The IRS Levy Power (4/4/14)

I have recently had email discussions with Leslie Book and Keith Fogg, authors of the Procedurally Taxing Blog, here, regarding some aspects of the levy power, particularly levy on right to receive future payments.  As a result of that discussion, I have been better educated about the levy and have made some revisions to my text.  I thank Les and Keith for their contributions to my education.

I cut and paste below the section revised and note in red-line the revised portions.  I do not include the footnotes.

VIII. Administrative Levy and Judicial Enforcement. 

A. Administrative Levy and Sale. 

  1. General Rules of Levies.

Levy includes the power to seize and sell the taxpayer's property (including interests in property and personal service compensation, such as wages).  § 6331(b) (levy); § 6335 (rules for sale).  A levy – often referred to as a seizure – is a “summary, non-judicial process, a method of self- help authorized by statute which provides the Commissioner with a prompt and convenient method for satisfying delinquent tax claims.”  The Supreme Court has said: “The IRS need never go into court to assess and collect the amount owed; it is empowered to collect the tax by non-judicial means . . . without having to prove to a court the validity of the underlying tax liability.”   

The IRS levy can involve a direct seizure of the property but more often the levy is accomplished by notice of levy to the taxpayer or third parties requiring them to turn over the taxpayer’s property in their possession.  Thus, the IRS can serve notice of levy a bank to obtain the funds in the taxpayer's bank account or can levy a brokerage firm to obtain the investments in the taxpayer's bank account.  The IRS can also levy persons or entities who appear to be third parties, asserting that they are nominees or alter egos of the taxpayer.  (I cover nominee and alter ego liability later in the text.) 

As noted, the IRS often levies on third parties by issuing “notice of levy,” which, like the IRS summons studied earlier, is simply a form that the IRS collection officer fills out and delivers to the person upon whom levy is made.  Once the person is given the notice of levy, the United States has the right to the property levied.  As to the property, the person receiving the notice of levy holds the property in a form of custodial relationship to the United States. 

The person receiving the notice of levy takes substantial risks in not responding to the levy.  The person receiving a levy is liable for the value of the property levied upon and not turned over, plus a penalty of 50%.  § 6332(d).  The defenses available to the party levied to avoid the levy are quite limited.  Nonpossession of the taxpayer’s property is a defense.  However, the “validity of the levy and competing claims to the ownership of the funds are not valid reasons for refusing to honor a levy.” The person can be relieved from the 50% penalty for reasonable cause, which would be something beyond the person's control that prevents compliance.  The IRM advises the agent to be judicious in assertion of the penalty, and courts also may give a liberal application of reasonable cause where the taxpayer is already penalize by liability for the value of the property that he may have turned over to the taxpayer. In order to protect the levied party, the levied party responding to the levy by delivering the property to the IRS is “discharged from any obligation or liability to the delinquent taxpayer and any other person with respect to such property or rights to property arising from such surrender or payment.”  § 6332(e).  As a result, practically speaking, the levied party “has two, and only two, possible defenses for failure to comply with the demand: that it is not in possession of property of the taxpayer, or that the property is subject to a prior judicial attachment or execution.” 

Continuous Levies May Apply to Continuing Payments for Remuneration (1/6/13)

I was reading a district court case this morning that assumed but did not discuss the validity of a continuous levy on LLC distributions.  United States v. 911 Management LLC et al.; No. 3:10-cv-01367 (D OR 2014) (I will  post a LEXIS citation later),  I thought this would be a good time to remind readers that statutory authority for such continuous levies is Section 6331(e), which provides:

(e) Continuing levy on salary and wages 

The effect of a levy on salary or wages payable to or received by a taxpayer shall be continuous from the date such levy is first made until such levy is released under section 6343.

The statute expressly limits the levy to "salary or wages."  But, at least in this case, the statutory terms are expanded to include other times of recurring remuneration for personal services.  As revised, here is the text from the current draft of my Tax Procedure Book (footnotes omitted):

Normally an administrative levy on a third party reaches only the property of the taxpayer that the third party has on the date that the levy is made. For example, if the IRS levies a bank account, the bank must turn over the balance on the date of the levy.  If the taxpayer makes a deposit the next day, that amount of the new deposit need not be turned over by the bank.  Notwithstanding this general moment in time nature of a levy, a levy on recurring “salary or wages” and personal service compensation (often called garnishments in other contexts) are continuing from the date of levy until the levy is released. § 6331(e).  The Regulations define the statutory terms “salary or wages” very broadly to include “compensation for services paid in the form of fees, commissions, bonuses, and similar items.” The courts have blessed this broader reading, sustaining, for example, continuous levies on payments (i) to independent contractors, such as commissioned agents, (ii) to partners as distributions, and (iii) to members of an LLC as distributions.  

I should note that, in the case cited, the lawyer apparently read the statutory language to include only "salary or wages" as those terms are usually defined and had the manager of the LLC advised the IRS:  [M]y attorney advised me to notify you that [the LLC] does not pay wages or salary to the [Taxpayer who received the distributions]."  Based on the lawyer's confusion as to the form used and some of the background facts and circumstances, the court foud:

[I]t was objectively reasonable for [the manager of the LLC] to rely on [the attorney's] advice to "report [to the IRS] that 911 Management does not pay wages or salary to [the Taxpayers" over [the IRS agent's] contemporaneous but contrary instructions.

So, the court relieved the manager from the penalty for failure to comply with the levy. The manager was lucky.  Here is my discussion of the penalty provision and reasonable cause escape (footnotes omitted):

The person receiving the notice of levy takes substantial risks in not responding to the levy.  The person receiving a levy is liable for the value of the property levied upon and not turned over, plus a penalty of 50%.  § 6332(d).  The defenses available to the party levied to avoid the levy are quite limited.  Nonpossession of the taxpayer’s property is a defense.  However, the “validity of the levy and competing claims to the ownership of the funds are not valid reasons for refusing to honor a levy.” The person can be relieved from the 50% penalty for reasonable cause, which would be something beyond the person's control that prevents compliance.  The IRM advises the agent to be judicious in assertion of the penalty.  In order to protect the levied party, the levied party responding to the levy by delivering the property to the IRS is “discharged from any obligation or liability to the delinquent taxpayer and any other person with respect to such property or rights to property arising from such surrender or payment.”  § 6332(e).  As a result, practically speaking, the levied party “has two, and only two, possible defenses for failure to comply with the demand: that it is not in possession of property of the taxpayer, or that the property is subject to a prior judicial attachment or execution.”