Lien, Levy, and Seizures
Revenue officers and ACS are authorized to seize assets controlled by third parties, including wages, bank deposits, certificates of deposit, accounts receivable, and other intangible personal property belonging to the taxpayer. These levies are normally issued by the IRS computer system. A revenue officer may seize, with proper approval, items of tangible personal property including, business assets, vehicles, safety deposit box contents, and other salable personal property.
Before a notice of lien or levy is issued, a revenue officer is required, “where appropriate (RRA 98 § 3421),” to have a supervisor review the taxpayer’s information, verify the balance due, and affirm that a lien, levy or seizure is appropriate. The IRS has chosen a broad interpretation of “appropriate,” taking the position revenue officers may levy in most cases without supervisory approval.
Conversely, a revenue officer cannot seize the primary residence of the taxpayer or the taxpayer’s spouse, former spouse, or minor child without prior judicial approval.
Also, a revenue officer must have managerial approval prior to seizing tangible personal property or real property used in trade or sale of business and, before doing so, must exhaust all other payment options.
Although not required before seizure, the IRS usually files a Federal Tax Lien to confirm its priority and provide public notice of their claim against the taxpayer’s assets.
Notices of Levy
Two common forms the IRS utilizes to reach intangible assets controlled by third parties are:
- Form 668-A, Notice of Levy. This form is used to levy on or in combination with seizure of intangible personal property held by a third party, such as a bank or other financial institution.
- Form 668-W, Notice of Levy on Wages and Other Income. This form is used to levy on the wages or other sources of income.
Except in jeopardy cases, the IRS must provide a taxpayer with written notice of their intent to levy, which they accomplish through issuance of Letter 1058, “FINAL NOTICE, NOTICE OF INTENT TO LEVY AND NOTICE OF YOUR RIGHT TO A HEARING. PLEASE RESPOND IMMEDIATELY.” The notice is served on the taxpayer by registered/certified mail return receipt requested or in person. The taxpayer has 30 days to file a request for Collection Due Process (CDP) hearing relating to tax periods/liabilities reflected on the notice. No levy action can occur during that 30 day period or, if timely filed, during the pendency of a CDP hearing process.
If a return receipt is not returned, the IRS can proceed against the taxpayer with levy action 30 days after the Letter 1058 was mailed. However, the IRS must provide a pre-levy equivalent hearing if subsequently requested by the taxpayer.
Jeopardy levies, state tax refund levies, and required notices
Taxpayers are not afforded a § 6330 hearing prior to a jeopardy levy or a levy on a State-issued tax refund. With a jeopardy levy, the taxpayer has a right to a post-levy § 6330 notice and post-levy § 6330 hearing and court determination. Due to the immediacy involved in jeopardy assessments, these files are given the highest priority. With a state-issued tax refund levy, the taxpayer will be provided a pre-levy 6331(d) CP-504 Notice, post-levy § 6330 notice, and has the right to a § 6330 hearing and court determination.
Collection due process request
The following are procedures for filing a CDP request.
• A taxpayer may request a CDP hearing, through a Form 12153, within 30 days following their receipt of the notice of levy.
• Although a taxpayer may attempt to reach an informal resolution prior to an § 6330 hearing, they must request the hearing within the 30-day period to preserve their rights in the event the issues cannot be resolved informally.
• A Form 12153 may be used by a taxpayer to request a CDP, but it is not required. The taxpayer may make an informal written request that must include the taxpayer’s name, address, phone number, type of tax, taxable period, taxpayer’s TIN, a statement requesting a CDP hearing relating to the proposed levy action, the taxpayer’s reasons for disagreement with the proposed levy, and be signed and dated by the taxpayer or their representative.
• The taxpayer may propose an offer in compromise or installment agreement in their CDP request.
Many cases can be settled informally by the revenue officer or Appeals without the need for an actual CDP hearing. However, the taxpayer needs to request a hearing within the 30-day period to protect their right to Appeal and to judicial examination.
Disqualified employment tax levy
The IRS is not required to hold a CDP hearing before issuing a levy to collect federal employment taxes if the taxpayer requested a CDP hearing relating to unpaid employment taxes within the two-year period before the start of the taxable period that is the subject of the current employment tax levy. However, the taxpayer may request a hearing within a reasonable period of time after the levy. In such instances, IRS may levy on the taxpayer without first issuing a Letter 1058.
Issues considered at CDP hearings
During a CDP hearing, the taxpayer may raise pertinent issues relating to the IRS’s collection activities. Pertinent issues include:
•• A taxpayer can raise appropriate spousal defenses during a CDP hearing. However, taxpayers cannot request relief under § 66 and § 6015 for tax liabilities/years if a final determination as to spousal defense has been previously made through a notice of deficiency (NOD) or final determination letter for those tax liabilities/years or a final decision on the spousal defense was previously rendered through administrative or judicial proceeding for those tax liabilities/years.
