Tax levy

[Bird]

I have a business owner who owes the IRS some money. He started by asking about a hardship, which the plan doesn't permit at the moment but of course could be amended to allow, and I threw out the idea of using the anti-alienation exception for a tax levy. So he met with the IRS agent and responds:

He is aware of cases where the ten percent penalty can be dropped, he believes this is one of them. He suggested that the plan not withhold the ten percent.

I find that a little scary because, well, it's not like someone has discretion over the penalty. Frankly, I don't even know if a levy is subject to tax, let alone penalties; if they just take your money is it the same as a distribution?

And he goes on to say:

The amendment can include situations involving taxes owed, or payments on mortgage to prevent foreclosure.

That makes me think he's talking about a hardship distribution, not a tax levy; it's almost like the agent is fishing around to see what he can get the owner to do voluntarily without squeezing him to the point of trying to negotiate a more favorable settlement (maybe that's a leap on my part).

If anyone has been through this or otherwise knows how to handle it, please comment. It seems like the agent should be the one imposing the levy first, not just hinting about how they can raise the money, if they're going to do it that way.

[movedon]

I don't have any experience with it, but I'll take a stab. I'm thinking the anti-alienation exception for IRS levies doesn't give a participant the right to voluntarily withdraw money (at all, with or without penalty) or give the plan sponsor the right to distribute money without a judgment or demand of some kind from the IRS or a court. I think the agent is incompetent or the client is dishonest.

[Peter Gulia]

From the Internal Revenue Manual:

5.11.6.1 (01-22-2010)

Retirement Income

Use discretion before levying retirement income. Also see Delegation Order 5-3 (Rev-1) at IRM 1.2.44.3.

A notice of levy is continuous for wages and salary. Other levies only reach property a third party is holding when the levy is received.

Reminder:

References to property include rights to property.

As long as the taxpayer has a fixed and determinable right to property, a levy attaches that right. Therefore, a levy on retirement income can reach payments in the future whether or not the taxpayer has begun receiving payments when the levy is served. This often means that a levy on retirement income reaches future payments. Because this type of levy may begin attaching payments long after the levy is served, follow-up when the taxpayer is expected to become eligible to receive payments. Also see IRM 5.11.5.6.2(7) regarding input of TC 971 AC 687 and IRM 5.11.7.2.5.1, FPLP and Paper Levy, for discussion regarding the Federal Payment Levy Program (FPLP) and paper levies. Consider setting a mandatory follow-up for Bal Due accounts reported currently not collectible.

If the taxpayer has the right to receive future payment but has not opted to do so, the levy attaches that right.

A levy served while the taxpayer is receiving periodic payments reaches payments due then, as well as payments as they become due later, as long as there is already a fixed and determinable right to the future payments.

A levy on a fixed and determinable right to receive future payment (e.g., retirement or pension income, Social Security benefits), made within the statutory period for collection, remains enforceable to the extent of the value of the property levied even if the property itself is not turned over within the statutory period for collection. In other words, a levy prior to the expiration of the statutory period for collection on a fixed and determinable right to receive future payment is still enforceable after the expiration of the statutory period for collection.

http://www.irs.gov/irm/part5/irm_05-011-006.html

[mbozek]

I have a business owner who owes the IRS some money. He started by asking about a hardship, which the plan doesn't permit at the moment but of course could be amended to allow, and I threw out the idea of using the anti-alienation exception for a tax levy. So he met with the IRS agent and responds:

He is aware of cases where the ten percent penalty can be dropped, he believes this is one of them. He suggested that the plan not withhold the ten percent.

I find that a little scary because, well, it's not like someone has discretion over the penalty. Frankly, I don't even know if a levy is subject to tax, let alone penalties; if they just take your money is it the same as a distribution?

And he goes on to say:

The amendment can include situations involving taxes owed, or payments on mortgage to prevent foreclosure.

That makes me think he's talking about a hardship distribution, not a tax levy; it's almost like the agent is fishing around to see what he can get the owner to do voluntarily without squeezing him to the point of trying to negotiate a more favorable settlement (maybe that's a leap on my part).

If anyone has been through this or otherwise knows how to handle it, please comment. It seems like the agent should be the one imposing the levy first, not just hinting about how they can raise the money, if they're going to do it that way.

I am not sure of what situation you are thinking of but there is an exception to the 10% premature distribution tax in 72(t)(2)(A)(vii) for payments made from a qualified plan pursuant to a tax levy under IRC 6331. But tax levies can only be enforced against benefits which are payable from a plan.

There is also a provision in reg 1.401k-1(d)(2)(B) which permits a hardship distribution on account of an immediate and hevay financial need to pay federal or state taxes or penalities anticipated to result from the distribution. I dont know whether a participant could request a hardship distribution in order to pay off a tax levy which is served on the plan administrator and qualfiy for the exemption from the 10% penalty tax.

[Bird]

I am not sure of what situation you are thinking of but there is an exception to the 10% premature distribution tax in 72(t)(2)(A)(vii) for payments made from a qualified plan pursuant to a tax levy under IRC 6331. But tax levies can only be enforced against benefits which are payable from a plan.

There is also a provision in reg 1.401k-1(d)(2)(B) which permits a hardship distribution on account of an immediate and hevay financial need to pay federal or state taxes or penalities anticipated to result from the distribution. I dont know whether a participant could request a hardship distribution in order to pay off a tax levy which is served on the plan administrator and qualfiy for the exemption from the 10% penalty tax.

Thanks; that clears it up somewhat. I was thinking that the IRS could put a levy on the plan account and actually take the money directly from the plan, but I guess not.