Howard's IRS and the Law Blog

A reader asks the following regarding IRS levies on social security benefits:

What is the difference between an automated federal levy on social security and a manual tax levy, and why does the IRS choose one over the other?

Here is my response:

1.     Automated Levy (15%).  Pursuant to section 6331(h) of the Internal Revenue Code, the IRS can continuously take, month after month, an automatic 15% of a taxpayer’s social security benefits.   All the IRS has to do is match its records of delinquent taxes to those of the government’s Financial Management Service, which indicate social security entitlement.  After a match is made, a notice is sent to the taxpayer from the IRS that the 15% levy will commence on his or her social security. Once the levy commences, the Financial Management Service sends a notice of confirmation to the taxpayer.

The automated social security levy is one of the most readily used IRS collection tools.  It is simple, and provides immediate, continuing and quantifiable results.  It also causes the most financial hardship.  In 2007, the IRS received 1.74 million payments from automated levies on social security benefits.  The IRS Taxpayer Advocate estimates that 86% of those levies were in situations were social security was the primary or only source of taxpayer income.

2.     Manual levy (100%).  The IRS is not limited by IRC 6331(h) to taking 15% of a taxpayer’s social security benefits.  The IRS can issue a manual levy that can continuously take all of the social security benefits under Internal Revenue Code section 6331(a), which permits levy on all wages, salary or other income (which would include social security).  The 15% automatic levy provision is a supplement to the manual levy power. The IRS can chose the manual approach if it deems fit and attempt to collect more than the automated 15%.

The manual levy requires the assignment of an IRS Revenue Officer, while the automatic levy is a paperless transmission.  The manual levy is usually made in extreme circumstances where there is a lack of cooperation.

3.     Exemptions on a manual levy.  One last, and very important, point:  It is important to understand that although the IRS can manually levy up to 100% of social security benefits, the taxpayer has the right to claim an exemption against the levy.  This exemption – contained in IRC 6334(a)(9) – permits the taxpayer to receive a minimum amount of the social security payment and defeat all or part of the manual levy.

The IRS publishes a table of the amounts that can be claimed as exempt.  A single taxpayer getting a monthly social security benefit can currently claim $779.17 as exempt from a manual levy.  That means the IRS, although it can make a manual levy, will only get amounts over $779.17 if the exemptions can be claimed in response to the levy.

The IRS has recently announced that they will attempt to be more reasonable in levy releases in hardship cases. If an automated or manual IRS social security levy does not leave sufficient funds to pay living expenses, the IRS should be contacted to demonstrate the hardship and to negotiate a release.

I am often asked by new clients how a tax lawyer can make a difference in an IRS dispute.  Here is my answer:
  • Once you retain a tax lawyer, the IRS must stop calling you.  The IRS is required to conduct all negotiations – telephone calls, meetings, etc. – through your attorney.  This valuable “buffer” allows time to determine the most accurate responses to IRS inquiries, not “on the spot” responses that cannot be taken back.
  • Your tax lawyer will have prior relationships with IRS collectors and auditors and understand how to keep your head out of the mouth of the bear.
  • Your tax lawyer will understand IRS laws that protects your wages, bank accounts, and property from IRS garnishment or seizure.
  • Your tax lawyer will know when to advise you if bankruptcy is the best way out, the differences between Chapters 7, 11 and 13, and be able to represent you in U.S. Bankruptcy Court.
  • Your tax lawyer will keep any statements made by you to him or her protected by the attorney/client privilege.  They generally cannot be revealed to the IRS or anyone else.
  • Your tax lawyer will represent you before IRS Appeals and U.S. Tax Court to seek judicial review of audit or collection cases.
  • Your tax lawyer may have previously worked for the Internal Revenue Service Office of Chief Counsel or the Tax Division of the U.S. Justice Department, and will bring that background and experience to the table.
Determining whether to hire an attorney to help you out of an IRS jam is an important decision.  If the nature of your case requires it, the right attorney can offer significant advantages.

The IRS Taxpayer Advocate, Nina Olsen, reported in her recent testimony to the House Ways and Means Committee that the IRS classified nearly $20 billion in tax debt as “currently not collectible” in 2008.   This is more than the amount the IRS collected on taxpayer delinquent accounts, including installment agreements and offers in compromise combined.

The IRS, by policy in its Internal Revenue Manual, ceases collection activity against taxpayers whose debt is deemed “currently not collectible.”  See Section 5.16 of the IRM regarding uncollectible accounts here.

