Follow up on TBOR and CDP

In an earlier post, I wrote about an order in the case of Dang v. Commissioner remanding a Collection Due Process (CDP) case back to Appeals. Taxpayer opposed the remand requested by the IRS arguing that the Tax Court should just grant the taxpayer’s request for relief without the need of a remand. In a recent order, it looks like the Appeals employee took little time after the remand to reach the conclusion proposed by the taxpayer although the matter is not quite finally settled.

At issue in this case was the taxpayer’s request that the IRS levy on his retirement account in order to satisfy the outstanding tax debt. The revenue officer refused to do so and the Appeals employee said that the CDP hearing did not provide such a remedy. The taxpayer requested that the IRS levy on the retirement account because he was not yet 59 and 1/2. If he pulled the money out of the retirement account as requested by the RO and the SO, he would have to pay tax on the money withdrawn and a 10% excise tax under IRC 72(t)(1). If the IRS levies on the retirement account, the 10% excise tax does not apply because of IRC 72(t)(2)(A)(vii).

Among other arguments, the taxpayer argued that requiring him to pull the money out violated the Taxpayer Bill of Rights since it would cause him to pay more than the correct amount of tax. Requiring him to pull out the money just seemed downright stupid and unfair which no doubt motivated the Chief Counsel attorney to request the remand at the outset of the case. The second time around, Appeals seems to get the concept. The case suggests that some training might be needed and maybe a change in the IRM to make it easier for ROs to levy on a retirement account when requested to do so by the taxpayer. Without such a request, ROs must seek high level approval to levy on a retirement account. Removing the layers of approval when the taxpayer seeks the levy would make it easier for ROs to acquiesce to such a request.

The approval levels provide a barrier that explains why the employees would not readily acquiesce in what seems like a reasonable request by the taxpayer and why their behavior was grounded in logic twisted by the approval levels. The approvals levels necessary to levy on retirement accounts were created to protect taxpayers. So, Mr. Dang’s problem in getting the IRS to levy finds its roots in a procedure designed by the IRS to help but when coupled with the elimination of the penalty offered by IRC 72(t)(2)(A)(vii) ends up hurting certain taxpayers. It’s good to see that the IRS was able to work though the problem in the remand.

Because the case appears on a path to agreement, we will not have the opportunity to see what the Tax Court would do with the TBOR argument made by the taxpayer and whether the use of TBOR in this context might provide a path to remedy.

Updates on Collection Issues

The IRS has recently updated several matters that impact taxpayers in collection. This post pulls together some of the newly available information.  The areas discussed in this post are the financial standards, the updated offer in compromise booklet, the impact of the new law on amounts exempt from levy and the impact of the new law on the time to file wrongful levy claims.

read more...

Financial Standards

On March 26, 2018 the IRS issued new financial standards to be used in collection cases.  The new standards provide guidance to individuals seeking to prepare a collection information statement in order to convince the IRS to grant an offer in compromise, an installment agreement, to make a currently not collectible determination or to otherwise decide the appropriate course of action in a collection case.  The financial standards have their roots in information published by the Bureau of Labor Statistics.  Congress also makes them applicable in bankruptcy cases for certain purposes.

Offer in Compromise

On March 25, 2018, the IRS issued a new Offer in Compromise Booklet. The updated booklet contains the following changes:

Form 656, Section 6, Filing Requirements – “I have filed all required tax returns and have included a complete copy of any tax return filed within 60 days prior to this offer submission.”

This is also addressed in the opening Q&A section under “Other Important Facts”:

“Note: If you have filed your tax returns but you have not received a bill for at least one tax debt included on your offer, your offer and application fee may be returned and any initial payment sent with your offer will be applied to your tax debt. Include a complete copy of any tax return filed within 60 days prior to this offer submission.”

WHAT YOU NEED TO KNOW, Q&A Section, Bankruptcy, Open Audit or Innocent Spouse Claim – “If you currently have any open audit or outstanding innocent spouse claim, wait for those issues to be resolved before you submit an offer.”

PAYING FOR YOUR OFFER – There is better highlighting of the Low-Income Certification option, with emphasis that low income certification means no money need be sent with the offer.

Because the IRS will not work an offer if a taxpayer has not complied with tax laws by filing all necessary returns, many taxpayers file returns immediately prior to the filing of an offer in compromise. The IRS does not always process past due returns with haste because it puts more focus on processing the currently due returns.  The new requirement that a taxpayer attach returns filed within 60 days of the submission of the offer allows the IRS offer group to avoid rejecting cases for lack of filing compliance and to get a view of the liabilities the taxpayer owes in advance of the actual assessment.

The warning about waiting for the resolution of outstanding audits or claims should be considered in the context that an offer in compromise acts as a closing agreement resolving all matters concerning the years covered by the offer. A taxpayer cannot go back and seek a refund after obtaining an offer and the IRS cannot go back and seek an additional assessment.  It is important to resolve all issues for the years covered by the offer but many taxpayers do not appreciate the scope of the offer with respect to the years it covers.

Low income taxpayers continue to receive a benefit when applying for an offer because they do not have to pay a fee for the offer or remit a percentage of the offer. Almost all practitioners know this but many individuals filing offers pro se may not appreciate this benefit and the new booklet tries to make it clearer.

Each of the changes seem appropriate and helpful.

Exemption from Levy

The exemption from levy is tied to the personal exemption. The personal exemption went up last year and the IRS has published guidance on how that change impacts the amount of the exemption from levy in a wage levy situation.  This creates a windfall for individuals subject to a wage levy that Congress probably did not think about when it passed the law.  Of course, windfall may be the wrong term when talking about a provision that can bring a taxpayer to their knees.  Here is the IRS description of the way the wage levy provisions will now work:

Public Law Number 115‐97, TAX CUTS AND JOBS ACT OF 2017, signed by President Trump on December 22, 2017, temporarily increases the basic standard deduction applicable to the 2018 taxable year [IRC § 63(c)(2); Rev. Proc. 2016‐ 55] across all filing categories:

  • From $6,350 to $12,000 for single individuals and married individuals filing separate returns;
  • From $9,350 to $18,000 for heads of households; and
  • From $12,700 to $24,000 for married individuals filing a joint return and surviving spouses.

