Levy, Seizure, Summons
The IRS cannot levy on a taxpayer’s tangible personal property or real property used in the trade or sale of business, without managerial/supervisory approval or court approval. Tangible business assets include property that can be physically seized and sold, such as vehicles and inventory. Additionally, approval can only be given after it is determined other assets are inadequate to pay the tax liability. Approval is not needed:
- if a jeopardy determination has been made,
- for intangible property, such as copyrights and certificates of stock, or
- before seizure of the business assets of a partnership or corporation; only for assets used in the trade/business of an individual taxpayer.
As long as it is timely made, the taxpayer can request judicial review prior to levy action by the IRS.
The Supreme Court has determined it to be a violation of a taxpayer’s Fourth Amendment Rights for the IRS to enter and search private premises they intend to seize without prior consent from the taxpayer or court approval through a Writ of Entry. Private premise is considered a location where the taxpayer has a reasonable expectation of privacy and where the general public not normally allowed. The IRS is not required to obtain a Writ of Entry for taxpayer assets located on public property or on private property that is accessible to the public.
For seizure of business property, the IRS must obtain taxpayer consent or a Writ of Entry to enter the “private area” of the taxpayer’s business. A Writ of Entry is not a search warrant. Examples of areas commonly considered private are:
- Restaurant kitchen areas
- Service departments
- Private self-storage facilities
- Garages and other attached or unattached structures
- Product storage areas for retail establishments
- Manufacturing plant production properties
- Fenced properties
- Cash registers
- Safe deposit boxes
- Company office areas
If the taxpayer does not provide consent to the IRS, as applicable, the revenue officer will request a Writ of Entry. Exceptions to the Writ of Entry requirement are limited to cases:
- When it is believed that advance notice will jeopardize the safety of the revenue officer(s),
- When attempts to contact the taxpayer or rightful occupant fail, or
- When there are other unforeseen circumstances.
If it is believed the taxpayer will attempt to place assets beyond the reach of the IRS, or if the taxpayer has previously done so, a Writ of Entry will be pursued without consent procedures.
If “private parking-authorized vehicles only” is posted or it is otherwise indicated the area is not accessible to the general public, contingent upon local policy and/or District Counsel, the IRS is required to obtain a Writ of Entry, which provides the taxpayer advance notice of the IRS’s contemplated action.
The IRS may enter into the restaurant or any other business of a delinquent taxpayer and seize all assets in the “public area,” i.e., the area in which the public is normally allowed, such as tables, chairs, stools, and booths. The IRS is required to obtain the taxpayer’s consent and/or a Writ of Entry before inventorying/seizing assets in non-public areas, such as contents of cash registers, items behind a bar/counter, at a serving station, in the food preparation area, and office of the restaurant. In an effort to avoid duplication of effort, Revenue Officers usually opt to seize all assets of the premises, not just what is available in “public areas,” upon receipt of the taxpayer’s consent or a Writ of Entry.
The Revenue Officer is required assign value to each property item on Form 2433, Notice of Seizure, and provide the Form 2433 to the taxpayer at the time of seizure, the value(s) of which the taxpayer may contest.
In seizure of a business by the IRS, the taxpayer and his employees are permitted to remove their personal property. Additionally, the Revenue Officer is prohibited from examining the books and records of the business, other than through a summons. Therefore the taxpayer should remove all books and records of the business from the premises without examination by the Revenue Officer.
The IRS must provide reasonable safeguards to protect the taxpayer’s property while it is under seizure, including, but not limited to, maintaining a burglar alarm system, heat and cool the premises, continue insurance payments, and make rent payments.
A taxpayer who obstructs an IRS seizure may be subject to criminal prosecution. It is a felony to remove/conceal property with intent to evade or defeat the collection of tax upon which levy is authorized. A taxpayer is also subject to prosecution if they threaten or attempt to intimidate a Revenue Officer during the performance their responsibilities tries, or tries to liberate property which has been seized by the IRS.
Some, but not all, situations during which seizures are prohibited, according to the Internal Revenue Code (IRC), are:
- When the taxpayer has insufficient equity in the property.
