IRC Levy Exemption for Disability Payments Ends Once Funds Hit Bank Account

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The IRS’s levy powers are broad but not unlimited. One of the categories of payments that is protected from levy is disability payments relating to military service. The IRS has consistently argued that if a veteran receives disability payments and those funds comprise some or all of the money in a bank account, an IRS levy can reach those funds, unless the taxpayer can establish some other exemption.

Last year in Death and Taxes Keith discussed how “generally, the IRS takes the position that money in a bank account is fair game for its levy no matter what source, protected from levy or not, generated the funds in the bank account.” In his post Keith discussed that despite that general rule IRS decided to take an administrative pass on levying funds in a bank account if the funds in the account include money received by the taxpayers as COVID-19 Funeral Assistance funds provided by FEMA. A while back I discussed a 10th Circuit case that hinted at perhaps a disagreement with the IRS view that it could in fact levy on a veteran’s disability payments once they hit the account.

Earlier this month the Fifth Circuit in US v Charpia had occasion to revisit the issue of tracing, in a slightly different procedural path than typical cases we discuss.

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Charpia had pled guilty to defrauding the Government.  Part of the sentencing included restitution of over $900,000. The district court issued an order of garnishment and Charpia appealed the garnishment order, claiming statutory exemptions for certain funds in her bank account.  Charpia’s bank account had about $65,000 due to a lump sum disability payment that related to her military service.

This all implicated Section 6334(a)(10) because the Mandatory Victims Restitution Act cross-references the IRC exemption for service related disability payments.

As I discussed a while back in Tenth Circuit Raises Possible Defense to IRS Levying Bank Account with Veteran’s Disability Payments Section 6334(a)(10) prevents levy on “any amount payable to an individual” relating to military disability payments. (Note that the same language exempts unemployment compensation and workers compensation). The Fifth Circuit noted that there is not a lot of caselaw on the meaning of “amount payable” but in finding for the government it distinguished other exemptions that extend more broadly to amounts “payable to or received by” an individual, such as the 6334(a)(9) exemption for wages. Moreover the Charpia opinion noted that the few cases that interpreted the (a)(10) exemption looked to a plain Black’s Law meaning of the term payable, which is an amount “[c]apable of being paid” or “suitable to be paid” rather than funds that had been paid and were sitting in an account.

Conclusion 

It was not a complete loss for Charpia, however. As an alternate argument, she leaned on the Consumer Credit Protection Act (CCPA), which provides a 25% cap on “aggregate disposable earnings of an individual for any workweek which is subjected to garnishment.”

The court held that the only reason why Charpia did not receive her disability payments periodically was because the government initially denied her request and she received a lump sum payment to make up for payments that “otherwise would have been paid periodically. ” As such, the court held that the partial exemption under the CCPA applied, and the government was only entitled to seize 25% of the funds in her account. 

While this was a partial victory for Charpia, it has limited use for traditional tax cases. The CCPA would not apply to a matter where the IRS were seeking to levy on the account, rather than the government seeking to collect under the Mandatory Victims Restitution Act,  because IRC 6334(c) provides that notwithstanding any other law, the only exemptions on the IRS’s levy power are found in IRC 6334(a)

Avatar photo About Leslie Book

Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law.

Comments

  1. Jim Malone says

    This position basically makes the exemption virtually meaningless. The case to litigate it in is one where the payments are deposited into an account that only holds disability benefits.

  2. Barbara Heggie says

    I had an Effective Tax Administration offer accepted in a similar scenario. The VA deposited a large, lump sum disability payment into the client’s bank account after “upgrading” him to 100% service-related disability, and the Centralized Offer in Compromise Unit thought that money should be part of his offer. After mulling it over for several months, Appeals disagreed, thank goodness — but no court ruling.

  3. Carl Smith says

    New York State takes the position that, since it can’t levy on Soc. Sec. benefits or pension benefits, it will not take those benefits out of a bank account to which they were deposited. Over the years, I have gotten refunds from New York State by showing a tracing of deposits — i.e., after a bank account was levied, I got the most recent monthly statements and traced the exempt and non-exempt deposits. Nearly every bank in NY knows not to turn over to NY anything from accounts whose sole deposits are from such exempt-from-levy income.

  4. Ward Dean, MD says

    Of course, a solution is to not have a bank account into which disability payments are sent. Although DFAS and the VA constantly pressure recipients to “go paperless,” they cannot force recipients of the benefit to open a bank account, and will still send paper checks.

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