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Procedural Considerations on Collection (Levies and Distraints) – Part One:  Introduction to Levies

To Bill’s credit, his call of the IRS’s bluff that they would actually try to collect his long delinquent tax debt has not resulted in any enforced collection action three years since he failed to report capital gains on the sale of seven of his largest ostriches.  You had no love loss when the giant birds were sold, having been chased down and assaulted by two of their number in your younger and more vulnerable years—the scar on the back of your head bearing constant witness to your trauma.

Nonetheless, Bill calls you one day to discuss the most recent notice that he received from the IRS in which they threatened—this time with a little more piss and vinegar (Bill’s words)—to seize his birds and everything else he held dear to himself.  Having explained this inevitability to Bill a number of times, you feel no real urge to get into enforced collection with him at this hour in the afternoon.  Nonetheless, having written before about the IRS’s collection activities vis-à-vis assessment and liens, you figure it can’t hurt to finish off the topic and explain to Bill what he very well may come to expect.

Authority of IRS to Collect Tax by Levy

If any person liable to pay any tax neglects or refuses to pay the same within 10 days after notice and demand, the IRS may collect such tax (and expenses of the levy) by levy upon all property and rights to property[1] belonging to such person or on which there is a lien provided in this chapter for the payment of such tax.[2]

If the IRS finds that the collection of tax is in jeopardy, notice and demand for immediate payment may be made by the IRS and, upon failure or refusal to pay such tax, collection by levy may be made without regard to the 10-day period after notice and demand.[3]

“Levy and Distraint”

The term “levy” means the “power of distraint and seizure by any means.”[4] Except with respect to continued garnishment of wages,[5] a levy may extend only to property possessed and obligations existing at the time of the levy.[6] When the IRS is authorized to levy, it may seize and sell any property or rights to property belonging to the delinquent taxpayer (whether real, personal, tangible, or intangible).[7]

If at first you don’t succeed, levy and levy again. If the levied property is not enough to satisfy the claim of the IRS, the IRS may as many times as necessary proceed to levy[8] until the amount due (including expenses of levy) is fully paid.[9]

Requirement of Notice Before Levy

A levy may be made on salary, wages, or other property with respect to an unpaid tax, but only after the IRS has notified the taxpayer of its intent to so levy.[10] No less than 30 days prior to the day of the levy, the notice must be given either in person, left at the dwelling or usual place of business of the taxpayer, or sent by certified or registered mail to the taxpayer’s last known address.[11] The 30-day notice requirement does not apply if the IRS has made a finding of jeopardy.[12]

The notice of levy must include a number of elements:

  1. provisions related to levy in the Code;
  2. procedures for levy and sale of property;
  3. the administrative appeals available to the taxpayer with respect to such levy and the procedures relating to such appeals;
  4. alternatives available to the taxpayer which could prevent levy on the property;[13]
  5. provisions related to the redemption of property;
  6. provisions related to the release of liens on the property and the related procedures; and
  7. provisions related to the revocation or limitation of passports of individuals with seriously delinquent tax debts.[14]

Continuing Levy on Salary and Wages

Although a levy generally only applies to property possessed at the time of the levy,[15] the effect of the levy on salary or wages payable to or received by the taxpayer is continuous from the date the levy is first made until the levy is released.[16]

Uneconomical Levy

No levy will (or can) be made on any property if the amount of the expenses which the IRS estimates (at the time of levy) would be incurred by the IRS with respect to the levy and sale of such property exceeds the fair market value of such property at the time of levy.[17]

Continuing Levy on Government Payments

The IRS may continuously levy against certain “specified” governmental payments including Social Security, unemployment benefits, workers’ compensation, and welfare.[18] However, such levy may attach only up to 15%.[19] The IRS may also continuously levy 100% of specified payments due to a vendor of property, goods, or services sold or leased to the Federal government (except a Medicare provider).[20]

No Levy During Pendency of Proceedings for Refund of Divisible Tax

The IRS may not levy on property or rights to property of any person with regard to “divisible taxes” (employment taxes) during the pendency of any proceeding brought by such person in a proper Federal trial court for the recovery of any portion of such divisible tax which was paid by such person if there are res judicata or collateral estoppel concerns.[21]

No Levy Before Investigation of Status of Property

No levy may be made on any property or rights to property which is to be sold[22] until a thorough investigation of the status of such property has been completed.[23] This means that the IRS must verify the taxpayer’s liability, must determine if the levy is uneconomical, must determine that the equity in such property is sufficient to yield net proceeds from the sale of such property to apply to such liability, and thoroughly consider alternative collection methods.[24]

No Levy While Certain Offers Pending or Installment Agreement Pending or in Effect

No levy may be made on property or rights to property of a taxpayer with respect to any unpaid tax[25]

  1. during the period that an offer in compromise by such person is pending with the IRS;[26]
  2. if such offer is rejected by the IRS, during the 30 days thereafter; and
  3. during any period in which an appeal of the IRS’s decision to reject the offer is pending.

Further, no levy may be made[27]

  1. during the period that an offer by the taxpayer for an installment agreement[28] for payment of such unpaid taxes pending with the IRS;
  2. 30 days after rejection of the proposed installment agreement;
  3. during the pendency of the appeal of the rejection of the installment agreement;
  4. during the period that such installment agreement for payment of such unpaid taxes in effect, and
  5. if the installment agreement is terminated by the IRS, during the 30 days thereafter; and
  6. any time during the pendency of the appeal of the termination of the installment agreement.

In the second article of this series on levies, we will discuss the procedure requiring notice and hearing before a levy attaches.  In the third article in this series, we will discuss the IRS’s enforcement of levies and distraints.


Footnotes:

[1] Except exempt property under IRC § 6334.

[2] IRC § 6331(a).

[3] Id.

[4] IRC § 6331(b).

[5] Under IRC § 6331(e).

[6] IRC § 6331(b).

[7] Id.

[8] In accordance with IRC § 6331.

[9] IRC § 6331(c).

[10] IRC § 6331(d)(1).

[11] IRC § 6331(d)(2).

[12] IRC § 6331(d)(3).

[13] Including installment agreements under IRC § 6159.

[14] IRC § 6331(d)(4)(A)-(G). The passport revocation provisions are found in IRC § 7345.

[15] Under IRC § 6331(b).

[16] IRC § 6331(e). A levy is released pursuant to the procedures set forth in IRC § 6343.

[17] IRC § 6331(f).

[18] IRC § 6331(h)(1).

[19] IRC § 6331(h)(2).

[20] IRC § 6331(h)(3).

[21] IRC § 6331(i).

[22] Pursuant to IRC § 6335.

[23] IRC § 6331(j)(1).

[24] IRC § 6631(j)(2).

[25] IRC § 6331(k)(1).

[26] Under IRC § 7122.

[27] IRC § 6331(k)(2).

[28] Under IRC § 6159.

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