•• A taxpayer may contest the correctness of collection action during a CDP hearing.
•• A taxpayer may offer alternatives to the collection action, including:
•o an installment agreement,
•o an offer-in-compromise,
•o posting of a bond,
•o substitution of other assets, and
•o discontinuing collection action to enable future payment.
The taxpayer may also contest the actuality or amount of the tax liability, if the taxpayer did not received a NOD or have other opportunity to dispute the tax liability.
Frivolous CDP hearing request
If the taxpayer submits an issue for the CDP hearing request that the IRS determines to be a “specified frivolous position” or was filed for the sole purpose of delaying or impeding IRS collection activity a penalty of $5,000 may be issued against the taxpayer.
Consideration of collection alternatives
In consideration of collection alternatives submitted by the taxpayer, Appeals must review all relevant evidence provided by the taxpayer, permit the taxpayer reasonable time to provide requested documentation, abide by statutory and regulatory limitations, and, if rejected, provide a detailed explanation in the notice of determination why the collection alternatives offered by the taxpayer were rejected.
The following are a sampling of why collection alternatives may be rejected by Appeals:
- if the taxpayer defaulted on a previous installment agreement.
- if a taxpayer fails to provide necessary financial information relating to an OIC during the CDP hearing.
- if a taxpayer failed to stay current on tax deposits.
A doubt of liability OIC will not be considered as a collection alternative in a CDP hearing request if the taxpayer previously received a notice of deficiency or had another occasion to dispute the liability and neglected to timely do so.
If a taxpayer had an OIC rejected by Appeals prior to a CDP request, the taxpayer may submit a new OIC as a collection alternative if they show the new OIC reflects changed circumstances and provides updated financial information. Appeals may review the previously rejected OIC for compliance issues, but the old OIC may not be considered during the CDP hearing.
If a taxpayer did not receive a statutory notice of deficiency or otherwise did not have an occasion to argue against the tax liability, the taxpayer may contest the actuality or amount of the underlying tax liability in a CDP hearing. If a taxpayer is determined to be ineligible to contest the existence or amount of the underlying tax liability in a CDP hearing, the they are also precluded from raising that issue in a judicial review proceeding. Also, if taxpayer does not raise the issue of the correctness of the tax liability during the CDP hearing, they cannot dispute it in a CDP judicial review proceeding.
Receipt of a statutory notice of deficiency
The IRS has the must show, by a preponderance of the evidence, that the taxpayer received the statutory notice of deficiency in time to petition the Tax Court to review the accuracy of the deficiency claimed by the IRS.
Without direct evidence that the taxpayer received or refused delivery of the notice of deficiency or refused its delivery, the IRS utilizes the presumption of official regularity and delivery to meet his burden of proof, i.e., there is belief in the law that a properly addressed letter will be delivered to the addressee. The statutory notice of deficiency will be sent by certified mail to the taxpayer’s last known address. The presumptions of official regularity and delivery may be refuted if the notice of deficiency is returned to the IRS marked “undeliverable.”
If the presumptions of official regularity and delivery apply, then the burden shifts to the taxpayer to rebut the presumptions. Rebuttal attempt will be rejected if the IRS can show, for example:
- the taxpayer intentionally provided an incorrect address to avoid delivery of IRS correspondence.
- the taxpayer refused delivery or deliberately took steps to prevent delivery of the deficiency notice.
- the taxpayer admitted to receiving other mail at the address on the notice.
“Other opportunity” to dispute liability
A CDP hearing request cannot be used to dispute the underlying tax liability if the taxpayer had a prior other opportunity to dispute the liability in an administrative hearing before Appeals or in a judicial proceeding. Opportunities to dispute the liability prior to a CDP hearing include:
- Appeals hearing – a prior opportunity for a conference with Appeals, provided for in a letter or in which the taxpayer actually participated, either before or after assessment of the liability.
- Pre-assessment letters – receipt of a notice that includes an opportunity to dispute taxes to which deficiency procedures do not apply in Appeals, including:
•o notice of a proposed excise tax assessment (Letter 955).
•o notice of a proposed trust fund recovery penalty assessment (Letter 1153(DO)).
•o notice that a IRC § 6682 penalty will be assessed.
•o notice of proposed employment tax assessment (Letter 950)
•o notice of proposed return preparer penalty assessment (Letter 1125(DO))
- Letter 105c disallowing refund claim – receipt of a letter denying a refund claim that gives the taxpayer an opportunity to dispute the disallowance in Appeals.
- Prior CDP notice – receipt of a prior CDP notice under IRC § 6320 or § 6330 for the same tax and taxable period, whether or not a CDP hearing was requested.
- Audit consideration – a prior audit reconsideration, if the taxpayer had an opportunity to dispute the results of the reconsideration with Appeals.
