Offer in Compromise Levy Abuse

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:: Offer In Compromise Levy Abuse

Offer in Compromise - Levy Abuse
It is the current position of the IRS that if a levy has been filed[1] against a taxpayer before an OIC is accepted for processing, the IRS does not have to discontinue the levy after the OIC has been filed. This position is based upon the words may be made in section 6331(k)(1) of the Code which provides:

6331(k)(1) OFFER-IN-COMPROMISE PENDING[2]. --No levy may be made under subsection (a) on the property or rights to property of any person with respect to any unpaid tax –

The IRS agrees that section 6331(k)(1) of the Code prevents the IRS from filing a levy collection action against any individual or business taxpayer if the OIC is “pending” (i.e., after the IRS has determined that the OIC meets its processing requirements[3]).

The IRS levy action is treated as continuous by the IRS on salary, accounts receivable, and other periodic payments. The position of the IRS does not make any sense. Consider the following example:

Example: The IRS garnishes the salary of individual A on November 21, 2005. A filed an OIC on November 26, 2005. A’s OIC was accepted for processing by the IRS on December 12, 2005. The IRS will not stop the salary garnishment. (The IRS will not garnish A’s income if the OIC was accepted for processing on November 26, 2005 and there was no levy in place at that time). The IRS continued to garnish all of A’s income subsequent to November 21 until A left his employment to avoid the garnishment[4]. The position of the IRS does not take into account that after the OIC is accepted for processing on December 12, 2005, each salary payment after that date is property received after the OIC was accepted for processing and before the garnishment action on that item of income. Property must come into existence first before a levy can be executed on any salary payment. Consequently, all levy actions after December 12 can only take place after the OIC was accepted for processing. For this reason, the IRS cannot garnish any salary payment after December 12, by reason of the IRS interpretation of §6331(k)(1).

The Example points out the fact that the IRS has set out an interpretative opinion on §6331(k)(1) (i.e., that property cannot be levied after an OIC has been filed prior to the levy) and then does not follow its own rule by garnishing property (the salary) after the salary payments are paid, at a time after the OIC has been accepted for processing.

There are other reasons for finding that the IRS position is erroneous and contrary to the law.. The IRS fails to take into account the intent of the Congress mandating a liberal acceptance policy in OIC cases[5]. The Conference Report, which accepted the Senate amendment to §7122 states:

The Senate amendment provides that the IRS will adopt a liberal acceptance policy for offer-in-compromise to provide an incentive for taxpayers to continue to file tax returns and continue to pay their taxes.

The IRS position on §6331(k)(1) in OIC cases is contrary to the clear intent of the Congress to create an incentive for taxpayers to continue to file tax returns and continue to pay their taxes. The continuous levy, begun before the OIC was accepted for processing, is contrary to the expressed objective of the Congress. The IRS policy creates a disincentive to remain in the same job. As a practical matter, most salary garnishment cases are against taxpayers living from hand to mouth and who cannot afford to lose net income after the payment of their current tax liability, and in many cases are forced to live on the “side of the economy” in situations designed to avoid garnishment.

In the case of businesses, a levy of accounts receivable means that the IRS is garnishing “gross income.” That gross income is necessary for taxes, payroll and necessary business expenses. Most businesses that would otherwise qualify for an OIC need to discontinue their business operations with that loss of gross income necessary for basic operating and administrative expenses. The IRS is generally overzealous in garnishment collection actions[6].

Lastly, the IRS interpretation of §6331(k)(1) is incorrect. This statute was enacted in 1998 in the IRS Restructuring and Reform Act at the same time that is mandated that collection action be halted for Installment Agreements in §6331(k)(2), and Congress used the same term no levy may be made during the period that an offer for an installment agreement is proposed by a taxpayer. Congress has made it quite clear that it has formulated a tax policy of encouraging, not discouraging, Installment Agreements. For the same reason, Congress has expressly encouraged Offers in Compromises to give taxpayers a “fresh start.” There is no reason why Congress would want to discourage OICs and Installment Agreements with a special rule if levys occur first. Tthe levy-first rule of the IRS is contrary to the clearly expressed intent of the Congress to facilitate OICs and Installment Agreements to encourage tax compliance. The levy-first rule discourages tax complaince. Only the Congress has a power to legislate. The IRS only has the authority to administer the law that Congress enacts. In the present situation, the IRS rule is legislative because it is contrary to the expressed intent of the Congress to be liberal in OIC and Installment Agreement cases and the IRS rule also serves a purpose to discourage rather than encourage tax compliance.

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[1] 6331(a) AUTHORITY OF SECRETARY. --If any person liable to pay any tax neglects or refuses to pay the same within 10 days after notice and demand, it shall be lawful for the Secretary to collect such tax (and such further sum as shall be sufficient to cover the expenses of the levy) by levy upon all property and rights to property (except such property as is exempt under section 6334) belonging to such person or on which there is a lien provided in this chapter for the payment of such tax. Levy may be made upon the accrued salary or wages of any officer, employee, or elected official, of the United States, the District of Columbia, or any agency or instrumentality of the United States or the District of Columbia, by serving a notice of levy on the employer (as defined in section 3401(d)) of such officer, employee, or elected official. If the Secretary makes a finding that the collection of such tax is in jeopardy, notice and demand for immediate payment of such tax may be made by the Secretary and, upon failure or refusal to pay such tax, collection thereof by levy shall be lawful without regard to the 10-day period provided in this section.

[2] Reg. §301.7122-1(d) states: An offer to compromise becomes pending when it is accepted for processing.

[3] The IRS will not process an OIC if the taxpayer had not met filing requirements or is in bankruptcy.

[4] It is usual in these cases for individuals in A’s position to live on the side of the economy generating income from miscellaneous jobs that do not provide continuous employment.

[5] Conference Report to the IRS Restructuring and Reform Bill of 1998, H. Rept. 105-599; H.R. 2676. The Report also instructs the IRS to be “flexible” with taxpayers on OIC issues.

[6] This article was presented by Alvin S. Brown Esq., a tax attorney specializing in IRS issues and problems. From my practice experience, it is estimated that 9 of 10 garnishment actions are excessive and create a “hardship” precluded by section 6343 of the Code and the regulations under that section. Continuous garnishments of accounts receivables of business will usually force closure of the business.