The IRS is generally required to give taxpayers notice of its intent to levy (or take) their property prior to it actually levying on the property. Congress recently amended the Code to provide the IRS with a new type of tax levy. This new levy is referred to as a “disqualified employment tax levy” and it enables the IRS to levy on property without first providing the taxpayer with any notice.
What Is A Disqualified Employment Tax Levy?
A “disqualified employment tax levy” is a levy to collect employment taxes if the taxpayer (or its predecessor) requested a Collection Due Process (“CDP”) hearing for unpaid employment taxes in the past two years.
The idea seems to be that taxpayers who have submitted a CDP hearing request within the past two years should not be entitled to a CDP hearing for subsequent employment taxes. This raises some serious questions.
Let’s look at the language used in the Code. New Code Sec. 6330(h) says:
a disqualified employment tax levy is any levy in connection with the collection of employment taxes for any taxable period if the person subject to the levy (or any predecessor thereof) requested a hearing under this section with respect to unpaid employment taxes arising in the most recent 2-year period before the beginning of the taxable period with respect to which the levy is served. For purposes of the preceding sentence, the term ’employment taxes’ means any taxes under chapter 21, 22, 23, or 24.’
This language raises some interesting questions.
Person Subject to the Levy
The use of the language “person subject to the levy (or any predecessor thereof)” is curious. The Code provides a very broad definition for this term. This can raise some interesting questions.
For example, what happens when a corporation — which is included in the definition of the term person — buys another corporation? Would the acquiring corporation be subject to a disqualified employment tax levy if it acquires the stock of a target corporation that had filed a CDP hearing request for an employment tax liability? What if the company merged with another corporation that had filed such a request?
The use of the term “requested” is also curious. Taxpayers often submit CDP hearing requests. The IRS can refuse to grant the taxpayer a CDP hearing–either because the hearing request was not timely, or even because the request was lost or not processed by the IRS. Or what if the IRS employee just chooses to ignore the prior CDP hearing request and issue this new levy? The Code does not require the taxpayer actually be given a CDP hearing in order for the taxpayer to be subject to the new disqualified employment tax levy. This raises the question of whether the taxpayer is subject to this new levy procedure if it submits a CDP hearing request but the IRS loses or otherwise denies the request?
The Timing Issue with This Levy
There is an interesting timing issue that this new type of levy raises. Imagine that a taxpayer submits a CDP hearing request in response to a notice of intent to levy. Imagine further that the IRS does not process the CDP hearing request until a year after the taxpayer submitted the CDP hearing request. If the taxpayer then has an employment tax liability that arises in a subsequent tax period, it appears that the taxpayer may be subject to the new disqualified employment tax levy.
This would result in the taxpayer eventually getting a CDP hearing prior to a levy for the first tax period and a CDP hearing after the levy for the second tax period – even though the underlying issue may be the same. Given that the IRS will not consider collection alternatives (such as payment agreements or offers in compromise) without considering all tax periods where there is an unpaid tax debt, IRS employees may need to manually flag the second tax year in its computer system to prevent this type of levy.
The question then is what do the taxpayer and the IRS employee to do if, unbeknownst to the taxpayer and the IRS employee, another IRS function (such as the Automated Collection System) processes this type of new levy while the IRS employee is working the case. Does the IRS employee then have to recalculate the taxpayer’s reasonable collection potential, interest, penalties, etc. before it can work out an alternative to collections? Does the taxpayer have the right to appeal the IRS decision if it turns out that the levy occurs while the IRS is working the case and IRS fails to recalculate these figures? This type of procedural timing issue may be very difficult for the IRS to avoid.
Is this New Levy Needed?
As a policy matter, the IRS already has the ability to impose a frivolous submission penalty on taxpayers who use the CDP hearing process to unreasonably delay the tax administration process and the IRS can use its jeopardy powers to levy on property if necessary to collect the tax. If the CDP hearing request is not frivolous and collection of the tax is not in jeopardy, it is difficult to see why the government would need to have an expedited levy process.
I have yet to encounter any of these types of levies in practice. It will be interesting to see how the IRS uses this new collection tool and how the IRS integrates this new tool into their tax collection system.