The Act also suspends personal exemption deductions. Both changes, the increase in the standard deduction and the suspension of the personal exemption, are effective for taxable years beginning after December 31, 2017, and before January 1, 2026. These two changes impact how a recipient of a levy will figure the amount of income exempt from levy. Prior to the change in the law, the amount that was exempt from levy was calculated by taking into consideration both the standard deduction and the total exemptions of the payee. With the elimination of personal and dependency exemptions, a new method for determining the amount of income exempt from levy was needed.

As part of the Tax Cuts and Jobs Act, Congress amended §6334 to provide that from January 1, 2018 through December 31, 2025 employers and other recipients of levies would exclude from levy $4,150 per dependent per year in addition to the amount excluded based upon the standard deduction for the filing status of the person subject to levy. The amount exempt from levy each pay period is calculated by dividing the total amount exempt from levy for the year by the number of pay periods. Publication 1494, Table for Figuring Amount Exempt from Levy on Wages, Salary, and Other Income has been updated. Changes are also being made to Forms 668-W(c), 668-W(c)(DO), 668-W (ICS) and Form 668-W, Notice of Levy on Wages, Salary, and Other Income, along with the instructions.  Due to the increase in the standard deduction amount, in most cases, the taxpayer will have more take-home pay that is exempt from levy.

Employers or others receiving levies will need to figure the amount of income exempt from levy. To do so the recipient  must determine what the payee’s filing status will be (The amount exempt from levy is based upon the standard deduction for that filing status); the frequency of payments, Daily (260), Weekly (52), Bi-Weekly (26), Bi-Monthly (24), Monthly (12); and lastly, the number of dependents that the payee will claim. In this example, the employer knows that the employee will claim the married filing joint standard deduction and has two dependents.

STEP 1: Determine the filing status of the payee.

STEP 2: Find the amount exempt from levy based upon how often taxpayer is paid:

Married Filing Jointly:

STEP 3: The taxpayer is entitled to exclude $4,150 per year per dependent. This chart shows the amount that can be excluded each pay period based upon pay frequency. The amount from far the right-hand column for the correct pay frequency will need to be multiplied by the number of dependents to arrive at the total amount exempt from levy that is attributable to the payee’s dependents.

Amount Exempt from Levy per Dependent:

Step 4:

Amount Exempt from levy from Bi-Weekly Pay:

Add the amount exempt per pay period based upon the payee’s filing status, plus the amount exempt per pay period per dependent to arrive at the total amount of take-home pay that is exempt from levy. A taxpayer that is married, files jointly, is paid $1,500 bi-weekly, and claims two dependents will receive $1,242.32 and will have $257.68 ($1,500-$1242.32) levied.

Wrongful Levy Claims

IRC § 6343(b) previously required taxpayers to make a wrongful levy claim within nine months of the taking of the property. For some people, this time frame was too short because they did not even learn about the taking during that time.  In response, Congress increased the amount of time taxpayers have to seek the return of property when they believe the IRS has wrongfully taken their property while trying to collect from a taxpayer.

Public Law 115-97, the Tax Cuts and Jobs Act extends the period for making an administrative claim to two years and if the taxpayer makes an administrative claim during that period the time to bring suit is extended for 12 months from the date of filing of the claim or for six months from the disallowance of the claim, whichever is shorter. The change applies to levies made after December 22, 2017, and to levies made prior to that date if the nine month period under the prior law had not yet expired.  The IRS issued IR-2018-126 to discuss the change and has revised Publication 4528 to reflect the change.

 

Lindsay Manor Reprise

Last year, we posted on the Tax Court’s decision in Lindsay Manor v. Commissioner, 148 T.C. 9 (2017). The taxpayer appealed the decision to the 10th Circuit, which has not only dismissed the appeal as moot but also vacated the Tax Court’s decision.

The Tax Court, in a precedential opinion, decided that a corporation could not avail itself of the hardship exception in IRC section 6343(a)(1)(D) holding, in support of Treas. Reg. 301.6343-1, that only individuals may avoid levy based on hardship.

On appeal, the government moved to dismiss the case as moot because Lindsay Manor no longer operated nursing home facilities. The 10th Circuit agreed because Lindsay Manor lacked a “personal stake in the outcome of the lawsuit.” The only issue on appeal was the applicability of IRC section 6343(a)(1)(D) to corporate taxpayers. Lindsay Manor had argued that it qualified for hardship relief only “because imposing the levy would leave it unable to ‘provide adequate care for its patients.’” Since Lindsay Manor no longer has patients this ground for relief does not exist anymore.

In dismissing for mootness, the 10th Circuit looked into the facts surrounding the nursing home Lindsay Manor operated. It turns out that another creditor had a receiver appointed six months before the Tax Court published its opinion. So, the case was moot before the Tax Court published its opinion. In the Tax Court, the IRS filed two motions for summary judgment. The second motion was filed on October 14, 2015 with the response from petitioner on October 28, 2015. The opinion was rendered on March 22, 2017 – about 17 months later. So, Lindsay Manor was operating the nursing home at the time of the last action by the parties prior to the issuance of the opinion. Obviously, neither the petitioner nor the IRS alerted the Tax Court to the change in circumstance.