The IRS will categorize a taxpayer as having an inability to pay and stop efforts to collect if it determines that collecting the debt would impose a financial hardship (see my blog post on IRS financial hardship here).  IRS debts can also be put in uncollectible status if it cannot locate the taxpayer or if it determines the amount owed is below IRS tolerance levels (i.e., amount owed, age of account).

The IRS Taxpayer Advocate has repeatedly recommended in her Annual Reports to Congress and in testimony that the IRS review its collection model to correct the imbalance between the amount of bad debt it carries and collects.  View her most recent testimony here.

The IRS takes the decision to use employee tax withholdings to pay business operating expenses rather than the IRS quite seriously.  The owners and managers of the business who make these decisions will find the IRS coming not only to the business, but to them, to recover a portion of the withholdings.

This is an exception to the usual rule that the business debts of a corporation or limited liability company do not extend to its owners.  These actions in paying creditors, not the IRS, put the assets of the owners and managers at risk.  The IRS calls this a trust fund recovery penalty because the employee taxes should be held in trust by the business for payment to the IRS.

The IRS is aggressive in investigating and holding business owners and managers responsible for the repayment of these withholding taxes.

But it is important to understand this: the investigation and assessment of the business taxes against owners and managers is often the end of IRS activity against them.  Collection enforcement of a trust fund liability is often light after the fact, with little or no contact afterwards.

The IRS Taxpayer Advocate reported that the IRS collected 3% of the withholding taxes it assessed against business owners and managers in 2007. Consideration of the extent of IRS active enforcement is an important factor in determining the best way out for those that cannot personally repay these trust fund withholding taxes.  Sometimes it is best to know when – and how – to hold tight.

The IRS is aware of the problem, but it remains reality nonetheless. A request should always be made during an IRS withholding tax investigation for an upfront collectibility determination before these taxes are laid on those behind the business.  But note that these requests are rarely taken to heart by the IRS.

Without an upfront collectibility determination, these taxes are put on the books against those running the business, and the IRS then has 10 years to collect the taxes from them.  At this point, time is often the best healer for ownership and management. Time often works best for those that cannot repay as trust fund taxes are generally harder to compromise than a straight income tax liability and are not dischargeable in bankruptcy.

A client came in today with an older tax liability that appeared to have only two years left on the IRS statute of limitations on collection.  The client had not heard from the IRS in years.

A statute of limitations is the time the IRS has to do something.  For IRS collection cases, it is the time the IRS has to collect  – 10 years.  After 10 years, the liability is cleared off the IRS books.

When was the end for my client?

Since all had been quiet, it was important to get a better feel for when the IRS statute of limitations began and ended without waking a sleeping giant.

The answer to determining a quiet end for my client was a review of the Federal tax lien the IRS had filed against him.

A Federal tax lien lists the date the IRS statute of limitations on collection begins, and lists the date it ends. Federal tax liens are public record, filed at a county clerk’s or recorder’s office.   After obtaining the tax lien, we had a good idea of when the statute of limitations on collection ended without having to call the IRS and disrupt still waters.

As part of the reliance on tax liens, it is important to get a clear understanding whether any events have transpired that could change the statute date that would not be evident from the Federal tax lien.  The most common events that will add to the collection timeframe shown in the Federal tax lien include the submission of offer in compromise, filing a collection due process appeal or innocent spouse claim, or going into bankruptcy.

With an initial determination made on the statute of limitation on collections from the Federal tax lien, we set a later date to contact the IRS – when we believed the liability would no longer be collectible, rather than while it still was.

Today IRS Commissoner Douglas Shulman gave an interview on National Public Radio (NPR) about how the IRS will be dealing with hardship cases during these difficult economic times.

Shulman did not addresss what is really holding up IRS collections – an offer in compromise system that accepts only 25% of the offers it receives.  The IRS collection guidelines have long been too rigid, resulting in an increasing number of taxpayers opting for bankruptcy on the IRS.  This almost always results in a lower recovery to the IRS than an offer in compromise.  And how is more bankruptcy good for our economy?

Here’s to Shulman truly being in sync with the hardships that taxpayers are going through and pushing through real changes – more administrative settlements that gives fresh starts and brings in dollars.

My clients are honest and usually have had some bad breaks – business failure, divorce, medical issues – it could happen to anyone.  Opening up the compromise progaram will provide more fresh starts, bring in money to the Treasury and get those with IRS tax problems back to their full abilities, including homeownership.

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