THE NOTICE OF LEVY

The seizure or levy process begins when the taxpayer has refused to comply: he has not responded to the series of balance-due notes sent him, he has defaulted on a previously arranged installment agreement, or he has failed to communicate fully with the IRS (e.g., he has not returned phone calls or he has failed to keep appointments).

The easiest and usually the first enforcement action is a Notice of Levy sent to the taxpayer's bank account or to the employer. A levy upon a bank account is usually total; it will attach everything in the account up to the full amount of the levy. A levy upon salaries, wages, and other income is not total; it has two limitations. An amount of $75 per week is exempted from levy on salary or wages and other income for each taxpayer against whom a levy is served. An additional $25 a week is exempted for the spouse and each dependent of the taxpayer.

IRS Form 668-W is used for attaching wages and salaries and is sent directly to the taxpayer's employer. Accompanying it is a Statement of Personal Exemptions, which the employer must give to the taxpayer/ employee to complete, and then return to the employer. A taxpayer who does not complete the statement loses his dependency for the payroll period.

A Notice of Levy served upon salary or wages is continuous until the tax is fully paid or the liability becomes unenforceable due to the six-year statute of limitations on collection. The provision for a continuous levy on salary and wages was included in the Tax Reform Act of 1976. Previously, the levy was a "one-shot" affair. It only attached a single paycheck, but it also attached the entire paycheck.

The IRM provides that if the unpaid liability is from a joint return filed by a husband and wife who are both employed, the levy should be served on the spouse with the larger income. A levy is not allowed to be served on both spouses except in "flagrant or aggravated instances of neglect or refusal to pay" (IRM 5322.3:(7)(a)).

Usually a levy served to a taxpayer's employer will result in an immediate visit to the local IRS office in an attempt to obtain a release. Internal Revenue Code Section 6343 authorizes a release of levy if it will facilitate collection of the liability. The regulations state that the following actions facilitate collection:

• An arrangement is made to place property in escrow to secure payment of the liability.
• The taxpayer furnishes an acceptable bond conditioned upon payment of the liability.
• The taxpayer makes a payment equal to the interest of the U.S. in the seized property.
• The taxpayer signs a satisfactory payroll deduction agreement.
• The taxpayer makes satisfactory arrangements to pay the liability in installments.
• It is determined that the value of the lien interest of the U.S. in the property is not sufficient to cover the expenses of the sale.
• The taxpayer signs an agreement to extend the statute of limitations, if one is needed.

Neither the Internal Revenue Code, the regulations, nor the IRM provide for a release of levy when the taxpayer can present evidence that the levy has created a real hardship for him and/or his family. Yet most revenue officers are compassionate enough to release a levy in that situation. Taxpayers with a legitimate case of hardship are advised to communicate with their local IRS offices as soon as possible before a levy or seizure is made. One can never be too sure of the level of compassion in any IRS office.

Internal Revenue Code Section 6334 provides that the following property is exempt from levy or seizure:

• Wearing apparel and school books necessary for the taxpayer or for members of his family. No specific value limitation is given, but expensive items like a fur coat are not exempt.
• Fuel, provisions, and personal effects of the head of a family which do not exceed $1,500 in value.
• Books and tools of a trade, business, or profession not exceeding $1,000 in value.
• Unemployment benefits.
• Undelivered mail.
• Certain annuity and pension payments.
• Workman's compensation.
• Amount required for support of minor children.
• Minimum exemptions on wages, salaries, and other income, as discussed previously.

Serving a Notice of Levy on bank accounts or paychecks is a very simple process. It only requires the revenue officer to complete the proper form and either mail or serve it personally on the bank or employer. Although most Notices of Levy are served on banks and employers, they can actually be served on any person or business entity that owes the taxpayer any sum of money for whatever reason.

A seizure of tangible personal or real property is much more complicated. It normally requires that the revenue officer first ascertain what property is available for seizing. The most likely targets for delinquent individual taxpayers are automobiles or homes, and either cash register contents or other equipment for business income taxpayers.