- When an Installment Agreement (IA) is pending or in effect, including 30 days after rejection/termination of the IA, and during an appeal filed within that 30 day period.
- When an Offer in Compromise (OIC) is pending, including 30 days after rejection of the OIC and during an appeal filed within that 30 day period.
- When the taxpayer is in bankruptcy.
- Real property used as a primary residence by the taxpayer, or any non-rental real property used by any other individual as a primary residence, if the liability is $5,000 or less.
- Before Collection Due Process (CDP) notices are issued, while CDP hearings and appeals are pending (unless jeopardy applies), while innocent spouse claims are pending, and primary residences without court approval.
The IRS is required to search for all payment options prior to seizing a taxpayer’s business assets or primary residence. Additionally, the IRS cannot seize real property used as a primary residence by the taxpayer, or non-rental real property of the taxpayer used by another individual as a primary residence, to pay toward a liability of $5,000 or less, including penalties and interest. The IRS can only levy on a principal residence of the taxpayer, taxpayer’s spouse, ex-spouse, or minor child if a United States District Court judge or magistrate gives written approval. The taxpayer and relevant family members must be given notice of USDC hearing to seize real property used as the taxpayer’s primary residence. At the hearing, the IRS must to show:
- the requirements of any applicable law or administrative procedure relevant to the levy have been met,
- the liability is owed, and
- no reasonable alternative for the collection of the taxpayer’s debt exists.
The IRS does not remove taxpayers from their home at the time of seizure. Instead, a Revenue Officer will go to the residence and serve the taxpayer with the 668-B Levy and the Notice of Seizure. The taxpayer does not have to permit the IRS employee(s) entry into the residence. The taxpayer is permitted to live in the residence during the sale process.
Request expedited opinion
Under IRC § 6343 (2), in certain conditions, a taxpayer can request an expedited opinion on levied business assets, if the levy on tangible personal property will preclude the taxpayer from performing their business operation.
The IRS is required to determine a Minimum Bid Price for seized property and provide the taxpayer a copy of its calculations, including its value of the assets, on Form 4585. Attached to the Form 4585, will be a letter to the taxpayer advising them of their right to protest the value set by the revenue officer and request a qualified appraisal.
If a Revenue Officer grossly understates the value of seized property, the taxpayer can preserve their rights as set forth on the reverse of Form 4585.
Previously, the IRS could reduce the minimum bid offer amount at auction. Now, if the minimum bid is not met at the time of auction, the IRS is prohibited from reducing the minimum bid price on the spot. If the IRS decides to reduce the minimum bid price it must follow the proper redetermination procedure and provide proper notice to the taxpayer.
Notice of Sale
The Service is required to publish a Notice of Sale in a newspaper or other medium of general circulation within the county in which the property is located at least 10 days, but not more than 40 days, prior to the contemplated sale date. Sales are of two types: Public Auction Sale and Sealed Bid Sale. The taxpayer should be personally served with a notice of sale. The choice of whether to sell property at public auction or by sealed bid is left to the Revenue Officer. You or your client, however, may make suggestions as to the best sale method. The Revenue Officer is required at the time of advertising the property for sale, to personally deliver a copy of the sale notice to the taxpayer if he or she can be located in the county in which the property is located.
The IRS is directed to sell seized property within a reasonable amount of time, i.e. there is no maximum amount of time they can hold the property under seizure prior to offering it for sale. However, the taxpayer may ask that seized property be sold within 60 days of their request. If the IRS determines a sale within 60 days is not in their best interest, they must notify the taxpayer within the 60 day timeframe.
After issuing a Public Auction Notice, the Revenue Officer can postpone a sale for a maximum of 30 days from the originally scheduled sale date. However, the postponement option should not be used by a Revenue Officer to amend the minimum bid to a lower amount or because the minimum bid was not reached. The Revenue Officer can utilize a Sealed Bid Sale, so long as the minimum bid is met. The IRS has the option to “bid in” if the minimum bid is not reached.
The successful bidder will receive a Certificate of Sale, which transfers the right, title, and interest of the taxpayer conditioned upon prior encumbrances.