I looked for a Tax Court Rule obligating the parties to notify the Court but could not find one.  I know that the IRS feels under an obligation to tell the Court when something happens that impacts jurisdiction and provides instructions to Chief Counsel attorneys for notification in the situation presented by this case, bankruptcy filings, etc. The IRS would not necessarily have known about the appointment of the receiver or at least not in a way that would naturally make its way to their Counsel. If petitioner’s counsel knew that his client had been replaced by a receiver, he probably should have notified the Tax Court although I could not file a Rule obliging him to do so.  If either party had notified the Court, I expect that the notification would have caused the Tax Court to not issue the opinion in the first place. Although the 10th Circuit talks below about what the Tax Court should have done, absent notification from one of the parties the Tax Court would have no reason to know of the change in circumstances. A quicker opinion might have averted the problem but this case was one of several with similar issues.  I find the criticism of the Tax Court on this point misplaced.  I was ready to place blame on petitioner’s counsel for not notifying the Court since he was the person most likely to know of the change in circumstances forming a basis for the vacatur but any criticism of petitioner’s counsel would require that they had notice of the receiver coupled with a duty to inform the Court.

The 10th Circuit stated:

“If an actual case or controversy ceases to exist during the course of tax court proceedings, the tax court must dismiss the case as moot.” Willson, 805 F.3d at 320. This case became moot when the court appointed the receiver. After that, Lindsay Manor no longer operated any nursing homes and consequently could not receive economic hardship relief. The Tax Court published its decision on March 23, 2017 – over six months after the receiver had been appointed and after the case had become moot. Rather than deciding the case’s merits, then, the Tax Court should have ‘dismiss[ed] the case as moot.’ Id. Vacatur is therefore appropriate.”

So, we have a sneak peek at what the Tax Court thinks about the regulation but the case itself no longer provides precedent for the position sustaining the regulation that economic hardship does not apply to corporations.

CP 504

I do not often write an introduction to my own blog post but am making an exception today. Today’s post is short and it is about a taxpayer right’s victory. I want to use the extra space to celebrate some other victories. Of course at PT we are excited about Villanova’s basketball victory for any of you who missed the game. Basketball is a unifying force at the school and a great source of pride. I miss going to the campus gym every morning and walking through the lobby which is a museum of their victories. Villanova had another great victory announcing the selection of Christine Speidel as its new tax clinic director. In addition to joining Villanova to run its tax clinic, Christine is joining procedurallytaxing as a member of our blogging team. She has written several guest posts over the years. Look for many posts by her in the future. As a law student she worked in the Consumer Law Clinic of the Legal Services Center where I now teach. She will bring a lot of new energy to the blog.

Another matter to celebrate is the annual publication of the low income taxpayer report. The report catalogs the work of these clinics and may be of interest to those of you with interest in the tax issues facing individuals. Volume 8 of recent journal article looks at the students who work in clinics and reports on how that work encourages (and discourages) future pro bono efforts of the students exposed to representation during school. Keith

On December 2, 2016, I wrote a strongly worded post about the inappropriate language in Letter CP 504. The CP 504 letter the IRS was sending at the time said that the if the taxpayer did not pay the tax listed on the form the IRS could levy on their property and listed a litany of types of property on which the IRS could levy. The problem with the letter was that the CP 504 letter does not give the IRS that right. The statements made in the letter were legally wrong and could have inappropriately led taxpayers to the wrong conclusion about the action the IRS could take to collect the unpaid assessment of taxes.

In addition to blogging the issue, I had discussions with the appropriate persons at the IRS explaining why I thought the letter was wrong and should be changed to eliminate the language stating that the IRS could levy on a taxpayer’s property. The IRS listened and it made a commitment that it would change the letter to make it accurate. The persons with whom I spoke indicated that the change would not occur until January 2018 – a period approximately one year after committing to the change. I knew that changing an important letter in the collection notice stream would take time and waited.

Recently, one of my clients received the new and improved CP 504 letter. The IRS made the promised changes and no longer tells taxpayers that it can levy on their property in the manner stated in the prior version of this letter. You can see a redacted version of the new letter here. You can find a copy of the prior letter in the earlier post if you want to compare the letters and note the changes.

The IRS deserves credit for changing the letter and appropriately responding to criticism. The collection notice stream is an important part of the collection process. Getting the language in the letters sent during that stream to be accurate as well as persuasive is an important part of the collection function at the IRS.

Collection from Retirement Accounts Part 3 – IRS Pushes Hard to Collect from F. Lee Bailey

The bankruptcy court in Maine has granted relief from the automatic stay to allow the IRS to collect from Mr. Bailey’s pension accounts and Social Security benefits. While the IRS has the power to go after these accounts, its exercise of this power is governed by the issues discussed in the first two parts of this series. This is another defeat for Mr. Bailey in his efforts to protect his assets from the collection of federal taxes. I wrote previously about Mr. Bailey’s filing of the bankruptcy petition after suffering a massive loss in Tax Court.

read more...

In my earlier post regarding Mr. Bailey’s Tax Court loss, I speculated that Mr. Bailey might achieve relief in bankruptcy because his Tax Court case resulted in the imposition of an accuracy related penalty rather than the fraud penalty. That may still be true; however, the type of penalty does not stop the IRS from pursuing his assets and that is what it is doing with a vengeance. The bankruptcy court starts off the opinion stating “This bankruptcy case is another chapter in the decade long struggle between the Internal Revenue Service and Mr. Bailey over taxes.” We have not previously written much about the ability of the IRS to take a taxpayer’s social security payments and pension accounts. In addition to the first two posts in this series, I briefly touched on it recently in a post about military pensions where I discussed the federal payment levy program. Mr. Bailey’s case provides the opportunity to discuss how and when the IRS will take these assets as the policies apply to a specific individual rather than the group of individuals studied by TIGTA.

