Taxpayers generally know that an IRS levy is not a good thing. Most have some sense that it can affect their financial well-being. If they have not been subject to an IRS levy, this may be all they really know about it.
The term “levy” is a verb that, in the context of the IRS, refers to the IRS taking a taxpayer’s property to satisfy unpaid taxes.
Congress recently introduced a new type of levy, called a “disqualified employment tax levy,” that enables the IRS to levy on the property without giving the taxpayer any prior notice.
The language used in the Code raises questions about who is subject to this new levy and the timing of the levy. As a policy matter, the need for this new collection tool is unclear, and it remains to be seen how the IRS will use it and integrate it into its tax collection system. Those with employment tax debts should be aware of this new type of IRS levy.
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What is an IRS Levy & Why Should Taxpayers Care?
An IRS levy is a legal action taken by the IRS to collect unpaid taxes from a taxpayer. It can take several forms. It may involve the seizure of assets, such as real estate. It may include a notice to an employer to garnish wages, or a notice to a bank to freeze and pay over bank account balances.
The IRS levy can have serious consequences for their financial well-being. If the IRS levies a bank account, for example, the taxpayer may not be able to access their funds, which can make it difficult to pay bills or make purchases and may even result in bounced checks for checks that have not cleared the bank before the levy hit.
If the IRS levies wages, the taxpayer’s employer will be required to withhold a portion of their paycheck to pay off the tax debt. This can put taxpayers in a difficult financial situation.
With most IRS levies, the taxpayer can submit a collection due process hearing request and challenge the levy. This will usually buy the taxpayer time to make other arrangements.
What Is A Disqualified Employment Tax Levy?
This brings us to the “disqualified employment tax levy.”
A “disqualified employment tax levy” is a levy to collect employment taxes if the taxpayer (or its predecessor) requested a Collection Due Process (“CDP”) hearing for unpaid employment taxes in the past two years.
Let’s look at the language used in the Code. New Code Sec. 6330(h) says:
a disqualified employment tax levy is any levy in connection with the collection of employment taxes for any taxable period if the person subject to the levy (or any predecessor thereof) requested a hearing under this section with respect to unpaid employment taxes arising in the most recent 2-year period before the beginning of the taxable period with respect to which the levy is served. For purposes of the preceding sentence, the term ’employment taxes’ means any taxes under chapter 21, 22, 23, or 24.’
The idea seems to be that taxpayers who have submitted a CDP hearing request within the past two years should not be entitled to a CDP hearing for subsequent employment taxes. This raises some serious questions.
Person Subject to the Levy
The use of the language “person subject to the levy (or any predecessor thereof)” is intriguing. The Code provides a very broad definition for this term, which can raise some interesting questions. For example, what happens when a corporation, which is included in the definition of “person,” acquires another corporation? Would the acquiring corporation be subject to a disqualified employment tax levy if it purchases the stock of a target corporation that had filed a CDP hearing request for an employment tax liability? What if the company merged with another corporation that had filed such a request?
The use of the term “requested” is also intriguing. Taxpayers often submit CDP hearing requests. The IRS can refuse to grant the taxpayer a CDP hearing for various reasons, such as if the hearing request was not timely, lost, or not processed by the IRS. Alternatively, what if the IRS employee chooses to ignore the prior CDP hearing request and issue a new levy? The Code does not require the taxpayer to have been given a CDP hearing to be subject to the new disqualified employment tax levy. This raises the question of whether the taxpayer is subject to this new levy procedure if they submit a CDP hearing request but the IRS loses or denies the request.
Property Exempt from IRS Levy
The IRS has the authority to seize a taxpayer’s assets through a levy in order to collect on unpaid taxes. However, the IRS recognizes that certain assets are essential for the taxpayer’s basic needs and survival, and therefore exempts them from being subject to a levy. These exemptions serve to protect the taxpayer’s fundamental rights and ensure they can maintain a basic standard of living. The exemptions include:
- Wearing apparel: Clothes necessary for the taxpayer and their family.
- School books: Textbooks and other educational materials required for school.
- Fuel: Heating oil, propane, or other fuels required for heating the taxpayer’s home.
- Provisions: Food and other necessary supplies for the taxpayer and their family.
- Furniture: Essential household furniture.
- Personal effects: Basic personal belongings.
- Unemployment benefits: Benefits received by the taxpayer while unemployed.
- Certain pensions and annuities: Some retirement income sources are exempt from levies.
- Undelivered mail: Mail addressed to the taxpayer that has not yet been delivered.
- Child support: Payments received by the taxpayer for child support.
- Partial income exemption: A portion of the taxpayer’s income may be exempt from levies to ensure they can cover essential living expenses.
If the IRS attempts to levy an asset that should be exempt, the taxpayer has the right to contest the levy.
The Timing Issue with This Levy
There is an interesting timing issue raised by this new type of levy. Imagine that a taxpayer submits a CDP hearing request in response to a notice of intent to levy. Further, imagine that the IRS does not process the CDP hearing request until a year after the taxpayer submitted it. If the taxpayer then has an employment tax liability that arises in a subsequent tax period, they may be subject to the new disqualified employment tax levy.
This would result in the taxpayer getting a CDP hearing prior to a levy for the first tax period and a CDP hearing after the levy for the second tax period, even though the underlying issue may be the same. Given that the IRS will not consider collection alternatives, such as payment agreements or offers in compromise, without considering all tax periods where there is an unpaid tax debt, IRS employees may need to manually flag the second tax year in their computer system to prevent this type of levy.
The question then is what happens if, unbeknownst to the taxpayer and the IRS employee, another IRS function, such as the Automated Collection System, processes this type of new levy while the IRS employee is working the case. Would the IRS employee have to recalculate the taxpayer’s reasonable collection potential, interest, penalties, etc. before working out an alternative to collections? Would the taxpayer have the right to appeal the IRS decision if the levy occurs while the IRS is working the case and fails to recalculate these figures? This type of procedural timing issue may be very difficult for the IRS to avoid.
Is this New Levy Needed?
The introduction of a new levy, called the “disqualified employment tax levy,” raises the question of whether it is really necessary.
The IRS already has the ability to impose a frivolous submission penalty on taxpayers who use the CDP hearing process to unreasonably delay the tax administration process. Additionally, the IRS can use its jeopardy powers to levy on the property if necessary to collect the tax.
If the CDP hearing request is not frivolous and collection of the tax is not in jeopardy, it is unclear why the government would need to have an expedited levy process.
While the new levy may be aimed at improving the efficiency of the IRS’s tax collection process, it remains to be seen whether it is a necessary addition to the IRS’s collection tools.
The Takeaway
Taxpayers should be aware of an IRS levy as it is a legal action taken by the IRS to collect unpaid taxes, which can have serious financial consequences for the taxpayer. A new type of levy, called a “disqualified employment tax levy,” has been introduced, which can be imposed without providing the taxpayer with any notice. This new levy raises questions about who is subject to it and the timing of the levy. As a policy matter, the need for this new collection tool is debatable, and it remains to be seen how the IRS will use it and integrate it into its tax collection system. Taxpayers should be proactive in addressing any unpaid tax debt to avoid the possibility of a levy.
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