Releasing Wage and Bank Levies
by Daniel J Pilla
Copyright © 2001 Winning Publications, Inc All rights reserved
Releasing Wage and Bank Levies
A previous issue of Pilla Talks Taxes featured a detailed analysis of the IRS’ new property seizure guidelines. I addressed the internal procedures that revenue officers must follow when dealing with delinquent collection cases. I identified the circumstances under which the IRS will and will not seize property. From the material presented, it is clear that while the IRS does recognize limitations on its seizure powers, the agency nevertheless enjoys those powers and will use them as outlined in that discussion. For that reason, I intend to focus in this presentation upon the procedures necessary to both avoid and win release of a wage or bank levy.
Avoiding Wage and Bank Levies
Prevention is always better, cheaper and easier then cure. This is certainly the case with IRS enforcement actions, especially wage and bank levies. As we learned in the last issue, the IRS will turn to wage and bank levies when it believes it is dealing with an uncooperative taxpayer. Those who make no effort to work with agency can expect its wrath. On the other hand, cooperating to the extent required by law ensures that while the IRS still expects the tax to be paid, it will not automatically turn the dogs lose to collect it.
To begin with, I examine two scenarios where the correct steps taken at the proper time will ensure that you will not find yourself on the business end of a wage or bank levy. The first situation involves filing a return without full payment of the tax owed. The second situation involves the IRS’ initial contacts requesting payment of taxes based either upon a tax return filed without full payment, or as a result of an audit or penalty assessment. Later in this discussion, I examine what to do if the IRS has already issued a wage or bank levy.
1. Filing the return without full payment. Obviously, the best approach is to file the return with full payment of the tax. However, if that is not possible, you must submit IRS Form 9465, Installment Agreement Request. A copy of Form 9465 is reproduced here at the end of this report and is also part of our Forms packet. Form 9465 sets the wheels in motion to establish an installment agreement. Once that process begins, you are substantially less likely to incur enforced collection than if you merely file the return without full payment. Moreover, recent changes to the installment agreement rules provide that under certain limited circumstances, installment agreements must be accepted without question. Code section 6159(c) provides as follows: (c) In the case of a liability for tax of an individual under subtitle A, the Secretary shall enter into an agreement to accept the payment of such tax in installments if, as of the date the individual offers to enter into the agreement--
(1) the aggregate amount of such liability (determined without regard to interest, penalties, additions to the tax, and additional amounts) does not exceed $10,000,
(2) the taxpayer (and, if such liability relates to a joint return, the taxpayer's spouse) has not, during any of the preceding 5 taxable years--(A) failed to file any return of tax imposed by subtitle A,(B) failed to pay any tax required to be shown on any such return, or(C) entered into an installment agreement under this section for payment of any tax imposed by subtitle A,
(3) the Secretary determines that the taxpayer is financially unable to pay such liability in full when due (and the taxpayer submits such information as the Secretary may require to make such determination),
(4) the agreement requires full payment of such liability within 3 years, and
(5) the taxpayer agrees to comply with the provisions of this title for the period such agreement is in effect.
On the basis of the above statutory provisions, for those facing a first time tax delinquency under $10,000 and who can make a reasonably aggressive monthly payment, the installment agreement will likely be accepted by the IRS with little question. Note, however, that the law also provides, at section (c)(3), that the IRS must determine that you are "financially unable to pay" the tax in full and on time. This determination generally involves the review of a financial statement, IRS Form 433-A. The financial statement shows all income, expenses, assets and liabilities. From there, the IRS determines your "disposable income," also considered your ability to pay. This is ascertained by subtracting your necessary living expenses (as determined by IRS’ national and local standards) from net take-home pay. The difference is your disposable income and becomes the amount of the installment payment.
Once the installment agreement is established, the IRS is legally precluded from enforcing collection through wage or bank levies, or in any other manner not specifically provided for in the installment agreement document (IRS Form 433-D), while the agreement is pending or being negotiated. Code section 6331(k)(2)(A). However, should you default on the agreement, the IRS may revoke it and undertake enforcement action after thirty days from the date of revocation.
2. Responding to IRS’ initial contacts subsequent to filing the return. Many people are unaware of Form 9465 at the time of filing their return and consequently, they file the return without full payment and without an Installment Agreement Request attached to the return. In this case, the IRS undertakes collection immediately after assessing the tax. This is generally done by a written notice requesting immediate payment. It is received within about five to eight weeks after the return is processed by the service center where it was filed.