Based on the pursuit of these assets in the bankruptcy case, it seems clear that the IRS has determined that Mr. Bailey meets its definition of having committed flagrant conduct regarding the payment of his taxes. I discussed, and linked to, the IRS definition of flagrant conduct in the first post in this series. Cases where the IRS makes the determination that the taxpayer’s conduct is flagrant are the ones in which you see the IRS using its collection tools to their full effect. You should always seek to have your clients behave in a way that keeps them from fitting into the flagrant criteria or, should their conduct fall into the flagrant criteria, have them work quickly to mitigate that behavior because that type of behavior can cause the IRS to use some tools at its disposal that it might otherwise keep holstered.

The IRS will routinely go after 15% of a taxpayer’s social security payments through the federal payment levy program. As discussed in the post referenced above, the IRS has filters that it applies, thanks to the National Taxpayer Advocate, which exclude from the FPLP taxpayers whose income appears to be less than 250% of poverty. Section 6343 requires that the IRS not levy on taxpayers when the levy would put the taxpayer into a hardship situation and the filters the IRS applies in the FPLP program recognize that a high percentage of the individuals with income below 250% of poverty would end up in a hardship situation if the IRS levied on 15% of their Social Security payments. Of course, individuals whose income exceeds 250% of poverty can come into the IRS and show that the levy places them in hardship status if the IRS takes 15% through this program. For a detailed description of FPLP, see part two of this series.

The IRS need not limit itself to 15% of a taxpayer’s Social Security payments and it can levy on the entire amount of the payments if it chooses and if doing so does not place the taxpayer into hardship status. The opinion does not say whether the IRS plans to take only 15% of his Social Security payments or all of them; however, I would be surprised if it is not planning to take them all. When it seeks to take all of a taxpayer’s Social Security payments, the discussion in the last part of part two of this series becomes important. Mr. Bailey’s case is or was prior to bankruptcy in the hands of a revenue officer. Now that he is in bankruptcy, there will also be a bankruptcy specialist working on his case and probably an attorney at the Office of Chief Counsel. These individuals will apply the policy decisions set out in the manual in deciding to take his social security payments. The only legal impediment, aside from the automatic stay, is IRC 6343 setting out the hardship exception to levy.

As discussed previously, taking social security payments does not stop when the statute of limitations on collection ends. The IRS lien attaches to the taxpayer’s right to the stream of payments. Because the taxpayer’s right to this stream is fixed, once the IRS levies on the taxpayer’s interest in the social security payments the levy attaches to the right to receive all of the payments. So, as long as the taxpayer lives and the tax debt remains outstanding, the IRS can continue to receive the social security payments.

From part one of this series you know that the IRS can also levy on interests that taxpayers have in IRAs or pension plans. Even though ordinary creditors cannot reach assets in pension plans because of restrictions put in place by ERISA, these restrictions do not apply to the IRS. The IRS has policies that cause it to pause and obtain approvals and certain levels within the agency in order to levy on pension plans but the law places basically no restrictions that prevent the IRS from levying on these plans. A levy on a pension plan does not accelerate payment from the plan, but just like the levy on the taxpayer’s Social Security payments, the levy on the pension plan does attach to all of the rights the taxpayer has in the plan even if those rights include future and not present payments. I can only assume that prior to seeking to lift the stay in Mr. Bailey’s bankruptcy case, the IRS and its lawyers have already made a determination that neither the policies in the manual or the provisions in IRC 6343 prevent levies upon his pension plan or social security payments.

These IRS rights to pursue Social Security and pension plan payments play out in Mr Bailey’s bankruptcy case in the context of the automatic stay. The automatic stay comes into existence the moment a debtor files a bankruptcy case and works to prevent creditors from taking most assets of the debtor and of the estate. Bankruptcy code section 362(a) lists eight separate matters covered by the automatic stay; however, creditors can apply to the bankruptcy court to lift the automatic stay to permit the creditor to go after an asset otherwise protected by the stay. That is what the IRS has done in Mr. Bailey’s case. The bankruptcy court must then determine whether to lift the automatic stay to permit the IRS to collect from these assets while the bankruptcy case proceeds.

The concern of the IRS is that if Mr. Bailey receives these payments he might spend them. Each time he spends the payments from Social Security and the pension plan, he dissipates an asset on which the IRS has a lien interest and allowing him to receive the payments can only occur if he provides adequate protection to the IRS that its lien interest will not be harmed by his receipt of these payments. The bankruptcy court notes that he has the burden of proof on all issues connected with the motion of the IRS to lift the stay except on the issue of the equity in the Social Security and pension benefits. The IRS must show these assets have equity to which the federal tax lien has attached. Showing that equity exists in social security and pension plan payments is very simple.

By the time the IRS filed the motion to lift the automatic stay, Mr. Bailey had already received his chapter 7 discharge. The discharge lifted the automatic stay with respect to collection against him personally but the stay would continue with respect to assets of the bankruptcy estate until the estate was closed. The claims of the IRS survived the discharge in the chapter 7 case according to the bankruptcy court but the court does not provide specific information as to why they survived. It appears that even if some or all of the IRS claims were not excepted from discharge under bankruptcy code 523, the federal tax lien continued to attach to property belonging to Mr. Bailey which he kept after the chapter 7. After the conclusion of the chapter 7 case, Mr. Bailey filed a chapter 13 bankruptcy case. This maneuver is sometimes called a chapter 20.

The court finds that the IRS lien interest in the Social Security and pension payments is not adequately protected. Mr. Bailey said he needed to use the payments from these sources to fund his chapter 13 case and therefore he should get to keep them; however, that is exactly what the IRS fears since in using them to fund the plan he will spend the money from these plans and as he does so he destroys the lien interest of the IRS. The court points out that though it rules for the IRS in this summary type proceeding, Mr. Bailey can challenge the lien claim of the IRS in another proceeding should he seek to do so.

