Tuesday, November 1, 2011

IRS Levy On a Paycheck


I am looking at a decision from the Court of Appeals for Kentucky. On first blush, the issue is so clear-cut that I wonder what the appellant was thinking even pursuing the issue. Of interest to us, however, is the issue itself.
William Hunter (WH) worked for the University of Louisville. WH got himself in trouble with the IRS. He must have ignored every notice sent him, as in June, 2006 the IRS served a notice of levy on UofL’s payroll department.
UofL did what it had to do – it notified WH that it would comply with the notice.
More than 3 years later, WH sued UofL, alleging that it wrongfully diverted wages due him. The university immediately filed and won a motion to dismiss. WH appealed.
The Appeals Court schooled WH. More specifically, it pointed to Code Sec 6332(d)(1):
Any person who fails or refuses to surrender any property or rights to property, subject to levy, upon demand by the Secretary, shall be liable in his own person and estate to the United States in a sum equal to the value of the property or rights not so surrendered, but not exceeding the amount of taxes for the collection of which such levy has been made, together with costs and interest on such sum at the underpayment rate … from the date of such levy ….

This is pretty clear for the tax code. Once UofL was levied – and if it refused to comply - it became liable. I don’t believe that UofL was interested in stepping into those shoes.
There is more in Sec 6332(d)(2):
In addition to the personal liability imposed by paragraph (1), if any person required to surrender property or rights to property fails or refuses to surrender such property or rights to property without reasonable cause, such person shall be liable for a penalty equal to 50 percent of the amount recoverable under paragraph (1).

So, in addition to being personally liable, the IRS can hit UofL with a 50% penalty.
Why was I surprised that WH pursued this action against UofL? Let’s look at Sec 6332(e):
Any person in possession of …property or rights to property subject to levy upon which a levy has been made who, upon demand by the Secretary, surrenders such property or rights to property …to the Secretary … 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.

This means that UofL was immune to suit, and the Appeals Court decided that UofL was immune to suit. How did WH even find an attorney willing to pursue this matter?
What is the lesson here?
First of all, the IRS will attempt numerous ways and times before it will levy. There likely have been many ignored notices before the IRS resorts to a levy. A payroll levy can be quite harsh, because the IRS provides for limited exemptions. The excess is to be remitted to the IRS. One can lose 75% of his/her paycheck to a levy.
What if you are the employer and receive a levy? First, call in the employee and explain the situation. Strongly encourage the employee to contact the IRS and pursue a payment alternative. Perhaps it is an installment agreement. It can be an offer in compromise. If the situation is financially dire, the IRS may even agree to place the taxpayer in “do not collect” status. And explain that you, as an employer, have no choice but to observe the levy.

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