This first notice is a "reminder" that you have not paid the tax owed. The IRS asks for payment and calculates interest and penalties through a period which is ten days from the date of the letter. This letter is often mistaken for a final notice because it says you must pay "within ten days." However, upon more careful examination of the language, we find that it actually instructs you to make payment within ten days to "avoid further accumulations of interest and penalties." In other words, the ten-day period mentioned in the letter is a period for which penalties and interest have already been added. Once the ten days expire, the bill begins to grow due to further assessments.
Please note that the first letter is not a final notice, notice of intent to levy since the letter does not fulfill the statutory requirements of a final notice. See code section 6331(d)(4). There are several collection notices such as that described above which you generally receive prior to receiving the final notice, notice of intent to levy. Moreover, the final notice is very clearly marked with the language "final notice" and also mentions within its title your right to a collection due process hearing under code section 6330 before enforcement action may commence. It is only that final notice which triggers the IRS’ enforcement rights under code section 6331(a). An example of a final notice is reproduced below.
Ideally, you should take decisive action to head off enforcement action prior to receiving the final notice. Respond to the IRS’ first notice, or if you have ignored it, respond to the second notice. The key is to respond at any point along the way but do not wait until you receive the final notice.
The response should be in writing and directed to the address shown on the top of the letter you received. Your correspondence with the IRS should always be sent via certified mail with return receipt requested. The letter should explain that you do not have the capacity to pay the tax in full and that you need an installment agreement. Ideally, you should include Form 9465 with your letter and indicate on the form how much you can pay each month. If you do not include the form, indicate in your letter the amount you are able to pay each month. This sets in motion the process of establishing the installment agreement and stabilizing collection to avoid enforcement action.
It is important to be clear about your requests. Do not use unclear references or unspecific terminology. Be concise and succinct. In addition, you must state clearly that you cannot endure enforcement action. The language I like to use reads, "I do not have the income or assets to be able to pay the bill in full and enforcement action will cause an undue economic hardship by making it impossible for me to pay my living expenses." Ask that the IRS establish the installment payment amount at the level you request. If the agency needs additional information to make a decision, it will contact you. Generally that contact comes in the form of a request for financial information through Form 433-A.
If you have already waited too long and the IRS has issued the final notice, notice of intent to levy, you must take quick action to head off a wage or bank levy. In this case, I recommend you contact the Taxpayer Advocate’s office rather than correspond with the service center. Service center action usually takes longer than the time you have available to prevent the levy. Now, keep in mind that when the IRS says you have thirty days to pay "or else," it does not mean it will take enforcement action on the thirty-first day. In almost no case will that happen. However, it is equally important to note that the IRS has the right to enforce collection anytime after thirty days. Therefore, you should not delay.
The IRS has established offices of the Taxpayer Advocate (TA) in all the offices of the District Director. To reach the TA, address your letter to the Taxpayer Advocate at the address of the district director in your local area. The letter should be much the same as that outlined above. In addition, I would include a copy of the IRS’ final notice and give the date that you received it. Explain pointedly that you cannot endure enforcement action and must have an installment agreement. The TA will consider your letter and assign the case for review and negotiation of an installment agreement prior to enforcement action.
In many cases, the citizen cannot make any payment given the amount of monthly income and level of necessary living expenses. In such a case, the IRS can freeze collection action and forego entirely the necessity of an installment agreement. This is known as uncollectible status and occurs when there is a financial hardship such that no payment can be made. If you cannot make a payment because of your financial condition, you should ask for uncollectible status in your letter and on the face of Form 9465. On line 11 where it asks for the amount of your monthly payment, write in the number zero. Then make a note on the bottom of the form that you are "seeking uncollectible status." Your letter should explain clearly that you cannot make a payment because of your harsh financial circumstances.
If the IRS agrees with you, it will freeze collection and no payment is expected. You should note however, that in the vast majority of cases, neither an installment agreement nor uncollectible status solve the underlying tax delinquent problem. The reason is that penalties and interest continue, even when the case is frozen due to financial hardship. Therefore, you must take some other action to resolve your situation. Consider an Offer in Compromise, bankruptcy or other strategy to reduce or eliminate the bill.
