May 22, 2020
So, What Exactly Can the IRS Take?
So, What Exactly Can the IRS Take?
The IRS must provide a series of notices if a debt is owed. Those notices culminate in the Final Notice of Intent to Levy. The taxpayer has 30 days to formally object to collections and suggest a collection alternative. Once the 30 days has expired the taxpayer is open to collections. So, what does open to collections mean? What can the IRS take in collections? To answer that question, it is best to discuss what is protected by law and what is open to collections.
Protected Property
- Business and professional tools of the trade up to a value of $3,520
- Clothing and schoolbooks that are necessary for the taxpayer and family
- Furniture and household goods up to a value of $7,720
- Personal residence if the balance of the debt is $5,000 or less
Protected income
- Wages necessary to pay court-ordered child support
- Public assistance benefits
- Unemployment benefits
- Worker’s compensation benefits
- Social security disability
- Special Pensions for Medal of Honor Winners
- Annuities under the Retired Serviceman's Family Protection Plan and Survivor Benefit Plan
- 85% of Social Security, Military, Railroad and Civil Service Retirement Income
Everything else, including retirement accounts, is open to collections provided it has equity and will result in a net recovery, if seized. To determine the net recoverable value, the IRS will typically reduce the value by as much as 20% to account for the results in a forced sale action.
It is important you understand that while retirement accounts are protected from other creditors, they are NOT protected from the IRS. IRM 5.11.6.2 instructs agents to levy retirement accounts in cases of flagrant behavior.
The IRS may levy the following retirement plans
- Qualified Pension, Profit Sharing, and Stock Bonus Plans under ERISA
- IRAs
- Retirement Plans for the Self-Employed (such as SEP-IRAs and Keogh Plans)
Under IRM 5.11.6.2 agent must go through a three step process to determine if circumstance warrant the seizure or levy of retirement accounts;
- The first step in deciding whether to levy on a retirement account is to determine what property, retirement assets and non-retirement assets, is available to collect the liability. If there is property other than retirement assets that can be used to collect the liability, or if a payment agreement can be reached, consider these alternatives before issuing a levy on retirement accounts. Also consider the expense of pursuing other assets as well as the amount to be collected. Levy determinations are made on a case-by-case basis and Revenue Officers must exercise good judgment in making the determination to levy. See IRM 5.11.1.3.1, Pre-Levy Considerations. Document the case history with the determinations made in steps (4) through (7) below. Additionally, levying on assets in retirement accounts requires application of the following procedures.
- The second step in deciding whether to levy on a retirement account is to determine whether the taxpayer's conduct has been flagrant. If the taxpayer has not engaged in flagrant conduct, do not levy on retirement accounts. Deciding whether the taxpayer has engaged in flagrant conduct must be done on a case-by-case basis. Keep in mind, however, extenuating circumstances may exist that mitigate the taxpayer's flagrant conduct. See IRM 5.1.10.3.2(9)(b), Effective Initial Contact.
- The final step in deciding whether to levy on retirement assets is to determine whether the taxpayer depends on the money in the retirement account (or will in the near future) for necessary living expenses. If the taxpayer is dependent on the funds in the retirement account (or will be in the near future), do not levy the retirement account. In determining whether the taxpayer depends on the money (or will in the near future), use the standards in IRM 5.15, Financial Analysis, to establish necessary living expenses. Use the life expectancy tables in Pub 590-B, Distribution from Individual Retirement Arrangements (IRAs), to estimate how much can be withdrawn annually to deplete the retirement account in the taxpayer's remaining life. Also, consider any special circumstances in the taxpayer's specific situation, such as extraordinary expenses or additional sources of income that will be available to pay expenses during retirement.
Below are examples of flagrant behavior:
(A) Taxpayers whose failure to pay is based on frivolous arguments which are listed in Notice 2010–33, IRB 2010–1 C.B. 609, or subsequent updates. See IRB 2010–33 at http://www.irs.gov/irb/2010-17_IRB/ar13.html. (D) Taxpayers convicted of tax evasion for the tax debt.
(B) Taxpayers who voluntarily contributed to retirement accounts during the time period the taxpayer knew unpaid taxes were accruing. See IRM 5.15.1.28, Retirement or Profit-Sharing Plans. (E) Taxpayers assessed with a fraud penalty for the tax debt.
(C) Taxpayers who continue to make voluntary contributions to retirement accounts while asserting an inability to pay an amount that is owed while IRS determined that voluntary contributions were not necessary living expenses and disallowed them for the purpose of determining taxpayers’ ability to pay. See IRM 5.15.1.28, Retirement or Profit-Sharing Plans.
(D) Taxpayers convicted of tax evasion for the tax debt.
(E) Taxpayers assessed with a fraud penalty for the tax debt.
(F) Taxpayers assisting others in evading tax.
(G) Taxpayers with liabilities based on illegal income.
(H) Taxpayers who are in business, pyramiding unpaid trust fund taxes, fail to provide a complete CIS, and do not comply with the results of the Service's financial analysis or fail to timely make FTDs.
(I) Individual taxpayers who are accumulating unpaid income taxes over multiple tax periods and will not adjust their withholding or make timely and adequate estimated tax payments to prevent future delinquencies. See IRM 5.1.10.3.2(5)(e), Effective Initial Contact.
(J) Trust Fund Recovery Penalty modules have been assessed at different times or against more than one business entity.
(K) Taxpayers who have demonstrated a pattern of uncooperative or unresponsive behavior that delays the collection of the tax due, e.g., failing to meet established deadlines, failing to attend scheduled appointments, documented broken promises to pay, failing to respond to IRS employee’s attempts to contact. In such cases, determining alternatives and the taxpayer's dependence on the money in the retirement accounts (final step) may not be possible, so a levy may need to be served without making those determinations.
(L) Taxpayers who have placed other assets beyond the reach of the government, e.g., sending them outside the country, concealing them, dissipating them, or transferring them to other people.
M) Taxpayers with jeopardy or termination assessments subject to collection.
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