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IRS Levy on QDRO Distribution to Mentally Disabled


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I am a caregiver for a 55-year-old woman disabled by mental illness since 2003. Her husband divorced her as soon as she became disabled, and she received alimony until he retired six months ago.  She was independent for the first several years I was with her, but I lived in her home as a safety measure because she was heavily medicated at night to keep her from having hallucinations that caused her to sleepwalk and even drive. She handled her own finances and I knew little except that even with disability and alimony she struggled financially due to the cost of her medications and paying for my room and board, which was the payment for my help.  After an accident in 2013 caused injuries to her brain and internal organs she became more dependent on me, and at the loss of driving privileges she became a recluse.  As soon as she receives her portion of her husband's retirement plan through a QDRO, I will be helping her find a residential care facility, as I am nearly 70 years old and ready to go. 

I apologize for the background, but it is necessary to my question.  She has recently told me in a rare lucid moment that she has not paid income taxes in eight years.  I did not mention to her that the IRS could levy her QDRO before she even receives it. Am I right?  I think she slipped under the radar since she has not received even a letter from them (I pick up our mail),  Her distribution will be $100k so they might take notice now, I'm afraid.  Thank you.

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I get this is a hard issue and no on wants extra expenses but you need to find a way to encourage this lady to get in touch with a CPA to help her with the tax returns that have not been filed.

Does this lady have any family?

It sounds like there might need to be some kind of discussion of setting up the legal infrastructure to allow a trusted person to help her with her finances before these issues become even more expensive. 

And yes the IRS can go after such money so being proactive is best. 

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Except for the thought  in the next paragraph, this is not a QDRO issue, it is a general income tax issue. If taxes are owed, the IRS can go after assets of the taxpayer.  A distribution from a retirement plan becomes an asset of the recipient.  You are probably aware that a distribution to a former spouse under a QDRO is an eligible rollover distribution to the extent not subject to required distributions rules.  As such, federal withholding at a 20% rate applies and state withholding may apply.  The withholding applies to the ultimate tax liability of the taxpayer; the net distribution is an asset of the recipient.

By policy (although the IRS is not bound) IRS will not levy on funds held in a retirement plan until the funds are distributable or until distribution (interpretations vary).  You appear to think that a distribution is necessary now to set up care for the taxpayer, so holding off on distribution or trying to determine the status of protections if the funds are rolled over directly may not be worthwhile.  You do not say anything about the contract for care.  It is possible that if the distribution funds are used to purchase  long-term care before the IRS is in the picture, the IRS may not be able or inclined to try to invade the contract.  You would need to engage other expertise to see if any possibilities lie in that direction.

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You might try checking with a State or local senior center, etc. - sometimes there are programs where lawyers/CPA's etc. (some of them retirees as well) provide free assistance with tax filing for senior citizens. Your State/locality might possibly have similar programs to provide either free or reduced fee assistance. Worth checking into, and best of luck!!

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First of all I want to express a heartfelt thank you for each of you for taking time to share your expertise with a stranger.  There are many valid points in your answers.

To Pmacduff:  Unfortunately there is enough income tax owed to absorb 75% of the QDRO because no taxes were paid out of her disability or alimony.  Just knowing this makes me feel a little angry, but she has had no extra cash for luxuries because her medication has taken every dime.

ESOP Guy, she has no family and as I said, she is a recluse, in part due to a movement disorder with symptoms similar to Tourette's.  The situation is urgent, but you are wise to suggest I seek assistance from a pro before the distribution.  I tried Belgararth's idea (your kindness was more than I expected) and called a trusted charitable organization who found an expert volunteer willing to come to our home to help with the taxes.  And last, but most definitely not least, QDROphile, your brilliant suggestion is the best way to protect the portion of the account she cannot put toward her debt; she will be in danger of homelessness if she is not receiving adequate care.   

I was pleasantly surprised to find that everyone who contributed here withheld judgment on the issue and gave well-considered advice.  Thank you all so much for that.  Best regards.

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