The IRS is authorized to utilize an outside auctioneer at IRS sales, but rarely does so, opting to use Revenue Officers as the auctioneer in most cases.
Release/Return of Seized Property
Under IRC § 6343(a)(1), a levy can be released in situations where the liability is satisfied or the statute for collection has run, release will help with the collection of the liability, the taxpayer has entered into an agreement to satisfy the liability, the levy is causing an economic hardship, or the fair market value of the property exceeds the liability.
Under IRC 6343(d), the IRS is authorized to return levied properties if the levy was premature or improperly issued, the taxpayer entered into an agreement to satisfy the tax liability subject to the levy, return will benefit collection of the tax liability, or return is in the best interest of the taxpayer and the United States.
The taxpayer has the option to negotiate an acceptable payment to the Revenue Office for release of the seized property prior to sale.
Defects in seizure process
Any flaws in the IRS seizure and sale procedure of a taxpayer’s property should be pointed out to the Revenue Officer and the prospective bidders prior to/at the sale.
Failure to reach minimum bid
If the Minimum Bid Price established by the Service is not met, the taxpayer can compel the IRS to “bid in” the property at the Minimum Bid Price or release the seized property to the taxpayer within 30 days.
Redemption of property
Any time prior to sale, the taxpayer may buy back their seized property through an amount negotiated with the Revenue Officer, which is, generally, the value of the lien on the property.
Any party may bid at an IRS sale, including a person friendly to the taxpayer. However, if the IRS establishes that an accepted bid was made by an individual who is a “nominee” or “strawman” for the taxpayer, the IRS can seize the property from the individual. A sale to a person friendly to the taxpayer is valid, if the individual establishes an independent source of funds, i.e. not from the taxpayer.
In states that do not have community property laws, a non-liable spouse can purchase the taxpayer’s property from the IRS. In such cases, the purchasing spouse will have clear title to the property, as long as they were not acting as a “nominee” or “strawman” for the taxpayer.
In the event corporate property is being sold by the IRS, shareholders or officers may bid on their own behalf or form a new entity to buy the property. The sale will be void if is determined the buyer is acting as a strawman, nominee, or used the taxpayer entity’s funds to purchase the property.
The taxpayer does not have a right to redeem personal property after it is sold, but does have the right to redeem real property within 180 days after it is sold by paying the accepted bid price, plus interest at a rate of 20 percent per year.
Seized property sale report
The Revenue Officer is required to provide the taxpayer with a Seized Property Sale Report on IRS Form 2436 upon sale of seized property. The form lists the proceeds from the sale, the costs of seizing and selling the property incurred by the IRS, and identifies the successful bidder.
Accounting of sales of seized property
The IRS is required to provide an accounting of all sales of seized property, whether real or personal, to the taxpayer, including the amount credited to the taxpayer’s account.
- A Revenue Officer may accept a payment plan proposed after seizure has occurred and release the seized property/assets without proceeding to sale.
- Another option is for the taxpayer to offer to make a payment of the minimum bid offer for the seized property, along with a proposed payment plan for the remaining tax balance. If accepted, the Revenue Officer will release the seized property.
- If a release of seizure is unsuccessful through Collection Division employees, the taxpayer can file a Form 911 with the local Taxpayer Advocate Service (TAS), requesting a Taxpayer Assistance Order (TAO). The taxpayer is required to demonstrate the seizure will cause significant hardship. Significant hardship, according to IRM 184.108.40.206(3), is considered situations where there is immediate danger of adverse action, more than 30 days’ delay, significant cost by the taxpayer (such as professional fees), permanent injury or long-term adverse effect on the taxpayer, and serious hardship.
- IRC § 6330(a)(1) provides that the IRS much notify a taxpayer in writing of their right to hearing before levy is made on their property or their right to any property.
- The taxpayer is afforded an opportunity to file a Collection Due Process (CDP) Appeal within 30 days of a Letter 1058, advising them the IRS intends to seize property/assets. With the filing of a CDP appeal, an Appeals Officer, as opposed to a Collection Division employee, will decide whether or not to release or allow a seizure. If the appeal is denied, the taxpayer can file a suit requesting the proposed seizure be prevented. If the taxpayer fails to file an appeal within the 30-day period, a request for an equivalent hearing through the Appeals Office may still be made; however, the taxpayer does not have the option of filing a suit if the appeal is denied.