PRE-SEIZURE CONSIDERATIONS

Before any seizure action is taken by a revenue officer, there are several things that he will have to consider. IRM instructions require the following:

    * Thorough consideration must be given to the Pacts and
      circumstances of a particular case before a decision is
      reached to seize an on- going business. (This is meaningless,
      because the IRM doesn't specify what facts must be considered.
      The only caution given is that "every reasonable effort has
      been made to collect the delinquent taxes on a voluntary
      basis." The type of efforts required are not set out. so
      "reasonable effort" is left to one's own interpretation.)
      (Policy Statement P-5-34)

    * If the property to be seized is the personal residence of the
      taxpayer, prior written concurrence of the next higher level
      of management must be secured. (IRM 5341. 1:(6))

    * Before the levy or seizure action is taken on an account, the
      taxpayer should be informed (except in jeopardy situations)
      that levy or seizure will be the next action taken and given a
      reasonable opportunity to pay voluntarily. (IRM 531 1:(5))

    * Prior to a levy on salary or wages, a written notice will be
      given in person, left at the dwelling or usual place of
      business of such individual, or shall be sent by mail to the
      individual's last known address.... The notice shall be given
      not less than 10 days before the date of levy. If the final
      notice was sent more than 120 days prior to contemplated levy,
      a new final notice will be required before levying on salary
      or wages.  (IRM 531 1:(7))

    * Before the actual seizure is undertaken, the TDA case file
      will be reviewed and the proposed seizure concurred in by the
      group manager. (IRM 5341.1:(5))

Once the revenue officer decides what to seize, he must determine the taxpayer's equity in the property. IRM 5341.2 states "the revenue officer must determine that there is sufficient equity in the property to be seized to yield net proceeds from sale to apply to the unpaid tax liabilities." This is done by determining the fair market value of the property and then examining public records to discover if the property intended to be seized is encumbered with any liens superior to the federal tax lien. If so, the unpaid balance must be considered in computing the taxpayer's equity.

THE WRIT OF ENTRY REQUIREMENT

Generally, revenue officers have the right to enter public or private premises to conduct their duties, but if the premises are the private residence of the taxpayer they may only enter to converse with the taxpayer. Without permission' they do not have authority to enter the residence to make a seizure.

In 1977 the Supreme Court ruled in G.M. Leasing v. U.S. that "a warrantless entry onto the private areas of personal or business premises of a taxpayer for the purpose of seizing property to satisfy a tax liability is in violation of the Fourth Amendment to the Constitution of the U.S." The IRS now requires that before such seizures are made the revenue officer must either obtain a Writ of Entry by a court order, or the taxpayer must sign a waiver of his Fourth Amendment rights. This means that without a court ordered Writ of Entry or the taxpayer's consent, the revenue officer can still seize property in the public portion of the taxpayer's business premises, such as the dining area of a restaurant or the sales area of a retail store.

WAIVING FOURTH AMENDMENT RIGHTS

The IRS has a special form which revenue officers use to obtain the taxpayer's permission to enter the private portion of business premises. This is a waiver of the taxpayer's Fourth Amendment rights against "unreasonable search and seizure." For what reason a taxpayer would waive his constitutional rights to allow the IRS to proceed with a seizure of his property is the great question of the day. But revenue officers tell me that they are very successful in obtaining waivers.

There appears to be two basic methods used to obtain the waiver. In one method, the revenue officer tells the taxpayer that if he doesn't sign the waiver, the IRS will take him to court and obtain permission anyway. The taxpayer, not wanting to go to court, reluctantly gives in and signs. However, only the IRS goes to court. It is the judge's responsibility to protect the rights of the taxpayer, and the taxpayer is not even invited, summoned, or compelled in any way to show up in court. In another, the revenue officer, while beginning to make the seizure, pulls out the consent form and explains to the taxpayer that the paper is merely a form requesting his signature as an indication that he understands what is happening. If the revenue officer is lucky, the taxpayer won't even read it before signing. This is illegal if the consent is presented during the seizure of private portions of the business premises (for example, a cash register contents seizure). In this instance the revenue officer is actually subverting the legal process and violating the taxpayer's Fourth Amendment protections.

