The IRS has the authority to attach a tax lien to property of the taxpayer once the IRS assesses a federal tax liability against the taxpayer and issues notice of an intention to levy. If the taxpayer fails to resolve his or her assessed federal tax liability by using one of the methods presented in our previous post, the IRS may levy against all property and rights to such property of the taxpayer. A tax lien remains effective and is only released when (1) the liability is satisfied or becomes time barred; (2) release will facilitate collection; (3) an installment payment agreement or an offer in compromise has been entered into; and (4) the taxpayer proves that the levy is creating an economic hardship on the taxpayer.
The IRS is allowed to levy against all property of the taxpayer, including his or her salary and wages. In order to properly levy against the taxpayer’s wages, the IRS must first serve a notice of levy on the employer or other third party who is in control or possession of the taxpayer’s property. According to the Internal Revenue Code section 6332(a), the employer must surrender the property to the IRS on demand. Failure to do so results in personal liability to the employer.
This rule was recently reviewed by the United States District Court in Gust v. US Airways (108 AFTR 2d 2011-5603 (DC NC 12/16/2011). On December 16, 2011, the court dismissed an employee’s suit against its employer for complying with an IRS levy and garnishing the employer’s wages. The employee, Gust, alleged that the employer, US Airways, unlawfully complied with a federal tax levy and garnished his wages. Gust claimed that the wages garnished were exempt and that US Airways was negligent for failing to ensure the levy was valid. The District Court stressed that US Airways had no duty to ensure that Gust had received process or even that the levy was valid. The court further held that once the IRS served a Notice of Levy on US Airways, that the employer had a legal obligation under Code section 6332(a) to turn over the wages to the IRS. Furthermore, the court concluded that US Airways did not have standing to challenge the validity of the levy.
An IRS notice of intention to levy should be handled with great care. Taxpayers who are not able to pay their tax liabilities need to be knowledgeable of all of their options when faced with an assessed tax liability. It is more advantageous to work with the IRS and to negotiate a resolution concerning outstanding taxes, as opposed to being faced with wage levy when the IRS is in a much stronger bargaining position.
Gust v. US Airways is a good reminder of the importance of compliance with notices of tax levies upon an employee’s wages and salaries. The employer is statutorily obligated to comply and when in compliance is immune from a later suit brought by the employee arising out of the employer’s compliance with the levy.