Mr. Bailey continues in his second bankruptcy case to do what many taxpayers before him have tried to do and use bankruptcy to wriggle free from federal tax debt. While it is possible to do that in certain circumstances, where the IRS has perfected its lien, debtor has assets to which the lien attaches, and the IRS is diligent in protecting its rights, the debtor will basically always lose. That does not mean the IRS will ultimately collect the $5 million dollars owed to it, but it does mean that while some or all of that debt remains due and owing, the IRS will continue to have open season on his assets including his Social Security and pension assets.

 

Levies on Retirement Accounts – Part 2 of 3 Social Security

In Part 1 of this series of posts on levies, I wrote about the ability of and the restrictions on levies on retirement plans by the IRS. In this post, I will discuss the ability of the IRS to levy upon a taxpayer’s social security payments, the choice the IRS has in how to do that, and the restrictions the IRS places upon itself as it decides to impose these levies. The big difference between levying on retirement accounts and on social security derives from the source of the funds. Retirement accounts rest with private parties while it is the government itself that makes the social security payments while at the same time being the party owed the unpaid taxes. In many ways, taking all or a part of a taxpayer’s social security payments is a form of offset; however, the Code does not treat it as an offset the same way it treats the offset of a refund in one year and a liability for a prior period.

IRC § 6331(h)(2)(A), as prescribed by the Taxpayer Relief Act of 1997, Pub. L. No. 105-34, § 1024, authorizes the IRS to issue continuous levies on certain federal payments. The Bureau of the Fiscal Service (BFS) (formed from the consolidation of the Financial Management Service and the Bureau of the Public Debt) is the Department of Treasury agency that processes payments for various federal agencies. Payments subject to FPLP include any federal payments other than those for which eligibility is based on the income or assets of the recipients. With a regular offset, the IRS simply programs its computers to check for any liabilities before it sends the refund to BFS for payment to the taxpayer. With social security, the IRS sends notice of the liability to BFS and the taking of the funds occurs at that level outside of the IRS since the funds, although coming from the federal government, come from another agency.

IRC Section 6334(a)(11) exempts from levy certain needs based payments such as Supplemental Security Income payments to the aged, blind, and disabled as well as State or local government public assistance or public welfare programs for which eligibility is determined by a needs or income test. The exemptions in section 6334 do not apply to regular social security payments since they are based on contributions and not based on need. Some taxpayers receiving social security do not need their social security payments to meet basic needs but many do. The IRS knows that many social security recipients will face hardship if all or a part of their social security payments are taken to satisfy tax liabilities. The debate concerns how to take the money of the taxpayers who do not need it while identifying the taxpayers who need it in order to avoid hardship.

read more...

As with the discussion on retirement accounts, this discussion is built upon a report issued by the Treasury Inspector General for Tax Administration (TIGTA). On June 30, 2016, TIGTA issued “Revenue Officer Levies of Social Security Benefits Indicate That Further Modification to Procedures Is Warranted” in which it discusses in detail the rules governing the IRS levy upon social security benefits and reviews how the IRS has done in following those rules. The discussion starts with a reminder of the federal payment levy program (FPLP). For the publication on FPLP created by the Taxpayer Advocate’s office look here.

Federal Payment Levy Program and Social Security

The TIGTA report describes the FPLP as follows:

“The FPLP is an automated program that includes taxpayers in both the Automated Collection System and the Collection Field function along with inventory that is currently not being worked by either Automated Collection System or the Collection Field function….

Through the FPLP, the IRS can issue a continuous levy of 15 percent on Social Security benefits. During Fiscal Year 2014, the majority of revenue collected by the FPLP program was from Social Security benefits. Between Calendar Years 2002 and 2006, the IRS had a low-income filter for Social Security benefits levied through the FPLP, but that particular filter was found to be inaccurate by the Government Accountability Office. The Government Accountability Office’s recommendation advised the IRS to eliminate the exclusion until a more accurate criterion could be developed. “

The IRS reinstated the filter in 2011, and it causes taxpayers whose income presents itself to the IRS as under 250% of poverty to bypass the FPLP in order that they can receive their full payment.

IRM 5.11.7.2 contains the description of all of the automatic offset programs operated between the IRS and Treasury. While the offset of funds from social security payments is the largest of these programs, it is only one of several including many designed to capture past due taxes from federal employees. According to IRM 5.11.7.2.3.4.2, the IRS sends the name of social security recipients with past due taxes over to the IRS after sending out a notice of intent to levy letter:

“For Social Security payments matched, a FPLP levy will be transmitted to BFS at least eight (8) weeks but no more than twenty-six (26) weeks from when the CP 91 or 298, Intent to seize up to 15% of your Social Security benefits, was issued (indicated by the unreversed TC 971 AC 169 posting cycle). A FPLP levy TC 971 AC 662 will post on the module with the literal “SSA” displayed in the Miscellaneous Field and TIN in the XREF TIN field.”

The NTA has written extensively on social security levies and particularly on the issue of the filters imposed to allow certain accounts to bypass the social security levy. For background, an interested reader might want to check out her report found here from the 2014 annual report to Congress. The discussion in the report focuses heavily on the decision of the IRS to exclude from its filters those taxpayers with unfiled returns. This discussion which also gets some play in the TIGTA report focuses on the reason for these levies and whether levies on retirement accounts and social security payments where taxpayers are known to be especially vulnerable should be used for general enforcement. The IRS has long used the levy as a means of promoting compliance because it wakes up the taxpayer by moving the IRS from its status as “pen pal” by sending many letters requesting payment, to the status of law enforcement when the taxpayer feels the pain of lost funds.

