The Taxpayer Advocate is a tireless champion of taxpayer rights. The Taxpayer Advocate is required by law to issue reports to Congress. Her most recent mid-year report was recently released. One of her issues was that the IRS continues to levy on retirement accounts even though the IRS guidance to its revenue officers is “insufficient to protect taxpayer rights.” As her report points out, the IRS has identified three steps which MUST be taken before a Notice of Intent to Levy can be issued on a retirement account such as IRA Qualified Pension, Profit Sharing, and Stock Bonus Plans under ERISA, and Retirement Plans for the Self-Employed (such as SEP-IRAs and Keogh Plans). These steps are:
- Determine what property (retirement assets and non-retirement assets) is available to collect the liability;
- Determine whether the taxpayer’s conduct has been flagrant; and
- Determine whether the taxpayer depends on the money in the retirement account (or will in the near future) for necessary living expenses. IRM 184.108.40.206(4)-(7) (Sept. 26, 2014)
A very significant issue in all cases is whether or not the taxpayer’s conduct is “flagrant.” The Taxpayer Advocate believes that despite recent changes in the IRM insufficient guidance is provided to IRS Revenue Officers to determine what conduct is flagrant. The IRM does not contain a definition of what is flagrant, although it does contain examples. Some of the examples contained in the IRM are:
- Taxpayers whose failure to pay is based on frivolous arguments, which are listed in Notice 2010-33, IRB 2010-1 C.B. 609, or subsequent updates.
- Taxpayers who continue to make voluntary contributions to retirement accounts while asserting an inability to pay an amount that is owed.
- Taxpayers who voluntarily contributed to retirement accounts during the time period the taxpayer knew unpaid taxes were accruing.
- Taxpayers convicted of tax evasion.
- Taxpayers assessed with a civil fraud penalty for the tax debt.
- Taxpayers assisting others in evading tax.
- Taxpayers with liabilities based on illegal income.
- Taxpayers who are in business, pyramiding unpaid trust fund taxes, and will not comply with the results of the Service’s financial analysis including submission of a complete CIS, including the timely deposit of FTDs.
- Individual taxpayers who are accumulating unpaid income taxes over multiple tax periods and will not adjust their withholding or make timely and adequate estimated tax payments to prevent future delinquencies.
- Taxpayers against whom the Trust Fund Recovery Penalty has been asserted on more than one occasion.
- Taxpayers who have demonstrated a pattern of uncooperative or unresponsive behavior, e.g., failing to meet established deadlines, failing to attend scheduled appointments, failing to attend scheduled appointments, failing to respond to revenue officer attempts to contact them.
- Taxpayers who have placed other assets beyond the reach of the government, e.g., sending them outside the country, concealing them, dissipating them, or transferring them to other people.
- Taxpayers with jeopardy or termination assessments.
In her report, the Taxpayer Advocate states that since June 2015 the IRS has greed to remake changes of some of these examples. Her report cites IRM 220.127.116.11(5), Funds in Pensions or Retirement Plans (June 14, 2016). Unfortunately these changes have not yet been posted to the IRS’ website so our tax attorney’s can’t comment on them.
Additionally, the Taxpayer Advocate continues to be concerned that without a definition of flagrant conduct, the determination of whether or not to levy on a retirement plan will be subject to the whims of a particular revenue officer. The Advocate has suggested a definition of flagrant conduct to include a “willful action (or failure to act) which is voluntarily, consciously, and knowingly committed in violation of any provision of chapters 1, 61, 62, 65, 68, 70 or 75, and which appears to a reasonable person to be a gross violation of any such provision.” Thus this is one more area where it pays to have zealous representation by a tax litigation attorney who can effectively set forth the reasons in favor of NOT levying on a retirement account.