For more details on the process of establishing an installment agreement or uncollectible status, please see chapters five and eleven of How to Get Tax Amnesty.
Releasing Wage and Bank Levies
Once a levy is place, it is imperative to move quickly. A wage levy attaches to the next paycheck and transfers to the IRS all money beyond current tax withholdings and the minimum exemption amounts. If you did not complete the exemption form, the IRS will end up with more than half you take-home pay. This prospect does not bode well for most people.
The bank levy is not so immediate, however, there is no minimum exemption amount. The IRS can and will take the entire bank balance and apply it to the delinquent tax. The reason the bank levy is not so immediate is because of the provisions of code section 6332(c).
This section provides that a bank must surrender the proceeds of a levy to the IRS after twenty-one days have lapsed from the date of the levy. This holding period allows the citizen to work with the IRS prior to the account being cleaned out. Most notably, it allows outstanding checks to be cleared before the IRS takes the money and causes those checks to bounce. Note, however, that before the bank will allow any checks to clear against an account under levy, it must obtain at least a partial release of levy from the IRS.
The general statutory guidelines for releasing levies against any property—including wages and bank accounts—is provided for in code section 6343. That statute reads in part as follows:
a) Under regulations prescribed by the Secretary, the Secretary shall release the levy upon all, or part of, the property or rights to property levied upon and shall promptly notify the person upon whom such levy was made (if any) that such levy has been released if—
(1)(A) the liability for which such levy was made is satisfied or becomes unenforceable by reason of lapse of time,
(1)(B) release of such levy will facilitate the collection of such liability,
(1)(C) the taxpayer has entered into an agreement under section 6159 to satisfy such liability by means of installment payments, unless such agreement provides otherwise,
(1)(D) the Secretary has determined that such levy is creating an economic hardship due to the financial condition of the taxpayer, or
(1)(E) the fair market value of the property exceeds such liability and release of the levy on a part of such property could be made without hindering the collection of such liability.
As you can see from this language, the IRS must release a levy if there is an installment agreement in effect at the time of the levy and the citizen is not in violation of any of the terms of the agreement. Code section 6343(a)(1)(C).
If there is no such agreement in effect, there are two other provisions of this law that can provide relief from a levy. They are subsections (1)(B) and (1)(D). I address each of them.
Subsection (B) contains general language that can apply in any situation where the levy can be shown to do more harm than good to the IRS’ prospects of collecting. When collection will not be facilitated by the presence of the levy, it should be released. One example is where a company has an employment policy against enforced creditor collections. If you can show that continuation of the levy will lead to your losing your job by virtue of the employment policy, it can be said that the levy will not "facilitate collection." Obviously, you are less likely to pay the tax if you have no job.
This section is not limited to employment policies that might cause you to lose your job in the face of an IRS wage levy. As I said earlier, this is broad language that can apply in any situation where the levy is likely to do more harm than good. This subsection should be used when there are no facts that justify resorting to other subsections of the statute.
Subsection (1)(D) provides for release when the levy is causing an "economic hardship" due to your financial condition. This is the section that must be argued, either alone or in conjunction with others, to ensure that you obtain relief from the levy. However, it is not enough to merely "allege" economic hardship. You must be prepared to prove that your overall financial condition is such that the levy stands to wreck you.
The IRS’ regulations provide some guidance as to what constitutes "economic hardship." Revenue Regulation section 301.6343-1 (b)(4) provides:
****This condition applies if satisfaction of the levy in whole or in part will cause an individual taxpayer to be unable to pay his or her reasonable basic living expenses. The determination of a reasonable amount for basic living expenses will be made by the director and will vary according to the unique circumstances of the individual taxpayer. Unique circumstances, however, do not include the maintenance of an affluent or luxurious standard of living.
To win release of the levy under this provision, you must be prepared to submit a detailed financial statement to the IRS, usually on Form 433-A. This statement provides the information the IRS needs to determine your ability to pay. As I stated earlier, the IRS evaluates your living expenses in light of its national and local standards and generally, attempts to squeeze as much from you as possible.
