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

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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.

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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.

 

Comments

  1. If collections levies a pension plan payments, you state it continues past the collection expiration date. So does it just go on in perpetuity, or is there a time limit or avenue to make the payment stop after a period of time after the CSED?

    • It has the ability to go on in perpetuity. The IRS must handle the account carefully because it cannot collect on anything else after the statute has expired. For example, it cannot offset a refund that arises after the statute has expired. A taxpayer could cause the IRS to stop the levy by showing that it caused hardship as defined in IRC 6343. Once the IRS stops the levy, it cannot restart after the statute has expired.

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