What happens
if the IRS sends you a levy (say on an employee, but it could also be your
account payable to a vendor) and you ignore it?
You can guess
that it is not going to be good.
I am looking
at U.S. v 911 Management.
Daniel Dent was
the sole manager of 911 Management, a limited liability company. The company
must have been successful, as it was distributing $5,700 monthly to Kathy
Weathers, one of its members. In 2007, the company further entered into an agreement
with Kathy to operate two hotels owned by her, from which it would pay her 3%
of the monthly gross proceeds.
In 2007, the
IRS served levy against the bank accounts of 911 Management. That action wound up
in litigation.
In February 2008,
the IRS served Notice of Levy on 911 Management. It wanted both the $5,700 and
3%, as the Weathers had fallen behind on taxes for 1996 and from 1998 through
2006. Turns out that Tom and Kathy Weathers were convicted of tax fraud. Tom
was serving 60 months at Club Fed, and Kathy received two years of probation.
OBSERVATION: Tom Weathers went to prison in October 2005.
Coincidentally, 911 Management was formed the same month. The Company was
paying Kathy $5,700 monthly, and that amount increased when she added the management
of two hotels into the mix. The IRS was fairly confident that the transaction
was a sham and a way to provide monies to her while her husband was in jail.
There were
technical issues with the levy notice, and the previous levy effort by the IRS
was in litigation. Dent contacted his business advisor as well as an attorney,
and he in turn received two separate but not conflicting responses. The business
advisor informed him that a bond had been posted, satisfying all the back taxes
for the Weathers. It was therefore not necessary to honor the Notice of Levy,
as the matter had been resolved.
COMMENT: The Revenue Officer informed Dent otherwise and that
monies were still due. This must have alerted Dent that not all the facts were
in.
Dent also
contacted an attorney, who had reservations about the levy procedure itself.
The attorney believed that the levy did not apply, because the levy was for salaries
and wages and the payments to Mrs. Weathers were neither.
OBSERVATION: Thus began a high-stakes gambit. There are tax
practitioners who play a heavy-procedural game, waiting if not stoking the IRS
to make a procedural mistake. For the most part, I have found this to be the
arena of the tax attorneys rather than tax CPAs, and I have been on the
listening end of some scathing anecdotes by IRS revenue agents over the years. The
IRS catches on, of course, and will commonly assign more experienced agents
when such a practitioner surfaces. Still sometimes the tactic works, and the
tete a tete continues another day.
Dent informed
the revenue officer that the levy did not apply. He of course did not remit the
$5,700 or the 3%. The revenue officer vociferously disagreed. Dent did not remit
anything, relying upon his attorney’s advice that the levy was erroneous.
Remember
that I mentioned the IRS had levied in 2007, a year before? That case was
decided, and both 911 Management and Dent were held personally liable for the levy
request. That is what happens when one ignores a levy: one steps into the shoes
of the delinquent taxpayer. It is the levy equivalent of the “responsible
person” taxes, which apply when one does not remit withheld payroll taxes.
So Dent was
held personally responsible. Can it get worse?
You bet.
There is another
penalty: the Section 6632(d)(2) penalty, which is 50% for failure to honor the
levy. The IRS wanted this penalty against Dent. Remember, the IRS believed 911 Management
to be a sham, so they were going to go the extra mile against Dent for participating
in the sham and resisting the levy.
There is a “reasonable
cause” exception to the penalty, and the Court decided that Dent had reasonable
cause. How? Apparently, there was enough smoke on the water over IRS procedure in
pursuing the levy that the Court accepted Dent’s reliance on his attorney as
reasonable cause.
Mind you, they
accepted his reliance on an attorney as reasonable cause to not levy another
50%. Dent was already personally responsible.
Another “win”
like that and Dent might bankrupt himself.
COMMENT: 911 Management came into existence when Mr. Weathers
went to jail in 2005 for five years. When did 911 Management cease doing business?
Five years later – 2010 – when Mr. Weathers was released from jail. Coincidence?
Just saying.