Collection by Revenue Officers

The TIGTA report focuses on the collection by revenue officers of social security payments. As discussed previously, the cases in the hands of revenue officers, the IRS field collection agents, will primarily be accounts in which a large amount of tax is due. TIGTA points out that revenue officers have no special instructions regarding pursuit of collection from social security payments. It made the following diverse findings from its interviews of 26 collection employees at various levels:

When making Social Security levy determinations, revenue officers are not required to consider whether the taxpayers’ income level is below 250 percent of the Federal poverty level . Field Collection procedures require that they determine if the FPLP process will be part of their strategy to resolve the case. Some other observations made in our audit interviews include:

  • Some Field Collection group managers require that all other taxpayer resources be levied before attempting to levy Social Security benefits, while others do not.
  • Some group managers believed that, in upwards of 90 percent of their cases in which paper levies are made on taxpayers, the taxpayer possesses no other source of income.
  • Some group managers stated that the case had to be “egregious” before Social Security Benefits would be levied above the 15 percent FPLP levy.
  • Some group managers indicated that Social Security levies were used to get a taxpayer’s attention, while others believed such use of a levy is not appropriate.
  • Some revenue officers use Form 668-W, Notice of Levy on Wages, Salary, and Other Income, which ensures that levied taxpayers receive the exemptions to which they are entitled, while others use Form 668-A, Notice of Levy, to maximize the levy.
  • Most interviewees indicated that most cases involving Social Security benefits already have an FPLP levy on the case when the case is assigned.
  • In one territory, the territory manager indicated that the groups in that territory never levy 100 percent of Social Security benefits. A revenue officer within that same territory indicated that he had issued as many as five Social Security levies in the past year and used Form 668-A to levy the maximum amount.
  • All interviewees indicated that a financial analysis should be performed on a Collection Information Statement to assess the taxpayer’s ability to pay the tax, and all stated that the“250 percent above Federal poverty level” criterion is not factored into their analysis.

In most of the cases in which the revenue officers were assigned, the IRS had already begun collecting 15% through the FPLP process and the question for the revenue officer was whether to take the entire social security payment. The median amount owed of the accounts sampled by TIGTA was over $80,000. TIGTA found that in 85% of the cases in which the revenue officer decided to levy, the decision fell within the guidance; however, in 15% of the cases the levy exacerbated or caused hardship. TIGTA noted that in the cases in which it determined the levy caused hardship the notes of the revenue officer usually supported the conclusion reached by TIGTA. TIGTA recommended better guidance for revenue officers on when to pursue a taxpayer’s social security and the IRS management agreed.

Conclusion

The ability to determine between a “can’t pay” and a “won’t pay” taxpayer is a difficult decision that requires both training and judgment. Both TIGTA and the NTA have written about the failure of the IRS to train and the failure of revenue officers and their managers to use appropriate judgment. If a revenue officer levies on a client’s social security payments because the client did not cooperate or did not file past due returns, use the decision in Vinatieri v. Commissioner, 133 T.C. 392 (2009) as well as the relevant manual provisions to convince the revenue officer to remove the levy. TIGTA’s report shows that the IRS gets the decision right most of the time but if the 15% error rate is correct, that still leaves a large number of taxpayers, many of whom are unrepresented, losing necessary funds to make ends meet. Providing revenue officers with better training and better oversight requires funds which is a problem we have discussed many times before.

 

 

 

Levies on Retirement Accounts – Part 1 of 3 Pension Plans and IRAs

Thanks to two Treasury Inspector General for Tax Administration (TIGTA) reports and one bankruptcy case, In re F. Lee Bailey, I am inspired to do a three-part series on how the IRS levies on retirement accounts. I note also that the National Taxpayer Advocate has blogged recently on this general topic. The first post will focus on the power of the IRS to levy and the decisions it makes in issuing a levy to obtain either a stream of payments from a retirement account or the retirement account itself. The second post will focus on the levy on social security payments, and the third post will look at the application of those policies in a specific case involving a well-known attorney who has fallen from the heights of the profession and has recently filed his second bankruptcy petition. I issued two posts, here and here, focusing on the levy of military retirement benefits in the past couple of months that also speak to this topic from both a policy and individual perspective.

The levy serves as the calling card for the IRS to taxpayers who have not responded to correspondence requesting payment. As I have discussed before, the IRS often hopes that the levy will cause the taxpayer to begin working with it. When the levy hits the taxpayer’s salary, retirement benefits, or similar stream of payments, it leaves the taxpayer in a position in which the taxpayer must deal with the IRS in some fashion because the loss of the stream of payments does not permit the taxpayer to make the payments necessary for life’s necessities. While it is common for the IRS to levy on wages and put the taxpayer into hardship, the discussion in the manual and the TIGTA reports makes clear that the employee generating the levy on retirement payments should consider this before making the levy rather than just using the levy as an enforcement tool. This is just one way in which the levy on retirement benefits differs from ordinary levies.

read more...

Levy Basics

To set the scene for this discussion of levies, looking at the basics of levy may help in understanding what the IRS can do with this enforcement tool. The levy allows the IRS to step into the taxpayer’s shoes and receive payments to which the taxpayer is entitled or to take control of property that the taxpayer could control. Levy is a provisional remedy and does not give the IRS greater rights to the property than the taxpayer has. Levy can set the scene for a fight over property rights through the wrongful levy process.

In United States v. National Bank of Commerce, 472 U.S. 713 (1985), the Supreme Court said that Congress could not have devised a broader lien than the federal tax lien. The comment about the federal tax lien has relevance to a post about levies because the IRS needs to have a lien on the property it intends to levy. National Bank of Commerce was a levy case in which the taxpayer, Mr. Reeves, had a joint bank account with his wife and mother. Only Mr. Reeves owed the IRS. The IRS levied on the bank account and demanded that the bank turn over all of the money in the account since Mr. Reeves could have walked up to the teller window and made a similar demand. The bank refused, arguing that before it turned over the money it needed the consent of co-owners of the account. In a 5-4 decision, the Court reversed the lower courts and ordered that the bank must turn over the money but made clear that levy is a provisional remedy and that turning over the money to the IRS did not deprive the taxpayer’s wife or mother from recovering the money upon a showing that it belonged to them and not to Mr. Reeves.

