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Procedural Considerations on Collection (Levies and Distraints) – Part Three: Enforcement of Levy

In the first article in this series of posts regarding the IRS’s enforced collection through levies, we discussed the IRS’s authority and limits thereto regarding levies and distraints. In the second article of this series on levies, we discussed the procedure requiring notice and hearing before a levy attaches.  In this third article in this series, we discuss the IRS’s enforcement of levies and distraints.

Enforcement of Levy

If a person (including an officer or employee of a company or a member or employee of a partnership) fails or refuses to surrender the property to the IRS subject to the levy, the person becomes personally legally liable to the IRS in an amount equal to the value of the property not surrendered, but not exceeding the amount of taxes for which the levy was made, together with costs and interest on such amount[1] from the date of the levy.[2] Any amount (other than costs) thereafter recovered from the person will be credited against the tax liability for the collection of which such levy was made.[3]

In addition to the personal liability, if a person required to surrender the property fails or refuses to do so without reasonable cause, the person will be liable for penalty equal to 50% of the amount recoverable.[4] No part of such penalty will be credited against the tax liability for the collection of which the levy was made.[5]

If a person—other than the delinquent taxpayer—who is in possession of the levied property, surrenders the property upon demand to the IRS, that person will be discharged from any obligation or liability to the delinquent taxpayer and any other person with respect to the property arising from such surrender.[6]

Production of Books and Records

If a levy has been made or is about to be made on any property, any person having custody or control of any books or records that may contain evidence or statements relating to the property subject to levy, must, upon demand of the Secretary, provide such books or records to the IRS for review.[7]

Property Exempt from Levy

The following property is exempt from levy[8]

  1. wearing apparel and schoolbooks;
  2. fuel, provisions, furniture, and personal effects not exceeding $6,250 in value;
  3. books and tools of a trade, business, or profession not exceeding $3,125 in value;
  4. unemployment benefits;
  5. undelivered mail;
  6. certain government annuity and pension payments;
  7. workmen’s compensation;
  8. judgments for support of minor children;
  9. a portion of wages, salary, and other income;[9]
  10. certain service-connected disability payments;
  11. certain public assistance payments;
  12. assistance under the Job Training Partnership Act; and
  13. residences in small deficiency cases and principal residences and certain business assets exempt in absence of certain approval or jeopardy.

A “residence in a small deficiency case” is any real property used as a residence by the taxpayer or real property of the taxpayer used by any other individual as a residence (other than a rental), and a small deficiency case is one in which the levy does not exceed $5,000.[10] No other property is exempt (including Social Security).[11] A principal residence will not be exempt from levy if the District Court of the United States approves in writing the levy of such residence.[12]

Sale of Seized Property

As soon as possible after the seizure of property, but prior to the sale of the property, the IRS will provide written notice of the seizure to the owner of the property at his usual place of abode or business or mailed to his last known address.[13] The notice must specify the sum demanded and must contain an account of the personal property seized or a description with reasonable certainty of the real property seized.

Prior to sale, the IRS must provide the owner of the property with notice of the sale, again at his usual place of abode or business or mailed to his last known address.[14] The IRS must also publish the notice of sale.[15]

If the levied property is not divisible, meaning that the IRS may not satisfy the whole amount of tax in expenses through the sale of part of the property, the whole of the property will be sold.[16] The sale should take place not less than 10 days nor more than 40 days from the time public notice is given.[17]

The sale should take place within the county in which the property is seized (unless the IRS brass says otherwise).[18] The owner of any property seized by levy may request that the IRS sell the property within 60 days after such request, and the IRS should comply with such request unless it is not in the best interests of the IRS.[19]

Before the sale, the IRS must determine a minimum price below which the property should not be sold or whether the purchase of the property by the IRS at the minimum price would be in the best interest of the United States.[20] The property should be sold to the highest bidder for not less than the minimum price.[21]

If the property doesn’t sell for the minimum price to a third party or the IRS, the property will be released back to the owner of the property, the cost of the sale and levy will be added to the amount to be collected, and it will remain subject to a federal tax lien.[22] The sale of seized property shall be stayed pending a Tax Court decision.[23]

When the property is sold, the IRS will provide the purchaser a certificate of sale upon payment of the full purchase price.[24] After the redemption period runs without redemption,[25] the IRS will execute a deed transferring the property to the purchaser.[26] If the IRS is the purchaser,[27] it will deed the property to itself forthwith.