- Offer in Compromise is an option during IRS seizure negotiations.
- The taxpayer has the option filing bankruptcy. By doing so, the IRS is prevented from selling property it seized. Additionally, if it has not already done so, the IRS cannot seize property during the pendency of the taxpayer’s bankruptcy proceeding, unless permitted by the bankruptcy judge.
IRS employees are given extensive authority by the IRC to compel the production of books, records, and/or testimony relating to:
- preparation of unfiled returns,
- determining tax, transfer, or fiduciary liability,
- correctness of a filed return, or
- collection of tax liability.
A summons frequently issued by the IRS is one requesting tax documents needed to prepare unfiled tax returns. These summonses are issued after the IRS made attempts to obtain the information through several written requests and at least one verbal contact from a revenue officer. Upon receipt of the summons, a taxpayer may provide the documents requested, file the delinquent return(s), or provide a statement as to why they believe they do not have to file the return(s). At any time during this process, the taxpayer can retain representation to assist them communicate with the IRS.
Summonses are rarely referred to the U.S. District Court for enforcement. However, should the IRS decided to do so, the taxpayer is usually provided final opportunity to comply with the summons before litigation commences.
If the taxpayer complies with the summons by providing the requested documents for a revenue agent to prepare the tax return, the taxpayer may not be afforded all allowable expenses and deductions against their income, possibly resulting in a higher tax balance. Additionally, the taxpayer may not be permitted to later amend the IRS-prepared return unless the balance reflected on that return is paid in full. In most cases, it is preferable for a taxpayer to retain a tax practitioner to timely reply to the summons and prepare/submit the requested return(s) to the revenue officer.
The taxpayer has the right to file a motion to quash summonses issued to determine their tax liability or potential tax liability and pursue a declaration by the U.S. District Court on the weight of the summons. The IRS must give the taxpayer notice of, and a copy of each, non-collection summonses they intend to serve on a third party(ies). If a motion to quash the summons is filed, the taxpayer should notify any third-parties who maintain relevant records not to comply with the IRS’s non-collection summons and provide those third parties with a copy of the pending lawsuit. Once notified, the third-party is forbidden from providing information to the IRS while the lawsuit is pending.
The taxpayer is not entitled to quash a summons relating to the collection of a tax liability. On collection case summonses to third-parties, the IRS must set a date of appearance no sooner than 23 days from the date of the service.
The IRS must let the taxpayer know, within a reasonable amount of time before doing so, they intend to contact a third-party(ies) to assist in the determination or collection of the taxpayer’s tax liability. This advance notice allows the taxpayer an opportunity to reach out to the third-parties and advise the IRS may contact them. The advance notice also provides the taxpayer with an opportunity to provide the IRS with additional information to avoid the third-party contact, which, if not avoided, could damage business relationships and/or one’s reputation.
The IRS does not have to provide advance notice of contact with third-parties if:
- a pending criminal investigation exists,
- for good cause shown the IRS believes notifying the taxpayer will jeopardize collection of tax, or
- for good cause shown it is believed retaliation against any person will occur.
A summons issued by a special agent indicates the taxpayer is under criminal investigation and it is recommended the taxpayer immediately contact an attorney experienced in criminal tax matters. The title block, next to the signature of the issuer of the summons, will reflect whether the summons was issued by a revenue officer/revenue agent or special agent.
Under Internal Revenue Code Section 7610(a)(1), individuals summoned to appear by the IRS are entitled to witness fees and travel expenses and those summoned for records are entitled to reimbursement of copy costs and time spent locating the summoned information.
The IRS can summons a taxpayer’s books records from a practitioner, enrolled agent, attorney, or accountant for any official purpose.
The taxpayer may defend against a summons, including invoking their Fifth Amendment privileges to avoid producing self-incriminating information, and has the right to have counsel present during IRS summons proceedings.