, blind, and disabled as well as State or local government public assistance or public welfare programs for which eligibility is determined by a needs or income test. The exemptions in section 6334 do not apply to regular social security payments since they are based on contributions and not based on need. Some taxpayers receiving social security do not need their social security payments to meet basic needs but many do. The IRS knows that many social security recipients will face hardship if all or a part of their social security payments are taken to satisfy tax liabilities. The debate concerns how to take the money of the taxpayers who do not need it while identifying the taxpayers who need it in order to avoid hardship.
As with the discussion on retirement accounts, this discussion is built upon a report issued by the Treasury Inspector General for Tax Administration (TIGTA). On June 30, 2016, TIGTA issued “Revenue Officer Levies of Social Security Benefits Indicate That Further Modification to Procedures Is Warranted” in which it discusses in detail the rules governing the IRS levy upon social security benefits and reviews how the IRS has done in following those rules. The discussion starts with a reminder of the federal payment levy program (FPLP). For the publication on FPLP created by the Taxpayer Advocate’s office look here.
“The FPLP is an automated program that includes taxpayers in both the Automated Collection System and the Collection Field function along with inventory that is currently not being worked by either Automated Collection System or the Collection Field function….
The IRS reinstated the filter in 2011, and it causes taxpayers whose income presents itself to the IRS as under 250% of poverty to bypass the FPLP in order that they can receive their full payment.
The NTA has written extensively on social security levies and particularly on the issue of the filters imposed to allow certain accounts to bypass the social security levy. For background, an interested reader might want to check out her report found here from the 2014 annual report to Congress. The discussion in the report focuses heavily on the decision of the IRS to exclude from its filters those taxpayers with unfiled returns. This discussion which also gets some play in the TIGTA report focuses on the reason for these levies and whether levies on retirement accounts and social security payments where taxpayers are known to be especially vulnerable should be used for general enforcement. The IRS has long used the levy as a means of promoting compliance because it wakes up the taxpayer by moving the IRS from its status as “pen pal” by sending many letters requesting payment, to the status of law enforcement when the taxpayer feels the pain of lost funds.
Some Field Collection group managers require that all other taxpayer resources be levied before attempting to levy Social Security benefits, while others do not.
Some group managers believed that, in upwards of 90 percent of their cases in which paper levies are made on taxpayers, the taxpayer possesses no other source of income.
Some group managers stated that the case had to be “egregious” before Social Security Benefits would be levied above the 15 percent FPLP levy.
Some group managers indicated that Social Security levies were used to get a taxpayer’s attention, while others believed such use of a levy is not appropriate.
Some revenue officers use Form 668-W, Notice of Levy on Wages, Salary, and Other Income, which ensures that levied taxpayers receive the exemptions to which they are entitled, while others use Form 668-A, Notice of Levy, to maximize the levy.
Most interviewees indicated that most cases involving Social Security benefits already have an FPLP levy on the case when the case is assigned.
In one territory, the territory manager indicated that the groups in that territory never levy 100 percent of Social Security benefits. A revenue officer within that same territory indicated that he had issued as many as five Social Security levies in the past year and used Form 668-A to levy the maximum amount.
All interviewees indicated that a financial analysis should be performed on a Collection Information Statement to assess the taxpayer’s ability to pay the tax, and all stated that the“250 percent above Federal poverty level” criterion is not factored into their analysis.
In most of the cases in which the revenue officers were assigned, the IRS had already begun collecting 15% through the FPLP process and the question for the revenue officer was whether to take the entire social security payment. The median amount owed of the accounts sampled by TIGTA was over $80,000. TIGTA found that in 85% of the cases in which the revenue officer decided to levy, the decision fell within the guidance; however, in 15% of the cases the levy exacerbated or caused hardship. TIGTA noted that in the cases in which it determined the levy caused hardship the notes of the revenue officer usually supported the conclusion reached by TIGTA. TIGTA recommended better guidance for revenue officers on when to pursue a taxpayer’s social security and the IRS management agreed.
The ability to determine between a “can’t pay” and a “won’t pay” taxpayer is a difficult decision that requires both training and judgment. Both TIGTA and the NTA have written about the failure of the IRS to train and the failure of revenue officers and their managers to use appropriate judgment. If a revenue officer levies on a client’s social security payments because the client did not cooperate or did not file past due returns, use the decision in Vinatieri v. Commissioner, 133 T.C. 392 (2009) as well as the relevant manual provisions to convince the revenue officer to remove the levy. TIGTA’s report shows that the IRS gets the decision right most of the time but if the 15% error rate is correct, that still leaves a large number of taxpayers, many of whom are unrepresented, losing necessary funds to make ends meet. Providing revenue officers with better training and better oversight requires funds which is a problem we have discussed many times before.

References: § 72
 v. 
 v. 
 §6334
 § 6343
 v. 
 § 6331
 § 1024
 v.