Redemption of Property

At any time prior to the sale of such property levied and seized by the IRS, the owner of such property may pay the amount due, together with the expenses of the levy and sale proceeding, and upon the IRS’s receipt of payment all further proceedings in connection with the levy will cease, and the property will be restored to the owner.[28]

If the property is sold,[29] the owners, their heirs, executors or administrators, or any person having any interest therein (or a lien thereon) may redeem the property at any time within 180 days after the sale.[30] If the property is redeemed, the purchaser will be paid the sale price.[31]

Application of Proceeds of Levy

Any money realized by the seizure of assets or the sale of property are applied first against the expenses of the proceedings, second to any specific tax liability on the seized property, and third against the liability of the delinquent taxpayer.[32] Any surplus proceeds must be credited or refunded by the IRS to the person or persons legally entitled thereto.[33]

Authority to Release Levy and Return Property

The IRS may release the levy upon all or part of the property levied upon if any one of five tests are met.[34] The levy will be released if[35]

  1. the liability for which the levy was made is satisfied or becomes unenforceable by reason of lapse of time;
  2. release of the levy will facilitate the collection of the liability;
  3. the taxpayer has entered into an installment agreement;[36]
  4. the IRS determines that the levy is creating an economic hardship due to the financial condition of the taxpayer; or
  5. the fair market value of the property exceeds the liability and release of the levy on a part of the property could be made without jeopardizing the collection of such liability.

Importantly, the release of the levy on property will not prevent any subsequent levy on the same property.[37]

If the IRS determines that the property has been wrongfully levied upon the IRS will return the specific property levied upon, an amount of money equal to the amount of money levied upon, or an amount of money equal to the amount of money received by the IRS from the sale of such property.[38] Property may be returned at any time.[39]

An amount equal to the amount of money levied upon or received from such sale may be returned at any time before the expiration of 2 years from the date of such levy.[40] Interest will be allowed and paid at the overpayment rate established under IRC § 6621.[41]

If the levy on the property was premature or “otherwise not in accordance with the administrative procedures of the IRS,” property may be returned.[42] Further, if the taxpayer enters into installment agreement,[43] the return of such property would facilitate the collection of the tax liability, or the return of the property would be in the best interests of the taxpayer and the United States,[44] then the property may be returned to the taxpayer.[45]

In the case of the levy on salary and wages payable to or received by the taxpayer, upon agreement with the taxpayer that the tax is not collectible, the IRS will release the levy as soon as practicable.[46] If the IRS levied a retirement plan and subsequently returns the funds, the taxpayer will be held harmless, the distribution on account of the levy will be treated as a rollover, and the taxpayer will not be liable for any taxes.[47]


Footnotes:

[1] At the underpayment rate of IRC § 6621.

[2] IRC § 6632(d)(1).

[3] Id.

[4] IRC § 6632(d)(2).

[5] Id.

[6] IRC § 6332(e).

[7] IRC § 6633.

[8] IRC § 6334(a).

[9] Calculated under IRC § 6334(d).

[10] IRC § 6334(a)(13)(A).

[11] IRC § 6334(c).

[12] IRC § 6332(e)(1)(A).

[13] IRC § 6335(a) (notice of seizure); IRC § 6335(b) (notice of sale).

[14] IRC § 6335(b).

[15] Id.

[16] IRC § 6335(c).

[17] IRC § 6335(d).

[18] Id.

[19] IRC § 6335(f).

[20] IRC § 6335(e)(1)(A).

[21] IRC § 6335(e)(1)(B).

[22] IRC § 6335(e)(1)(D).

[23] IRC § 6335(g); IRC § 6863(b)(3).

[24] IRC § 6338(a).

[25] As the period is set forth in IRC § 6337.

[26] IRC § 6338(b).

[27] In accordance with IRC § 6335

[28] IRC § 6337(a).

[29] As provided in IRC § 6335.

[30] IRC § 6337(b)(1).

[31] IRC § 6337(b)(2).

[32] IRC § 6342(a)(1)-(3).

[33] IRC § 6342(b).

[34] IRC § 6343(a)(1).

[35] IRC § 6343(a)(1)(A)-(E).

[36] Pursuant to IRC § 6159.

[37] IRC § 6343(a)(3).

[38] IRC § 6343(b).

[39] Id.

[40] Id.

[41] IRC § 6343(c).

[42] IRC § 6343(d)(2)(A).

[43] Pursuant to IRC § 6159.

[44] As determined by the Taxpayer Advocate.

[45] IRC § 6343(d)(2)(B)-(D).

[46] IRC § 6343(e).

[47] IRC § 6343(f).

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