Employers Immune from Suit for Complying with IRS Levy

Editor: Mark G. Cook, CPA, MBA

Procedure & Administration

When a taxpayer fails to satisfy his or her tax liabilities, the IRS has an array of administrative tools for obtaining taxpayers’ compliance. One such method is levying a taxpayer’s wages at the source, through the (albeit usually unwilling) participation of the taxpayer’s employer. The term “levy” is defined as the power to seize by any means, and Internal Revenue Code provisions require employers to help the IRS in its tax collection efforts. Understandably, employers generally do not wish to become entangled in the private financial affairs of their employees; likewise, employees would prefer not to have their employers involved. This item addresses an employer’s rights and responsibilities when required to comply with an IRS wage levy.

Sec. 6332 was enacted to create a legal obligation on third parties to comply with an IRS levy. The statute provides, in pertinent part, that “any person in possession of (or obligated with respect to) property or rights to property subject to levy upon which a levy has been made shall, upon demand of the Secretary, surrender such property or rights (or discharge such obligation) to the Secretary.” Employers fall squarely within the category of persons required to comply with a levy: Upon levy, the employer must withhold and remit amounts specified in the IRS tables in Publication 1494 until the outstanding tax liability has been satisfied or the levy is released.

Employers who do not comply or refuse to surrender property subject to a levy can be held personally liable for the value of the property not surrendered and may also be subject to a penalty equal to 50% of that property’s value (Sec. 6332(d)(2)). Facing such consequences, employers obviously would find it in their best interests to comply.

It is not uncommon in these situations for employees to argue with their employer about compliance with an IRS levy. Employee tactics may range from appealing to the employer’s sympathies for the hardship the levy will cause to veiled threats. Employers might think they are stuck in a quandary: Do they acquiesce to their employee’s wishes and risk personal liability or comply with the levy and strain their relationship with the employee? Fortunately, however, Sec. 6332(e) relieves the employer (or any other third party holding property subject to a levy) from having to make the decision. An employer who complies with a levy “shall be discharged from any obligation or liability to the delinquent taxpayer and any other person with respect to such property or rights to property arising from such surrender or payment” (emphasis added).

In Hunter v. University of Louisville, No. 2010-CA-001613-MR (Ky. Ct. App. 8/5/11), the Kentucky Court of Appeals affirmed the dismissal of a suit the taxpayer had filed against the university (his employer) for complying with a levy and surrendering the taxpayer’s wages to the IRS. The trial court had dismissed the case for failure to state a claim for which relief could be granted, holding that Sec. 6332(e) precluded the taxpayer from seeking relief against his employer. The appellate court noted that the immunity provided under the Code has been broadly interpreted: “Even where a levy is determined to be invalid, the custodian of the property is still immune from liability from actions arising from its compliance with the levy” (Hunter, slip op. at 4).

In practice, employers do not have a choice about complying with an IRS levy; they have much to lose and nothing to gain from noncompliance. Notwithstanding their broad immunity from employees’ claims, employers should nonetheless know their legal responsibilities to their employees as well as to the IRS in dealing with levies.

EditorNotes

Mark Cook is a partner at SingerLewak LLP in Irvine, CA.

The editor would like to offer a special thanks to Christian J. Burgos, J.D., LL.M., for his assistance with this column.

For additional information about these items, contact Mr. Cook at (949) 261-8600, ext. 2143, or mcook@singerlewak.com.

Unless otherwise noted, contributors are members of or associated with SingerLewak LLP.