If the taxpayer did not take the available prior opportunity to dispute the tax liability, they will be prevented from disputing the same tax and taxable period in a following CDP hearing.
Situations that are barred from being heard during CDP hearing include:
- If upon receipt of notice, the taxpayer contests an assessment stemming from a math or clerical error on their return, the IRS is must abate the assessment immediately. Reassessment of the tax is subject to the deficiency procedures. The IRS does not provide the taxpayer an opportunity for an Appeals hearing prior to issuance of the notice of deficiency in these cases.
- If the taxpayer had an opportunity for a prior penalty Appeals hearing after denial of a penalty abatement request.
- If a taxpayer signed a Form 4549 consenting to the immediate assessment and collection of a tax liability.
- If the Service filed a proof of claim regarding an unpaid tax liability in a bankruptcy proceeding and the bankruptcy court had jurisdiction to determine the liability.
- If a tax lien foreclosure suit or a suit to reduce assessments to judgment involving the tax liability is held.
Determination by appeals
In making a CDP determination, an appeals officer is required to:
- ensure applicable law or administrative procedure requirements have been met;
- consider issues raised by the taxpayer at the hearing; and
- determine if the suggested collection action weighs the need for collection of taxes with being minimally intrusive to the taxpayer as the situation allows.
A “Notice of Determination Concerning Collection Action(s) under I.R.C. Section 6320 and/or 6330” is issued by certified mail to the taxpayer’s last known address, includes a summary of the determination, the Appeals’ officer’s basis for the determination, and advises them of their right to judicial review by the Tax Court.
Judicial review of CDP hearing
If the taxpayer decides to have the Tax Court review the CDP hearing determination, they must make the appeal to the Tax Court within 30 calendar days of the date of the determination letter. The taxpayer may not raise new issues for judicial review, only those included in the CDP hearing. The Tax Court will review issues relating to whether or not the tax is valid, including spousal claims, on a de novo basis, i.e., without consideration of prior determinations. Other matters are reviewed by the Tax Court on an abuse of discretion measure.
If a taxpayer does not timely request a CDP hearing, they may request an “equivalent hearing” with Appeals within one year of the proposed levy. An equivalent hearing is largely similar to the CDP hearing, but is not subject to judicial review. While the taxpayer is not provided with suspensions for limitation periods during the equivalency hearing pendency, as it is with a CDP hearing, collection action may be suspended during its pendency as a matter of policy.
Suspension of collection statute of limitations
The IRS is prohibited from taking lien or levy action during the pendency of the CDP hearing proceeding and, concurrently, the statute of limitations on collection is suspended during the same period. The IRS may take lien or levy action during the pendency of CDP hearing proceedings in the event of jeopardy or a levy upon a state tax refund.
Form 668-A, Notice of Levy
Form 668-A, Notice of Levy, is utilized by the IRS to seize funds in bank accounts, accounts receivable, and the cash value of life insurance from third parties holding assets for the taxpayer. The Levy attaches only to the funds/assets held for the taxpayer at the time the levy is received by the third party. Therefore, if a taxpayer deposits funds into their bank account subsequent to the bank receiving the IRS levy, the levy does not attach to those newly deposited funds. However, the IRS has the option of issuing successive levies.
- Bank or financial institution – When a bank or financial institution is served with a Form 668-A, it is required to hold the levied funds to which it attached in escrow for at least 21 days. The funds held cannot be utilized by taxpayer, the IRS, or the bank during the 21-day period.
- Accounts receivable, including notes receivable and other assets – depending upon the type of accounts/notes receivable, the IRS may issue a levy to attach to one payment or unqualified installment payments. If it is uncertain of the taxpayer’s right to receive future/additional installment payments, the IRS may issue a 668-A as each installment is due.
- Benefit Income – The IRS can issue a continuous levy that attaches to 15% of the following payments:
•o benefits based on a payee’s income or assets (or both);
•o worker’s compensation;
•o the lowest exempted amount of salary;
•o annuity or pension under the Railroad Retirement Act and benefits under the Railroad Unemployment Insurance Act; and
•o unemployment benefits and certain means-tested public assistance.
- Levy on lump sum of IRA or pension plan – The IRS cannot force distribution from a pension plan if a lump sum payment is not available to taxpayer. If the taxpayer can withdraw a lump sum from an IRA, the IRS may levy the lump sum and the taxpayer must report that amount as income in the year the funds were levied.
•o Waiver of early withdrawal tax – If the IRS levies on an employer-sponsored retirement plan or IRA, the funds withdrawn through the IRS levy are exempt from the 10% early withdrawal tax.
- Levy on IRAs and 401K plans – If the IRS levies upon IRAs, Keoghs, and 401K plans, it cannot assess an excise penalty on the funds involuntarily withdrawn, however, the taxpayer does have to pay the resulting income tax.
