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IRS Jeopardy Levies: The Silent Killers



How Can a Jeopardy Levy Place You In Jeopardy?

As we have discussed in some previous posts, IRS levies are usually attention-getting tools as opposed to collection tools. The Service almost always cancels bank and other levies if the taxpayer enters into a repayment or other plan. But if the IRS suspects that it will have no other opportunity to collect the tax due, it may use a no-notice levy and immediately seize the taxpayer’s assets. The taxpayer will have no idea that anything is amiss until the waiter quietly says that “there is a problem with your debit card.”

Your Rights in a Jeopardy Levy Case

Typically, the IRS must provide a 30-day notice before it levies the taxpayer’s available assets. Furthermore, it must thoroughly document the need for this levy. Usually, there must be sufficient evidence that the taxpayer has been completely uncooperative. But according to Internal Revenue Manual 5.113, in some cases, the Service may pursue a no-notice levy after only a cursory assessment, if it has a reasonable basis to believe that a levy is the only way it can collect the tax debt. The underlying statute does not set the reasonableness standard, so courts usually rely on a separate provision that authorizes a no-notice levy if there is evidence of:

  • Taxpayer Flight: The IRS may take action without notice if the taxpayer has immediate plans to hide and/or leave the country. Typically, the Service must establish that the taxpayer had no travel plans until s/he became aware of a potential bank levy.
  • Dissipation (Waste) of Assets: If the travel plans involve only assets, that is evidence of dissipation. The same thing applies if the taxpayer has plans to fraudulently transfer assets, such as selling a rent house to a brother-in-law for far less than fair market value.
  • Financial Insolvency: This one is difficult for the IRS to pin down, because once the taxpayer files bankruptcy, the IRS cannot file a no-notice levy without special permission from the bankruptcy judge.

The standard of proof is not entirely clear either, but it is somewhere between “not arbitrary or capricious” and “substantial evidence.” In layman’s terms, that means more than “a hunch” and less than “pretty sure,” so the bar is fairly low.

Responding to a No-Notice Levy

The taxpayer can appeal a jeopardy levy. While the standard of proof is low, the IRS usually does not have very much evidence in these matters, so appeals are often successful. If the Appeals Division of the IRS upholds the no-notice levy, the taxpayer may appeal to district court as part of a Collection Due Process hearing.

If the taxpayer succeeds, the IRS must promptly return all the levied property. However, this sweet victory is usually only temporary. The Service almost always pursues another remedy, mostly a standard bank levy. To permanently avoid the consequences of a no-notice levy, the taxpayer must normally enter into a repayment plan, halt collection activities with a Currently Not Collectible designation, or perhaps file a successful innocent spouse claim.

Have a tax audit defense question? Contact Venar Ayar.

 

 

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