How Fast is Fast Enough When Bank Receives a Levy from IRS

To set the scene, it is necessary to go back slightly before the issuance of the levy. The taxpayer, Mr. Waterman, filed a return and received a refund that was much too large. The IRS discovered its mistake. The case does not give much detail about the erroneous refund or why the IRS thought that jeopardy procedures were appropriate and necessary for the recovery of the money. It does note that the revenue officer (RO) assigned to the case obtained the appropriate approval from Chief Counsel, IRS to use the jeopardy levy procedures. Armed with approval to use the jeopardy levy process, the RO went to taxpayer’s home.

The RO arrived at the taxpayer’s home at 9:30 AM on September 9, 2009. The time sequence is important in order to see the speed required of the bank here. The statute requires that the IRS make demand for payment before executing the levy. This making of the demand gives the taxpayer a last opportunity to pay – generally, the taxpayer will have received notice and demand and other collection correspondence prior to this point but not always – and also gives the taxpayer notice that the IRS is hot on their trail. On balance, Congress might decide that giving the taxpayer one last chance to pay gives them too much information about the intentions of the IRS. At this time, however, the IRS must make this notification despite the obvious consequences.

Here, the RO not only demanded payment but also gave him documents showing that the IRS intended to levy his bank account. The RO did not need to be that specific although the taxpayer could probably have figured that out with very little effort. Having given the required last demand for payment, the RO drove directly to taxpayer’s bank and served a jeopardy levy shortly before 9:50 AM, less than 20 minutes after arriving at the taxpayer’s house. The bank employee faxed the levy at 9:50 AM to the bank’s central processing office. Less than two hours later, the taxpayer arrives at the bank – perhaps he was a slow reader – and withdrew $40,000 from his account before the bank placed a freeze on the account.

The bank did put the freeze on the account two days later and did capture some money which it turned over to the IRS. The IRS, however, felt that the bank acted too slowly in putting on the initial freeze and brought suit for failure to honor the levy. The bank responded that it acted fast enough and that the IRS should not have alerted the taxpayer to its intent to levy the taxpayer’s bank account.

How fast should a bank, or any party, act upon receipt of a levy? Should it act more quickly if the levy is a jeopardy levy? Should a large bank with a specific process for handling levies have a different time frame than a smaller, potentially more nimble, operation. Here, the IRS argues that the bank had a duty to build a system that placed a hold on the bank account in less than two hours. Neither the code nor the regulations address the time a party receiving a levy has to process the levy and two hours seems very fast.

The local bank employee faxed the levy with alacrity. If a breakdown occurred, it occurred in the handling of the levy by the centralized unit. In a large operation with multiple bank branches, the establishment of a central unit provides the only way to alert all branches unless the first bank the IRS touches has the ability through the bank’s computer system to place a freeze on the account across the entire system. In the end that seems to be exactly what the IRS thinks the bank should do. This is an interesting expectation given the speed with which the IRS acts and the operation of its computer system. I do not necessarily disagree with the IRS and its expectation of the bank but it is interesting to think about how our concepts of speed in ordinary business practices have evolved over time with the increasing power of computers.

The court looked to the statute to find its answer to the liability of the bank in these circumstances. It took note of the fact that the RO did not need to tell the taxpayer that it intended to levy his bank account and in doing so the RO’s actions were “clearly improper.” Because I think that anyone being handed a levy noticed and receiving a personal demand for immediate payment should quickly conclude that the IRS would be all over their bank account, I do not think that the RO did anything that made a difference.   I would agree with the court that best practice would not be to rub it in the taxpayer’s face but I might argue that the truly best practice would be to lock up the assets before telling the taxpayer that you were personally pursuing collection. If collection of the liability is in jeopardy, go get the money before alerting the taxpayer that you are hot on the case.

Having determined that the RO should not have given the taxpayer notice of the intent to levy on the bank account, the court went on to point out that only two defenses exist under IRC 6332 to the failure to turn over property subject to a levy: 1) the defendant did not possess any property or rights to property belong to the taxpayer or 2) the property held by the defendant was subject to prior attachment or execution. It was agreed that neither of those defenses worked here.

Since the bank knew that it did not have a statutory defense, it sought to use equitable defenses. When a bank uses equitable defenses, you know it is in trouble. Aside from the defense that the RO should not have specifically provided the taxpayer with information about the IRS intention to levy, the bank made the reasonable argument that it acted within a reasonable period of time. Since neither the statute nor the regulations spell out the speed with which a bank must freeze its accounts, it makes sense for the bank to focus on the allowance of a reasonable period of time for compliance. The court concluded, however, that the statute does not contain any reasonableness element delaying the placing of the bank account under the IRS’ control. The bank needed to act immediately to do this and it did not. The court pointed to the 50% penalty that exists where the party receiving the levy fails to turn over the levied property. Here, the IRS did not seek the 50% penalty but the court found that the inference of the penalty was that it applied where the party acted unreasonably. This placed the reasonableness of the actions of the party receiving the levy in the realm of argument about the application of the penalty and not the application of the liability itself.

Finally, the court said a bright line rule was needed in order to avoid have the IRS and the courts bog down into a “granular inquiry on the levy process.” That provides great support for the IRS and a strong cautionary rule for anyone receiving a levy that they must react immediately. Banks receive levies all the time and have systems for processing the levies. Many third parties receive levies very infrequently or once in a lifetime. Understanding the importance of moving quickly in the face of its receipt cannot be overemphasized. Third parties not familiar with the process will frequently contact counsel for assistance and need immediate advice. The speed required by this opinion could apply to the actions of counsel as well as the receiving entity.

The court had previously denied a summary judgment motion filed by the IRS. It made clear that it came to this conclusion only after studying the circumstances of a levy and the statute. The fact that the party receiving the levy is the only one who can stop the dissipation of the asset in their control drove the result. Maybe the bank will take this case into the 9^th Circuit but for now the IRS has a very powerful well-reasoned opinion supporting immediate compliance with its levy.