- Cash loan value of insurance – The IRS can levy upon the cash loan value of insurance, without surrender of the policy.
Form 668-W, Notice of Levy on Wages, Salary, and Other Income
A Form 668-W, Notice of Levy on Wages and Other Income, is served upon the taxpayer’s employer. If the taxpayer does not fill out the exemption form that is furnished to the employer with the Form 668-W, the employer is required to compute the exemption as if the taxpayer was married filing separately with one exemption, with the remainder of the net pay submitted to the IRS. Court-ordered child support payments will increase the statutory allowance for dependents.
The IRS will generally limit a levy to take home pay, i.e., allowing for the usual deductions for pension, health insurance, et cetera, unless the IRS determines the taxpayer is intentionally assigning pay toward deductions to defeat the levy.
With management approval, 15 percent of social security benefits, on a continuing basis, may be seized through a 668-W issued to the Social Security Administration.
There are court cases to support the IRS levying upon independent contractors, such as realtors and truck drivers, on an ongoing basis.
Release of Levy on Wages
The IRS should release a levy in the following situations:
•· The levy was issued prior to the expiration of the 30 day notice period and it was not a jeopardy situation.
•· The taxpayer paid the liability in full or the liability will be paid in full after application of a pending adjustment.
•· The levy is creating an economic hardship (file a Form 911 through the Taxpayer Advocate Service or request currently not collectible status).
•· The notice was not sent to the taxpayer’s most recent confirmed address.
•· Release of the levy will enable the IRS to collect on the liability.
•· The statute of limitations on collection expired.
•· The taxpayer enters into an installment agreement.
•· The taxpayer submits an Offer in Compromise.
•· The taxpayer filed for bankruptcy.
•· The IRS did not follow proper levy procedures.
If, after review of the taxpayer’s financial condition, the IRS determines the taxpayer is unable to pay the tax liability, the IRS will place the taxpayer’s account in currently non-collectible status. If a taxpayer’s account is placed in currently non-collectible status, the IRS will immediately release a wage levy.
A taxpayer can submit a Form 911 to the Taxpayer Advocate Service to request assistance in effectuating the release of a levy. Through the Form 911 the taxpayer must demonstrate the levy will cause a significant hardship. Significant hardship includes, but is not limited to the following situations:
- The immediate risk of adverse action exists;
- Where resolution of the taxpayer’s account is delayed for more than 30 days;
- The taxpayer will incur significant cost in professional fees to negotiate resolution of the account if relief is not granted; or
- The taxpayer will suffer irreparable damage or a protracted harmful effect.
Levy on Joint Ownership Account
The IRS may issue a Notice of Levy to a financial institution where the taxpayer has a joint account with a third party. It is the burden of the third party to show the funds in the joint account did not originate from or on behalf of the taxpayer.
Very few items are exempt from levy by the IRS, those are:
- everyday clothing,
- school books,
- personal items of limited value,
- books and tools on a trade, business, or profession,
- welfare benefits, and
- Supplemental Social Security benefits.
The IRS is prohibited from seizing a taxpayer’s residence for a tax liability that is less than $5,000. Additionally, it cannot seize real property that is the primary residence of the taxpayer, the taxpayer’s spouse, former spouse, or minor child without judicial approval. The taxpayer and relevant family member(s) must be given advanced notice of the judicial hearing at which the IRS must show proper legal/administrative requirements were met, the tax liability is owed, and they exhausted all other reasonable collection sources.
To effect the seizure of a primary residence, the revenue officer will prepare a suit narrative report that is then presented to levels of IRS management and, if approved, to DOJ counsel to prepare and file suit in the U.S. District Court.
The suit narrative report will contain the taxpayer’s name, address, and taxpayer identification number and then follow a basic format:
Introduction will generally include:
• A request for civil action to obtain judicial approval for seizure of principal residence.
• Funds expected as the net sale proceeds.
• The type of tax and current outstanding balance.
• The collection statute expiration date.
• A summary of actions or explanation why specific actions were not taken.
• If needed, explanation and request for urgent action
•· A chronological listing of facts, with supporting exhibits.
Conclusion and Recommendation:
• Summarized facts for seizure of principal residence.
• Re-stated request for civil action.
The following will be included in the package:
•o Calculation of estimated minimum net sale proceeds
•o Commercial title report
•o Copies of Notices of Federal Tax Lien
•o Copy of Deed to Property
•o Form 13719, Pre-Seizure Checklist and Approval Request
•o Form 2433, Notice of Seizure
•o Form 2434-B, Notice of Encumbrances Against or Interests in Property Offered for Sale
•o Form 4477, Civil Suit Recommendation
•o Suit Narrative Report
•o Any other relevant documents, such as including appraisals