The Tax Court ruled in Warren Keith Jackson and Barbara Ann Jackson v. Comm’r of Internal Revenue, T.C. Memo 2022-50, filed May 12, 2022 that it is not an abuse of discretion for IRS Appeals to sustain a proposed levy and deny a proposal of an installment agreement for a taxpayer that has failed to make required estimated tax payments. Taxpayers timely filed and failed to pay multiple years of 1040 income tax liabilities that totaled $128,095 as of 2018. Taxpayers submitted a proposal for an installment agreement. A field Revenue Officer rejected the proposal of $556 per month for the installment agreement and cited that the taxpayers had “sufficient cash or equity in assets to fully or partially pay the balance owed.” Further, that rejection stated that taxpayers needed to make estimated tax payments to qualify for an installment agreement. Given the amount of the debt and monthly proposal, this was a Partial Payment Installment Agreement which requires the IRS to address equity prior to establishment of the payment agreement. After the IRS rejected the agreement, a levy notice with appeal rights was issued. On Appeal, the IRS noted that the taxpayers did not appear to be current on estimates and that they had equity equal to $98,000 in real property. Ultimately Appeals sustained the levy because of non-response. The Tax Court in its review made clear that it has consistently held that an Appeals officer does not abuse their discretion by declining a collection alternative for taxpayers that fail to remain compliant with current taxes. The fundamental take away is that the taxpayer must fix the problem by showing they are capable of paying their current taxes, prior to seeking a collection alternative.
The National Taxpayer Advocate has reported in its Fiscal Year 2016 Objectives report to Congress that a proposal by the IRS to expand collection efforts against retirement plans of federal employees “infringes on taxpayers’ rights to a fair and just tax system.” Federal employees have the ability to participate in the Thrift Savings Plan (TSP), which is similar to a private sector 401(k) plan in that employee savings are tax deferred and qualify for some level of employer, (in this case the federal government), matching.
Taxpayers, including federal government employees, who owe taxes are subject to IRS levy on their property and rights to property. This power extends to retirement accounts, including the TSP. However, given the importance of retirement savings to an individual’s welfare during old age, the IRS has historically regarded a levy on retirement funds as a special case that requires additional scrutiny and a manager’s approval.
Essentially, before a field Revenue Officer can levy a retirement benefit, the agent would determine what property is available to levy – both retirement and non-retirement, determine if the taxpayer has acted in a flagrant manner, and finally determine if the retirement funds are required for necessary living expenses. There are distinct problems with these factors, but that has been partially mitigated by other requirements prior to issuance of the levy. The field Revenue Officer must either secure the signature of the Area Director of Field collections, or secure a manager’s approval.
In order to obtain a collection manager’s approval in this instance, the field Revenue Officer is required to draft a detailed memo that sets out a summary of all information provided to the agent by the taxpayer, whether the taxpayer has exhibited any flagrant behavior, and more importantly, other collection alternatives that have been considered and rejected. In other words, the retirement account falls into a secondary level of collection after the field Revenue Officer reviews other property or income to levy.
Recent activity at the IRS has created a pilot program to levy TSP accounts. Most importantly, and of greatest concern, this program will be administered by ACS employees. ACS is the Automated Collection System unit. When a taxpayer’s account is in ACS, it is not assigned to a single employee for collection, rather, there are various employees in functions and units that work on similar matters. These employees do not receive the same level of financial analysis training as a field Revenue Officer.
In addition to the reduced training received by ACS employees, the pilot program calls for ACS employees to document any information that a retirement is impending and that the taxpayer will be relying on funds from the TSP for necessary living expenses. This lacks any analysis regarding other property the taxpayer may have that would be available to collect from, or if the taxpayer acted in a flagrant manner, all requirements of a field Revenue Officer.
Finally, the pilot program requires managerial approval prior to levy on retirement accounts – but that is a requirement of many collection actions by ACS employees – hardly elevating these situation to a special case status. What is not referenced is the required memo to the manager detailing information provided by the taxpayer and collection alternatives considered and rejected before proposing levy to the retirement account – all requirements of the field Revenue Officer.
In summary, the IRS is targeting one type of retirement account, the TSP, for increased collection activity, over all others. ACS does not have the ability to levy any other retirement accounts at this time. The National Taxpayer Advocate believes that this pilot program undermines both taxpayer rights and retirement security policy. As such, the National Taxpayer Advocate is going to continue to push the IRS to abandon the Thrift Savings Plan levy pilot program If the IRS adopts the program, the National Taxpayer Advocate is prepared to accept all TSP levy cases coming from ACS. Taxpayers should take advantage of this opportunity to protect their retirement income. Additionally, where possible, taxpayers should seek assistance from the Appeals division in order to entertain collection alternatives through Appeals’ Collection Due Process hearing procedures. Feel free to contact Caraker Law Firm, P.C. with any questions you may have.