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By Michael S. Anderson of Anderson Tax Law logo for Arizona tax attorney Michael S. Anderson P.C.
  • Releasing an IRS levy when tax returns aren’t filed

    Releasing an IRS levy when tax returns aren’t filed

    The IRS likes to get attention.  It doesn’t take “selfies” to get it, but once it issues a wage garnishment or a bank levy on your account, you will wish that it just used a camera instead.

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    It doesn’t use a camera because it wants something from you that sometimes it can only get by inflicting pain.  It wants missing returns, a disclosure of your finances or some missing estimated tax payments typically.

    The IRS can condition the release of the wage garnishment or bank account levy on receipt of what it wants.  So if you have one or several years of missing returns… it can literally say “too bad, that wage levy will remain in place until those returns are filed”.

    This is true with a few exceptions.  One  exception is the filing of a bankruptcy which will stop the levy by operation of law.  The other exception is based on a U.S. Tax Court Case from 2009 called Vinatieri v. Commissioner (See Office of Chief Counsel Notice re: Vinatieri here cc-2011-005).

    In Vinatieri v. Commissioner, the Tax Court found that the appeals office had abused it’s discretion when it upheld a levy after the officer decided that the levy would be an economic hardship for the taxpayer but left the levy in place anyway because of missing returns.  The Tax Court based it’s decision on section 6343(1) of the IRC which requires that the IRS release a levy if it will cause the taxpayer economic hardship.   The Court reminded everyone that the statute contained no wording conditioning the release on the filing of any missing tax returns.

    After the Vinatieri decision the IRS issued a Chief Counsel Notice cc-2011-005 in order to try and ensure that appeals officer would follow the Tax Court Decision.

    There are a few issues to be aware of if you think you are in a hardship, the IRS has levied or garnished and you have un-filed returns:

    1.  You will probably need to point out the Vinatieri decision and the Chief Counsel notice to the collection personnel you are dealing with.  They won’t want to follow it and may not be aware of it even several years after the fact.

    2.  “Economic Hardship” isn’t going to be defined by you.  The IRS has a set of budget standards that help it determine whether you are truly a hardship case and it will try and apply those standards to your situation.  If after it applies those standards, it sees “excess” income, Vinatieri won’t apply.

    3.    In order to finalize the case and be placed on “non-collectible status” , you will need to prepare and file the missing returns.  Vinatieri says that levy can’t take place if you are in a hardship but the case file can’t be closed and a determination made without those missing returns.  The IRS will set a deadline for the missing returns and if you don’t meet it – it will try to collect again based on your non-cooperation.

    Conclusion

    If you are being levied or garnished and think that you qualify for hardship status but have missing returns, review the links in this article before proceeding.  Make sure you qualify for hardship status, find out which returns need to be filed, and start working on those asap.