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Tax Blawg

Tax Talk for Tax Pros

Introduction

Welcome to TaxBlawg, a resource for news and analysis of current legal issues facing tax practitioners. Although blawg.com identifies nearly 1,400 active “blawgs,” including 20+ blawgs related to taxation and estate planning, the needs of tax professionals have received surprisingly little attention. The Wall Street Journal's Tax Blog gives “tips and advice for filers,” and Paul Caron’s legendary TaxProf Blog is an excellent clearinghouse for academic and policy-oriented news. Yet, tax practitioners still lack a dedicated resource to call their own. For those intrepid souls, we offer TaxBlawg, a forum of tax talk for tax pros.

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What Should An Employer Do When It Receives An IRS Notice Of Levy To Garnish Compensation of A Worker?

Getting a Notice of Levy from the IRS is never fun, especially if you are the taxpayer.  However, it can be even more perilous when you receive one with respect to someone you employ that owes the IRS money, seeking to garnish the worker's compensation.

An employer would be making a serious mistake to simply ignore the levy, whether she tells the worker about it or not.  Any person who receives a levy but fails to honor it faces personal liability under I.R.C. § 6332(d) (1) in the amount of each payment that should have been turned over to the IRS.  Thus, the employer who ignores the levy could pay the worker the compensation, as well as have to pay the IRS a second time.  In addition, Subsection (d) (2) creates a second tier "penalty," up to 200% of the amount that should have been paid to the IRS, if the failure to do so was willful.

An organization named Mission Primary Care Clinic learned this lesson the hard way.  It received a levy on the compensation of one of its members, and failed to pay.  A lawsuit followed in the United States District Court for Southern District of Mississippi.  The Clinic argued that the amounts paid to the member were not compensation covered by the levy, and the Court disagreed.  In rejecting this argument, the Court upheld the primary liability for failure to honor the levy.  The additional penalty for willfulness was not at issue.  In March this year, the Clinic's appeal of this ruling was rejected by the Fifth Circuit Court of Appeals.  If you are an employer facing this situation, you do not want to relive this experience.

With that in mind, the first step any employer should take is to call in the worker and have a heart-to-heart talk about the problem.  It is possible that the old, creaky IRS computer issued the levy by accident, and if the employee tells you that, you and he should call the number on the levy to verify that.  More often, Notices of Levy are issued because the IRS is unable to work out a payment arrangement with the taxpayer, often because the person is not responding.  In those cases, serving a levy is almost a matter of desperation on the part of the IRS, which needs to get the taxpayer's attention, and does so by serving a Notice of Levy.  Needless to say, this tactic usually works!  It may be a situation where all the worker needs to do is to complete financial statements and submit them with supporting documents as a prelude into entering into an installment agreement with the Internal Revenue Service.  If the worker and IRS reach an agreement, the IRS will "release" the notice of levy, and so notify the employer.  However, until the employer receives that release, she pays the worker at the peril of her business.

Therefore, whatever the situation happens to be, the employer should counsel the worker to deal with this problem and not let it continue, as the levy – so long as it remains outstanding – is going to take a huge chunk out of the worker's compensation.  There are exemptions for such things as child support orders and amounts equal to the monthly equivalent of standard deduction and exemptions, but the worker must affirmatively establish his entitlement to those exemptions, and they do not leave much to live on.  And no matter how sympathetic she feels about the worker's plight, failure to honor the levy could make things worse for both the worker and the employer.

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    George Connelly is recognized as one of the leading federal tax litigators in the United States.  His practice focuses on IRS audit, collection and criminal matters including civil and criminal tax litigation matters, for clients ...