After issuing the notices required in IRC 6330 and 6331, the IRS can take a taxpayer’s property without court approval. For the small number of taxpayer’s who seek Collection Due Process relief after receipt of the notice, the Tax Court must bless the use of the levy. For the vast majority of taxpayers, the IRS makes decisions on what and when to levy without interference from any judicial body. In most cases, the levy comes as a surprise to taxpayers who fail to appreciate the meaning of the correspondence warning them of the IRS’s intent to levy and who only appreciate the power the IRS possesses once it takes the levy action.

Basics of TIGTA Report

On September 26, 2017, TIGTA issued a report entitled “Procedures for Retirement Account and Thrift Savings Plan Levies Not Always Followed by Revenue Officers.” The report not only looks at specific levy actions taken by the IRS but does an excellent job of explaining the rules governing collection employees when levying on a retirement account. My discussion here will highlight the rules. If you have a case with this issue or questions not answered by this post, you should carefully read the report and the related Internal Manual Provisions (referred to in this post sometimes as “Manual” and sometimes as “IRM”).

The report breaks up its discussion of retirement account levies essentially into three parts: 1) levies on the income stream from a retirement account; 2) levies on the retirement account itself; and 3) levies on thrift saving accounts. Thrift savings accounts belong only to federal employees, and I am not going to discuss that part of the report because of its limited coverage; however, if you represent a current or retired federal employee with money in a thrift saving account, this discussion is valuable.

If the taxpayer has already retired and receives payment from some type of defined benefit or defined contribution plan or an IRA, the IRS can levy on the stream of payments. It gives broader authority to its employees to levy on a stream of payments than on the retirement account itself. Internal Revenue Manual 5.11.6.1 provides that both revenue officers and employees of the Automated Collection System (ACS) can levy on the stream of payments. If the IRS levies on a stream of retirement payments before the statute of limitations expires, the levy reaches the future stream of payments that comes after the expiration of the statute because the levy has taken over the taxpayer’s defined rights to future payment prior to the expiration of the statute.

Levying on a Stream of Payments from a Retirement Account

The manual gives relatively detailed instructions on when and how collection employees can levy on the stream of payments. Before levying on this stream of retirement payments, ACS employees should check to see that the IRS has properly sent the notice of intent to levy and if the file indicates taxpayer is in a hardship situation. These are basically the same procedures required for regular levies. The difference in process for the stream of levy payments is the requirement that the ACS employee obtain managerial approval. Since the manager has little information to review when making this decision, the report leaves the impression that such approval is fairly routine. The TIGTA review determined that ACS employees followed the required procedures in the cases reviewed.

TIGTA also found that ACS employees were not required to consider the financial situation of the taxpayer before issuing the levy. TIGTA looked closely at the 30 cases it identified and found that in about 25% of those cases the levy on the stream of payments placed the taxpayers in a hardship situation. It recommended that the IRS change it procedures to place more emphasis on determining if the levy would cause hardship. The IRS agreed to emphasize that ACS and managers should pay attention to available data; however, it is not sending the employees out to gather additional data. I do not see a distinction between levying on a stream of payments and levying on someone’s wages but the TIGTA report sends the message that more protection is needed for these payments than wages.

The rules for cases in the hands of revenue officers are slightly different than those for ACS employees. The IRS expects that revenue officers assigned to individual accounts will know more about the taxpayers assigned to them than an ACS employee who does not have individual taxpayers assigned. The manual requires that revenue officers follow all normal levy procedures and to “use discretion” when determining whether to levy on a stream of payments from a retirement account. In addition to normal pre-levy procedures, revenue officers were required to consider the taxpayer’s:

– responsiveness to attempts at contact and collection

– filing and paying compliance history

– effort to pay the tax

– whether current taxes are being paid; and

– financial condition, including information related to economic hardship determinations.

TIGTA’s review of 28 cases found that about 15% of the taxpayers were in a hardship situation. While TIGTA felt the IRS should not have levied if it knew the taxpayer faced hardship, IRS management disagreed and responded that a revenue officer can levy if the taxpayer fails to respond or misses deadlines. TIGTA, sounding like the National Taxpayer Advocate (NTA), recommended changes to the manual to place more emphasis on hardship pointing out that if the IRS simply uses the levy as a wake-up call to the taxpayer without giving thought to hardship it not only places an undue burden on the taxpayer but also causes more work for the IRS as it unwinds the levy.

NTA comments on this levy issue can be found here, here and here. This recommendation also mirrors a recommendation TIGTA made with respect to levies on social security payments which I will discuss in the next post in this series. The IRS agreed to make changes to IRM 5.11.1.3.1 to reflect this dialogue. Notice that in the new IRM provision a reference to Taxpayer Bill of Rights is baked right into the directions on what the revenue officer should do. In this report, TIGTA recommended that the IRS change this newly drafted IRM provision to make it even clearer that the financial condition of the taxpayer is a primary consideration in making the levy and the IRS agreed to make that revision.

