A. Levy and Distraint and Tax Lien Provisions

PRESENT LAW

Levy and Distraint: Procedural rules

In general, present law provides that levy upon (i.e., taking of) property may be made if a taxpayer neglects or refuses to pay tax within 10 days after notice and demand (Code sec. 6331). Collection of tax by levy is lawful without regard to the 10-day period, if the Internal Revenue Service finds that collection of tax is in jeopardy.

Provided that collection of tax is not in jeopardy, levy may be made upon the salary, wages, or other property of any person with respect to any unpaid liability only after the IRS has notified such person in writing of its intention to make the levy.

This notice must be given in person, left at the dwelling or usual place of business of the taxpayer, or sent by registered or certified mail to the taxpayer's last known address, no less than 10 days before the day of the levy. A single notice is sufficient to cover all property of the taxpayer subject to levy.

The effect of a levy on salary or wages payable to, or received by, a taxpayer is continuous from the date the levy is first made until the liability out of which the levy arose is satisfied or becomes unenforceable by reason of lapse of time. The IRS must release promptly such a levy when the liability out of which the levy arose is satisfied or becomes unenforceable by reason of expiration of the period of limitations, and must notify promptly the taxpayer upon whom such levy was made that the levy has been released.

Under present law, the owners of real property that is sold after a seizure, as well as their heirs, executors or administrators, or any other person having an interest therein, may redeem the property at any time within 180 days after the sale (sec. 6337).

Levy and Distraint: Property exempt from levy

Present law exempts certain property from levy (sec. 6334). Among other items, this exemption covers (1) fuel provisions, furniture, and personal effects; (2) books and tools of a trade, business, or profession; and (3) wages, salary, or other income. (Wearing apparel and school books, unemployment benefits, undelivered mail, certain annuity and pension payments, workmen's compensation, and judgments for support of minor children are also exempt from levy under this provision.)

For a taxpayer who is head of a family, an exemption of $1,500 for fuel, provisions, furniture, and personal effects in his or her household and for arms for personal use livestock, and poultry is available.

A $1,000 exemption for books and tools necessary for the trade, business, or profession of the taxpayer is provided.

The exemption for wages, salary, and other income is $75 per week plus $25 per week with respect to each individual over half of whose support is received from the taxpayer, who is a spouse or dependent of the taxpayer, and who is not a minor child of the taxpayer with respect to whom amounts are exempt from levy pursuant to a support judgment entered prior to the date of levy.

Tax Liens

If any tax is not paid when due, the full amount of the liability (tax, interest, and penalties) is a lien in favor of the United States against all property of the taxpayer owing the liability (sec. 6321). This lien arises automatically, but present law provides numerous rules governing the priority of the the lien as against interests of third parties also having an interest in the property (sec. 6323).

A lien imposed with respect to any tax must be released no later than 30 days after either (1) the liability for the amount assessed together with all interest and penalties in respect thereof has been satisfied fully or has become legally unenforceable, or (2) acceptance of a bond that is conditioned upon the payment of the amount assessed, together with all penalties and interest (sec. 6325). Present law provides no appeal of a lien separate from the right to challenge assessment of the underlying liability.

Amount of damages in case of wrongful levy

In the case of an alleged wrongful levy, a person (other than the taxpayer against whom is assessed the liability out of which such levy arose) who claims an interest in, or lien on, the property levied upon may bring a civil action against the United States in a U.S. district court (sec. 7426). If the court determines that there has been a wrongful levy then the court may (1) order the return of the property if the United States is in possession thereof; (2) grant a judgment for the amount of money levied upon or (3) if the property has been sold, grant a judgment for an amount not exceeding the greater of the amount received by the United States from the sale or the fair market value of the property immediately before the levy.

EXPLANATION OF PROVISIONS

Levy and distraint: Procedural rules

The bill would amend the rules pursuant to which the Internal Revenue Service enforces payment of tax by levying on a taxpayer's property in several ways. First, the bill would increase the period that the IRS must wait before levying after notice of the levy has been sent to the taxpayer from 10 days to 30 days. As under present law, the waiting period would not apply in cases where collection of the liability was in jeopardy.