While the Supreme Court's G. M. Leasing decision is recognized for expanding the substantive rights of taxpayers by including tax seizures under the Fourth Amendment umbrella, it is generally not known that the IRS has actually used the Writ of Entry process to expand the government's powers. For example, IRM 5341.1:(20) states "A search warrant cannot be issued to a revenue officer authorizing entry upon private premises to search for property to be seized for distraint purposes. Rule 41 of the Federal Rules of Criminal Procedures (Title 18 U.S.C.) is the sole authority for the issuance, execution, and return of federal search warrants. That rule only authorizes issuance of warrants to search for and seize property stolen or embezzled in violation of the laws of the United States...." This rule historically has been used to protect the homes of U.S. citizens from "fishing expedition" raids by IRS agents searching for something to seize. It did not really apply to business premises because the IRS always thought that revenue officers had the authority to seize the entire business premises, which meant that they did not have to know beforehand what they were going to seize. After the seizure stickers were placed on the premises, they thought they had the right to search at will.

When the revenue officer now applies to a court for a Writ of Entry it is IRS's Counsel who prepares the form and gives it to the U.S. Attorney's office for submission to the court for approval. The language reads:

ORDERED: that revenue officer and such other revenue officer as may be designated by the Internal Revenue Service, are authorized to enter the premises described and to make such search as is necessary in order to levy and seize, pursuant to Section 6331 of the Internal Revenue Code of 1954.

What this means is that the IRS has now turned a Fourth Amendment protection process into an expansion of the levy and seizure powers to include the power of "search" before seizure. This may not be important to a business income taxpayer who did not have this protection before the G.M. Leasing case, but it could be important to an individual income taxpayer. It is now possible, though unlikely, for the IRS to obtain court-ordered permission to enter a residence and actually search the premises for objects to seize.

THE SEIZURE ACT

The seizure act begins when the revenue officer presents Levy Form 668-B to the taxpayer. If full payment is not made at that point, the revenue officer proceeds with the seizure. Part three of the levy form is then given to the taxpayer, seizure stickers are placed on the property, and he is asked to be present during inventory of the seized property.

Upon completion of the inventory, the revenue officer prepares Form 2433, Notice of Seizure, and lists all property seized. A copy of the Notice of Seizure is given to the taxpayer as soon as possible since the levy legally occurs on the date the Notice of Seizure is given to the owner.

Completion of the seizure requires the IRS to take control of the property. Property that must be removed for storage (for example, an automobile) must be moved by a commercial firm. All moving and storage fees are billed to the taxpayer and added onto his tax liability. The government is responsible for preserving and protecting personal property during the period of seizure. The care of real property is considered the responsibility of the owner or tenant. (IRM 338.22 of 58(10)0.)

However, IRM 5343. I seems to take a different view of the government's responsibility. It reads: "As a general rule taxpayers are not entitled to receive any credit for the value of their property which has been stolen after the property was seized and prior to its sale by IRS."

The next step in the seizure process is establishing the fair market value of the property under seizure. This is usually very difficult for the revenue officer if the seized property is anything other than a house or car. IRS property evaluation procedures now allow revenue officers to obtain a professional appraisal if necessary. An accurate appraisal of the property is very important to the taxpayer. Internal Revenue Code section 6335 requires that a minimum bid price be established for seized property offered for sale. A minimum bid price is the lowest bid the IRS will accept at a sale of seized property. The primary purpose of establishing a minimum bid price is to avoid selling the seized property at substantially less than the forced sale value of the taxpayer's interest (or equity value) in the Property.

THE MINIMUM BID PRICE

Establishing the minimum bid price begins with the fair market value figure of the property. The revenue officer is then allowed to reduce the fair market value figure by up to 25% to arrive at the forced sale value figure. He then multiplies 80% or more of the forced sale value to compute the forced sale equity and reduces that by the amount of prior encumbrances to arrive at the minimum bid price. In no case will the minimum bid price exceed the tax, penalty, interest, and all other charges on the account.

