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.”
