Introduction Employers routinely receive IRS wage levies, with strict and immediate time constraints for complying. However, with some proper procedures in place, employers should have no problem complying with a wage levy. This Insight provides employers a short guide for dealing with IRS wage levies. Issuance of a Wage Levy Under Internal Revenue Code ("Code") section 6331, the IRS may issue a levy for the purpose of seizing a person's property to satisfy unpaid taxes. This is usually done using IRS Form 668-W(c). A levy may be issued after three prerequisites are satisfied: (1) the IRS issues an assessment for taxes due and sends a Notice of Demand for Payment; (2) the taxpayer fails to respond to the assessment or refuses to pay the assessment; and (3) the IRS issues a Final Notice of Intent to Levy and Notice of Right to a Hearing at least 30 days prior to the levy.1 A taxpayer has the right to contest the Final Notice if, within 30 days of receipt, he asks the IRS to review the matter. The taxpayer further has a right to appeal the IRS determination, including bringing a suit in federal court.2 In order to preserve the right to file a court action the taxpayer must file IRS Form 12153 with the IRS within 30 days of the levy notice. The statutes, cases, IRS forms and publications all make clear that a taxpayer has the right, and the responsibility, to challenge any levy that he deems erroneous or illegal.3 Recipients of a wage levy, such as an employer, enjoy no rights to challenge a wage levy because they have no interest in the property subject to it. Thus, the levy process up to the issuance of a wage levy is entirely between the IRS and the taxpayer and does not involve the employer. If an employer receives a wage levy it usually means that the employee has either exhausted his rights or failed to exercise them in a timely manner. An Employer's Required Compliance Wages and salaries, including severance and back pay awards, are expressly subject to levy.4 Settlement amounts are also subject to levy. As is generally the case with wages, the taxpayer's property interest subject to levy - his wages - is in the hands of the person's employer. Thus, employers are served with wage levies in order to allow the IRS to seize those wages earned by the employee before they are paid. In order to encourage third party compliance with such levies, Congress enacted Code section 6332. That section provides, in pertinent part, that "any person in possession of (or obligated with respect to) property or rights to property subject to levy upon which a levy has been made shall, upon demand of the Secretary, surrender such property or rights ... to the Secretary ...."5 If the person "fails or refuses to surrender any property or rights to property, subject to levy, upon demand by the Secretary," the person will become personally liable for the taxes, penalties and interest on the levy, plus collection costs.6 In addition, a penalty equal to 50 percent of the tax due may also be exacted.7 The courts have stated that "clearly, a refusal to honor the levy will be at the third person's own risk. Even in somewhat doubtful circumstances, the liabilities and penalties may be imposed."8 The Code, however, states that employers who comply with a wage levy order cannot be held liable to an employee for such compliance.9 Steps for Complying with an IRS Wage Levy Because an employer is obligated to start withholding in accordance with the wage levy within 10 days of mailing, it is critical for employers to have in place a system that identifies IRS wage levies immediately upon receipt. Employers should establish mail room procedures so that wage levies are quickly routed to the proper personnel to ensure that the employer meets the time requirements. Upon receipt of a wage levy, an employer should take the follow steps:
Revised Publication 1494 Increases Exemption Amounts for 2006 The IRS recently announced that it had increased the amounts subject to exemption from a wage levy for 2006.11 Thus, for example, the exempt amount for a taxpayer filing as "Married Filing Joint Return" with three exemptions increased $25 from $816.67 to $841.67 for 2006. Employers should keep in mind the following rules when calculating the amount exempt from a wage levy in accordance with Publication 1494:
Releasing a levy The IRS must release a wage levy when the taxes, penalties and interest are paid in full. In addition, the IRS must release a wage levy in the following cases:
Unless the levy has been completely satisfied, an employer should continue to comply with it unless it receives notice from the IRS that the levy has been removed for one of the reasons stated above. Responding to Employees Arguing Employer Need Not Comply with Levy An employee will sometimes inform his employer that it does not need to comply with the wage levy order for a variety of reasons, or otherwise threaten action against the company if it complies. However sympathetic an employer might be, as noted above, an employer should comply with wage levies or risk being liable for the levy itself and a 50 percent penalty. Threats of litigation by an employee, however real, should not discourage employers from compliance given the express indemnity set forth in the Code. Regardless of the reasons an employee provides, it is important for an employer to respond politely but firmly in writing that it is obligated to comply with the IRS wage levy and that it will do so until satisfied or until the IRS informs the employer that it may cease compliance, particularly if the employee threatens litigation. Employers should consult their legal counsel to assist in fashioning an appropriate response. Below are some of the more common but nevertheless invalid reasons some taxpayers have used to try to convince employers that they do not need to comply with an IRS wage levy:
Dealing with Multiple Federal and State Wage Levies In addition to IRS wage levies, all states with an income tax have their own procedures for levying state income (and other state taxes). Further, there are state procedures for garnishing wages for child support payments as well as for court judgments. When multiple levy orders exist at any one time, there are specific rules governing the priority of payment for such levies. The various state procedures and priorities are too numerous to set forth here. However, Littler's Employment Taxes Practice Group can assist employers with both federal and state wage levies and garnishment procedures in all of these contexts. Conclusion Employers should have procedures in place to quickly respond to an IRS wage levy, including the following:
1 IRC § 6331(d); see also The IRS Collection Process, IRS Publication 594 (Rev. 02-2004). GJ Stillson MacDonnell is a shareholder and chair of the Employment Taxes Practice Group and William Hays Weissman is an associate in the Employment Taxes Practice Group in Littler Mendelson's San Francisco office. If you would like further information, please contact your Littler attorney at 1.888.Littler, , GJ Stillson MacDonnell at , or Mr. Weissman at . What is a tax levy quizlet?What is a tax levy? The amount of money the municipality must raise through the property tax. A property's assessment of its fair market value. An automatic tax increase due to an increase in property assessments.
Is a levy a tax?A levy is a legal seizure of your property to satisfy a tax debt. Levies are different from liens. A lien is a legal claim against property to secure payment of the tax debt, while a levy actually takes the property to satisfy the tax debt.
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