Second, the bill would provide that specific disclosures must be made in all notices of levy. These notices would be required to describe the levy provisions of the Code and the procedures (including appeal rights) pursuant to which a levy occurs. Additionally, all alternatives available to the taxpayer, including methods by which property may be redeemed and tax liens released would have to be disclosed in the notice of levy.

Third, the bill would expand the circumstances under which a continuing levy on a taxpayer's salary or wages would terminate. Under the bill, the levy would terminate if the taxpayer and the IRS entered into an agreement for installment payment of the unpaid tax liability (see Part II. 8.) or if the IRS determined that the liability was unenforceable due to the financial condition of the taxpayer.

The bill does not establish guidelines for determining when a taxpayer would be determined to be financially unable to pay a liability to an extent justifying termination of a continuing levy on salary or wages.

Fourth, the IRS would be precluded from taking property in payment of a liability if the expenses associated with the levy were greater than the value of the property or the liability to be satisfied. Additionally, a levy could not be made on any day on which a taxpayer responded to a summons issued by the IRS.

Fifth, the Treasury Department would be directed to prescribe regulations establishing new rules for determining the minimum price at which property levied upon would be sold. The bill would direct that these regulations not limit the minimum price to the amount of the liability for which the sale is made, the expenses of the levy, or any combination of the two.

Levy and distraint: Property exempt from levy

The bill would expand the types and amounts of property which are exempt from levy. The amount of exempt fuel, provisions, furniture, and personal effects would be increased from $1,500 to $20,000. Additionally, animals in addition to livestock and poultry (presently exempt) would be exempt within this category. Property of a trade or business would be exempt to the extent of $10,000, but only if the trade or business was not a corporation.

The amount of salary or wages exempt from levy would be increased to $200 per week plus $50 per week for the taxpayer's spouse and each dependent other than a minor child with respect to whom a support order existed. Income exempt from levy would continue to be exempt if the income were deposited in a bank or other savings institution to the extent that the deposit (or share purchase) occurred within thirty days after receipt of the exempt funds.

Under the bill, a taxpayer's principal residence, a motor vehicle used as a primary source of transportation for commuting to and from the taxpayer's place of business, and any tangible personal property the taking of which would preclude the taxpayer from carrying on his trade or business would be exempt from levy except in certain cases. This property could be taken for payment of tax only if a district director or assistant district director of internal revenue personally approved the levy or if collection of the tax were determined to be in jeopardy.

Levy and distraint: Release of levy

Specific new standards would be provided for determining when a levy would be released. Under the new rules, the IRS would be required to release a levy if,

(1) the unpaid liability was paid

(2) the release of levy would otherwise facilitate collection of the liability;

(3) the taxpayer entered into an agreement to pay the liability in installments (see Part II. B. below);

(4) the expenses of the levy and sale of property exceeded the amount of unpaid liability;

(5) the taxpayer was prevented by the levy from meeting necessary living expenses; and

(6) the value of the property levied upon exceeded the unpaid liability and the release could occur without hindering collection of the liability.

The bill does not define the term "necessary living expenses" for purposes of Item 5, above.

Tax Liens

The Treasury Department would be directed to prescribe regulations within 180 days of enactment of the bill to implement a procedure for administrative appeal of any lien imposed on a taxpayer's property. The bill would not otherwise change the rules under which a lien for unpaid tax attaches to property or the priority of such a lien as compared to other interests in the property.

Taxpayer actions against IRS procedural violations

The provisions of present law permitting administrative and judicial review of assessments of tax and wrongful levies would be expanded. The bill would authorize any taxpayer to bring a civil action in United States district court if a lien were imposed or levy made on the taxpayer's property in a manner violating the procedures established by the Code. The taxpayer would be required to have filed a written request with the IRS Taxpayer Ombudsman for an order to stop the lien or levy (see the discussion in Part II. E., below) as a prerequisite for bringing action. The district court could provide any remedy which it determined appropriate.