In addition, the regulation provides that the IRS will take into consideration the following information for purposes of determining the extent to which a person’s living expenses are "reasonable:"
(A) The taxpayer’s age, employment status and history, ability to earn, number of dependents, and status as a dependent of someone else;
(B) The amount reasonably necessary for food, clothing, housing (including utilities, home-owner insurance, home- owner dues, and the like), medical expenses (including health insurance), transportation, current tax payments (including federal, state, and local), alimony, child support, or other court-ordered payments, and expenses necessary to the taxpayers production of income (such as dues for a trade union or professional organization, or child care payments which allow the taxpayer to be gainfully employed);
(C) The cost of living in the geographic area in which the taxpayer resides;
(D) The amount of property exempt from levy that is available to pay the taxpayers expenses;
(E) Any extraordinary circumstances such as special education expenses, a medical catastrophe, or natural disaster; and
(F) Any other factor that the taxpayer claims bears on economic hardship and brings to the attention of the director. Rev. Reg. section 301.6343-1 (b)(4)(ii)(A)-(F).
To make the presentation discussed here, submit a letter via certified mail to the office of the Taxpayer Advocate in your local district. Remember that the TA has a presence in the office of each district director throughout the nation. Be specific and detailed in your request and provide the information outlined above so the IRS can make a reasonable determination on the merits of your request. Be very clear and specific about the nature of the harm the levy is doing. It is not enough to make the conclusory allegation that the levy is causing "economic hardship." You should give examples, such as, you are unable to make a mortgage or auto payment, or, you have several outstanding checks that will bounce, thereby destroying your good standing with merchants and creditors.
Make a specific and clear request that the levy be lifted immediately. Keep in mind that if you withhold information regarding your financial status and ability to pay, you will at least delay the process and likely, you will meet with denial of your request to release the levy.
Consistent with this observation, please note the language of Rev. Reg. section 301.6343-1(b)(4)(iii), which provides as follows:
In addition, in order to obtain a release of a levy under this subparagraph, the taxpayer must act in good faith. Examples of failure to act in good faith include, but are not limited to, falsifying financial information, inflating actual expenses or costs, or failing to make full disclosure of assets.
Hence, you cannot withhold information or misstate your financial condition and hope the IRS will release the levy.
Levy verses Lien
Many citizens mistake a lien for a levy. The confusion causes consternation and leads some to believe that the IRS may have violated the law restricting enforced collection while an installment agreement is pending. Many times, this is not the case.
There is an important difference between and levy and lien and you should understand what it is. A levy is the process by which the IRS takes ownership of your assets, whether they are bank accounts, wages or other property. Through a notice of levy to your employer, for example, the IRS in essence stands in your shoes vis-à-vis your right to receive the paycheck. Rather than collect the check yourself, the IRS collects it and applies the proceeds to the delinquent taxes.
On the other hand, a lien does not alter the ownership of any property interest. When the IRS files a lien, the presence of that lien does not operate to transfer to the IRS your interest in, say, your home. Rather, the lien secures the assessment to the property. The lien is the process by which the agency protests its interest in your property, thereby preventing the wholesale liquidation of the property without paying the assessment.
In short, liens do not transfer property rights; levies do.
In addition, the mere fact that you are under an installment agreement does not preclude the IRS from filing a tax lien. What’s more, the IRS is not precluded from filing a lien while you are negotiating for an installment agreement. On the installment agreement form itself, IRS Form 433-D, there is a section which allows the IRS to either file a lien in connection with the agreement at the time of signing it, or file one in the future. In most cases, a lien is already in effect at the time the agreement is negotiated. As such, the form contains a check-the-box line that provides for that as well.
In conclusion, simply filing a tax lien while the installment agreement is being sought or is in effect does not violate restrictions contained in code section 6331. The provisions of that section just do not apply to the lien.
I should note, however, that the filing of federal tax lien is subject to a separate collection due process appeals right, provided for under code section 6320. Just as is provided in section 6330 with respect to other collection actions, an appeal from the filing of a lien may be exercised if done so in a timely manner. The process is available to challenge the filing of the lien. Under code section 6320(a), the IRS must notify the taxpayer within five days that a lien has been filed. An appeal can be taken if the protest is submitted within the thirty-day period beginning the day after the five-day period expires. I will provide more detail on the lien appeals process in future newsletters. (Pilla Talks Taxes)
In almost every case, wage and bank levies can be avoided or their negative impact minimized if one acts promptly and correctly. However, if one is to ignore the problem, hoping against hope that it will go away, the situation will only grow worse. And, to add insult to injury, you will likely lose your appeals rights by waiting.
Copyright © 2001 Winning Publications, Inc All rights reserved
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