The IRS has the power to levy on or take a taxpayer’s property. This includes nearly all property, including Social Security payments. The Treasury Inspector General for Tax Administration (TIGTA), the agency that audits the IRS, recently released a report that examined the IRS’s practices in levying on Social Security payments.
Social Security Payments
TIGTA’s report notes that Social Security payments are the primary source of income for many older taxpayers. Social Security payments are not based on need, so they are subject to the IRS levy powers.
The IRS has a program, the Federal Payment Levy Program (FPLP), by which it can have a continuous levy on Social Security payments. The amount that can be levied by the IRS is capped at fifteen percent of the Social Security payments.
As noted by TIGTA, the IRS does not have to use the FPLP program. Lower income taxpayers are generally filtered out and subject to the IRS’s general collection efforts. TIGTA found that these taxpayers may be subject to levies in excess of the fifteen percent cap for the FPLP. In some cases the levies were 100 percent of the Social Security payments.
Instead of applying the fifteen percent cap, the IRS’s general collection efforts consider the taxpayers:
- Responsiveness to attempts at contact and collection.
- Filing and paying compliance history.
- Effort to pay the tax.
- Financial condition, including information related to economic hardship determinations.
TIGTA report also addresses economic hardship. Section 6343(a)(1)(D) says that the IRS is to release a levy if it determines that the levy is creating an economic hardship due to the financial condition of the taxpayer.
Treasury Regulation § 301.6343-1(b)(4)(i) explains that an economic hardship occurs if the levy results in the taxpayer being unable to pay his or her “reasonable basic living expenses.” This term is not defined. The regulations merely say that reasonable basic living expenses is something different than maintaining an affluent or luxurious standard of living.
It should be noted that this is not necessarily the same as the “reasonable collection potential” standard that the IRS typically considers when making IRS collection decisions.
Treasury Regulation § 301.6343-1(b)(4)(ii) provides the following factors that the IRS is to consider in making this determination:
- The taxpayer’s age, employment status and history, ability to earn, number of dependents, and status as a dependent of someone else;
- The amount reasonably necessary for food, clothing, housing (including utilities, home-owner insurance, home-owner dues, and the like), medical expenses (including health insurance), transportation, current tax payments (including federal, state, and local), alimony, child support, or other court-ordered payments, and expenses necessary to the taxpayer’s production of income (such as dues for a trade union or professional organization, or child care payments which allow the taxpayer to be gainfully employed);
- The cost of living in the geographic area in which the taxpayer resides;
- The amount of property exempt from levy which is available to pay the taxpayer’s expenses;
- Any extraordinary circumstances such as special education expenses, a medical catastrophe, or natural disaster; and
- Any other factor that the taxpayer claims bears on economic hardship and brings to the attention of the director.
The IRS is able to raise economic hardship on its own volition, but in most cases it is up to the taxpayer to request that the IRS do so. The same goes for providing financial information to the IRS so that it can confirm that there is an economic hardship. TIGTA found that the IRS was not raising this issue or using the information it already had to lift levies when there were known or suspected economic hardship.
TIGTA even found that some revenue officers are using the Form 668-W, Notice of Levy on Wages, Salary, and Other Income, which ensures that levied taxpayers receive the exemptions to which they are entitled, while others use Form 668-A, Notice of Levy, to maximize the levy. It also found that the IRS was inconsistent in its approach to levying on Social Security payments and that IRS’s upper management were not even aware that their employees were levying on Social Security payments.