Procedure & Administration
A tax levy is the most debilitating penalty that the IRS can impose. Unlike a lien, a levy is not a claim for a tax debt, but an actual seizure of property to satisfy the tax debt. While it is important to understand the lien process and protections available to taxpayers, another issue comes into play when the IRS levies on assets that may belong to a third party.
According to Sec. 6331(a), the IRS has the right to seize and sell “all property and rights to property.” This means real or personal property and tangible or intangible property (Regs. Sec. 301.6331-1(a)(1)) and thus includes items such as a personal vehicle and residence, as well as wages, investment assets, receivables, and bank accounts. However, specific items are exempt under Sec. 6334(a): wearing apparel, school books, fuel, provisions, furniture, personal effects, tools of the trade, certain unemployment benefits, undelivered mail, certain annuity and pension payments, workers’ compensation, child support payments, income payments not exceeding an exempt amount, certain disability payments, certain public assistance payments, assistance under the Job Training Partnership Act, and principal residences and certain business assets.
Tax levies are generally not unexpected, as the IRS usually only levies after meeting specific requirements:
- The tax was assessed, and the taxpayer was sent a “Notice and Demand for Payment”;
- The taxpayer did not pay the assessed tax; and
The taxpayer received a “Final Notice of Intent to Levy and Notice of Your Right to a Hearing” at least 30 days before the levy was to occur. Receipt includes delivery directly to the taxpayer, to the taxpayer’s residence, or to the taxpayer’s place of business. (More information is available on the IRS’s “Levy” page at tinyurl.com/282zs3.)
Occasionally, the IRS seizes assets that can be claimed by another party (other than the taxpayer who owes the taxes). If the third party believes that is the case, an administrative wrongful levy claim may be filed under Sec. 6343(b). An administrative wrongful levy claim is a
request, made by a person other than the taxpayer who owes the taxes, for the return of property believed to be wrongfully levied upon or seized. Generally, the person making the request believes that the levy or seizure is wrongful because the property levied or seized belongs to them, or they believe they have a superior claim to the property that is not being recognized by the IRS. [IRS Publication 4528, Making an Administrative Wrongful Levy Claim Under Internal Revenue Code (IRC) Section 6343(b), p. 1 (2007)].
The claim must be made in writing to the IRS and should include the name and address of the claimant, a description of the seized property, the party’s basis for claiming an interest in the seized property, the name and address of the taxpayer who was originally levied upon, the IRS office that issued the levy or made the seizure, the date listed on the levy notice or actual copy of the levy notice, and any additional documents that support the claim. If any of this information is unavailable, an explanation of why it is unavailable should be submitted with the claim. The claim should be mailed to the IRS, with attention to the Advisory Group Manager for the specified area of seizure or levy. IRS Publication 4235, Collection Advisory Group Addresses (2011), provides a list of these addresses.
If the IRS initially rejects the claim, the claimant has the right to an appeals process through the Collection Appeals Program, as explained in Publication 1660, Collection Appeal Rights . Alternatively, under Sec. 7426(a)(1), “a third party may bring a civil action against the United States in a district court of the United States seeking the same relief” (IRS Publication 4528). In addition, if the IRS rejects the claim, a taxpayer would still be able to bring a civil suit in district court.
There is no time limit for making a claim or filing suit if the property has not been sold.
If the government has sold the seized property or has submitted cash collections to the IRS, the third party must make an administrative wrongful levy claim or bring a civil action within a nine-month period beginning on the levy date (Sec. 6532(c)(1)). If the third party has elected to take civil action in district court after initially making an administrative wrongful levy claim, Sec. 6532(c)(2) extends the nine-month period for the shorter of:
- 12 months after the filing date of the administrative wrongful levy claim, or
- Six months after the mailing by registered or certified mail of a notice of disallowance of the claim.
Adherence to the statute of limitation is critical to a successful return of funds. In an Oct. 29, 2010, program manager technical advice (PMTA 2010-066), the IRS clarified that while property can be returned to a third party at any time, the IRS is not authorized to return funds after nine months from the date of levy when an administrative claim was not submitted within that nine-month period or when an administrative claim is submitted, but the IRS does not act on the claim and the third party does not file a wrongful levy suit within the applicable statute of limitation under Sec. 6532(c)(2).
Valrie Chambers is a professor of accounting at Texas A&M University–Corpus Christi in Corpus Christi, Texas. Jacob Gatlin is supervising senior with Carr, Riggs & Ingram LLC in Birmingham, Ala. Prof. Chambers and Mr. Gatlin are members of the AICPA Tax Division’s IRS Practice and Procedures Committee. For more information about this column, contact Prof. Chambers at email@example.com.