Levying on the Retirement Account Itself

Only revenue officers can levy on a retirement account. Because revenue officers are primarily assigned to cases in which the taxpayer owes a fair amount of money, in some geographic locations this means more than $100,000, many taxpayers whose accounts remain in ACS will not face the prospect of having their retirement account levied even though the ACS employee might levy any stream of payment that exists. The manual creates four discrete rules that govern levy upon the retirement account itself and create barriers to the use of such a levy as a tool:

  • Revenue officers must consider “all alternatives” before issuing a levy on a retirement or IRA account.
  • Revenue officers must determine if the taxpayer’s conduct has been flagrant. Look here for a detailed explanation of flagrant behavior. It includes such things as making voluntary contributions to retirement accounts while asserting an inability to pay past due taxes; demonstrating a pattern of uncooperative or unresponsive behavior; being convicted of tax evasion; being assess the fraud penalty; assisting others in evading taxes and incurring a tax liability based on illegal income. This requirement means that otherwise cooperative taxpayers may get a pass on having their retirement funds levied.
  • Revenue officers must determine whether the taxpayer depends on the money in the retirement account or will depend on it in the near future for necessary living expenses; and
  • Revenue officers must prepare a memorandum summarizing the taxpayer’s compliance history and reason for the levy and obtain approval from the Area Director. This type of requirement creates a bureaucratic barrier that will stop many cases because the revenue officers do not have the time or the inclination to do this type of work and expose themselves to criticism from their group manager or the area director. Whenever you find this higher level approval provisions in the manual, they serve as a signal to the employee that except in extreme cases this is something to be avoided.

Conclusion

Retirement accounts receive special consideration. Giving too much deference to money in retirement accounts generally favors higher income taxpayers over lower income taxpayers because of who is most likely to have money built up in retirement plans. The IRS must carefully balance its enforcement in this area to pursue these accounts when the taxpayer has the ability to pay while holding back from enforced collection against these accounts where a levy would create economic consequences for the taxpayer that would engender hardship. This balance is often made harder for the IRS because taxpayers do not always respond quickly or completely concerning their financial situation. TIGTA rightly seeks to have the IRS not blindly use the levy as it might ordinarily do to spur taxpayer cooperation but to look within its database for information regarding the hardship that might occur if the levy takes place. This is a good dialogue. TIGTA does a nice job in this report laying out the issues and the rules.

 

Applying the Federal Payment Levy Program to Veterans

The National Taxpayer Advocate has recently written a couple of blog posts on the application of the Federal Payment Levy Program (FPLP) to veterans which can be found here and here. The posts provide significant detail and insight into the application of the program to veterans and argue persuasively that the IRS has applied the program too broadly by failing to use filters that it has adopted for other similar FPLP programs. If you are not generally familiar with FPLP the first post provides a good deal of background into the program generally.

read more...

In May, 2017, the Service expanded it application of the FPLP to include military retirement payments paid by the Defense Finance and Accounting Service. The decision to expand FPLP to these payments makes good sense. It stems from a recommendation in an audit by the Treasury Inspector General for Tax Administration (TIGTA). This seems to be one of those situations in which the auditors of the IRS did an excellent job of noticing a hole in the collection system, the IRS relatively quickly followed up to implement a program which will collect money from people receiving federal payments who have not fulfilled their tax obligations at little cost to the Treasury.

If the program is so good, why is the NTA complaining and why do I think her complaint is valid? The problem is not the program itself but the scope of the program. In implementing this program, the Service made a decision not to exclude from the levy program military retirees whose incomes fall below 250 percent of the federal poverty level. The decision to apply the FPLP to all military retirees means that money will be taken from the pensions of many retirees who are quite vulnerable. The second post goes into details about the numbers of military retirees whose income falls below 250% of poverty. When the IRS levies on a person whose income is that low, it almost always comes into the prohibition on levy when the taxpayer is in a hardship situation. A high percentage of the military retirees whose income falls below 250% of poverty will have allowable expenses that exceed their income. This qualifies them to have the IRS remove the levy. Many of the military retirees, like many of the recipients of Social Security payments, lack familiarity with IRC 6343. So, they will not raise it. For those that do raise the hardship issue, with or without knowing the statutory basis, the IRS will expend its precious resources undoing the levy and probably cost itself more in that process than it obtains from several others. For these reasons the IRS has chosen not to levy on similarly situated individuals in other settings.

The Service developed a filter to the FPLP which it uses to screen out low income taxpayers receiving Social Security old age or disability benefits and Railroad Retirement Board benefits. I applaud the use of this filter because applying the FPLP to the vast majority of taxpayers with income under 250% of poverty would implicate the hardship restriction on levy imposed by IRC 6343. It does not make good business sense or good policy to levy on these individuals with a high likelihood that hardship exists and require them to raise the hardship exception to levy.

For the same reasons that it makes good business sense and policy not to impose the FPLP on recipients of federal payments under the Social Security or Railroad Retirement Board, it also makes sense to extend the application of the exclusion to military retirement payments made to military retirees whose income is less than 250% of poverty. Military retirees, having served our country in such an important way, do not deserve to be discriminated against in this way. They have the same financial constraints as non-military retirees whose income is less than 250% of poverty. We should not honor their service by making it harder for them to receive the hardship relief granted by the Internal Revenue Code. The same presumptions that they would qualify for such relief should apply to this group as well.

The expansion of the FPLP to military retirement payments followed an internal audit criticizing the Service for failing to capture these payments under the FPLP. The internal audit, however, did not suggest that the same exclusions offered to individuals in the lowest economic strata of our society should be ignored when those individuals were recipients of a military pension based on their long and honorable service to the country. Many military retirees fall into the low income category and should receive the same treatment with regard to the low income filter as other recipients of federal benefits.

The NTA has marshalled the data showing that the levy will fall hard on the low income military retirees just as it falls hard on other persons receiving federal payments. The IRS should reconsider its decision not to apply the filter. The removal of the filter does not give the group with less than 250% of poverty in earnings a free pass and the decision is not a static decision that applies for the 10 year statute of limitations. If the IRS has information about the military retiree’s assets or other sources of support suggesting that imposition of the levy would not produce a hardship, nothing prevents the IRS from imposing FPLP or other collection remedies at any time.