    For example, assume the IRS seizes a house with a fair market
value of $95,000 for $15,000 in delinquent taxes. The house has a
first mortgage prior to the federal tax lien with an unpaid balance
of $50,000. The minimum bid price is computed as follows:

             Fair Market Value    95,000
             Forced Sale Value
             (95,000 less 25%)    71,250
                                   x 80%
                                  57,000
             (prior encumbrance) -50,000

             Minimum Bid Price =   7,000

Until a couple of years ago the taxpayer never knew what the minimum bid price was, and this allowed the revenue officer to adjust it arbitrarily until he got a bid on the property. Now IRM 5361. 1(4) states "the revenue officer will advise the taxpayer of the minimum bid price and the basis for computation...". If the taxpayer disagrees with the established minimum bid price, the revenue officer will advise the taxpayer of his right to use either an IRS valuation engineer, when feasible and available, or a professional appraiser who is acceptable to the IRS and the taxpayer, to assist the revenue officer in reevaluating the forced sale value.

If the taxpayer is unable to redeem the seized property within a reasonable period of time, the revenue officer must make plans for selling the property. The revenue officer must decide whether to hold a public auction or sell by sealed bids. If there are a number of items being sold, he must also group them. Property can be sold separately, in groups, or in the aggregate. All information is given on a Notice of Sale with the original given to the taxpayer. The Notice of Sale will also be run in a newspaper published or generally circulated within the county in which the seizure was made. Additional notices must be posted outside the premises of the seized property, in public places such as the local court house, and mailed to persons on a special "bidders list."

Seized property is sold "as is," without express or implied guarantee or warranty. While prospective purchasers are normally given a chance to inspect the property before the sale, the bidders are handicapped in discovering the true condition of the property and in searching for hidden defects. For instance, bidders are not allowed to drive a seized automobile before the sale. Only the "right, title, and interest" of the taxpayer is sold, and this interest is offered subject to any prior mortgages, encumbrances, or valid liens.

At the sale of the seized property, the revenue officer is required to accept the highest bid, unless the highest bid is lower than the minimum bid price. If that situation occurs, the revenue officer is required to purchase the property for the United States at the minimum bid price. Some districts have "unwritten" policies against this because the taxpayer gets credit on his tax liability for the U.S. government purchase of his property. If the IRS later sells the property at a lower price than what was bid by the IRS at the sale, the government loses the difference between the lower sale price and the minimum bid price.

So the Internal Revenue Manual gives the revenue officer an opportunity not to bid the property in for the government. IRM 5361:(6) reads:

    If, after the sale has commenced, previously unknown facts are
    disclosed that indicate a basis for adjusting or redetermining
    the minimum bid price, the revenue officer may adjourn the sale
    to reevaluate the minimum bid price. See IRM 53S3.3. If
    appropriate, the minimum bid price may then be reset to more
    realistically reflect the forced sale value of the seized
    property in light of existing conditions. The revenue officer
    cannot reduce the minimum bid price merely to guarantee a sale
    or to avoid having to bid in the property. Such valid reasons,
    as a prior encumbrance made known during the sale or a
    realization that pans are no longer available for the equipment
    being sold, etc. must exist.

Once the highest bidder has been recognized, the responsibility of the government for the protection or preservation of seized personal property ceases. As soon as possible after the full purchase price is paid, the purchaser receives the property and IRS form 2435, Certificate of Sale of Seized Property. The Certificate conveys to the purchaser "all right, title and interest of the taxpayer in and to the property sold." It also effectively wipes out any liens, encumbrances, or title over which the tax lien had priority.

The taxpayer has the right to redeem any seized property up to the moment the highest bid is accepted. IRM 5346.2 states that the taxpayer must make "full payment of the tax and additions thereto, along with any expenses or costs in connection with the seizure..." This is called the redemption procedure and is different than the Internal Revenue Code provision which allows a "release" of the seizure "for less than immediate full payment" if the release "will facilitate collection of the liability." It is important for a taxpayer to try to obtain a release of seized personal property under any provision of the manual. Once personal property has been sold to the highest bidder, the taxpayer may never see the property again. He has no rights of redemption after the sale. In the case of the sale of seized real estate, taxpayers' ownership rights are not immediately terminated. Under Internal Revenue Code section 6337, real estate sold by the IRS for delinquent taxes may be redeemed within 180 days after the sale by the taxpayer, his heirs, executors, administrators, or any person having an interest or a lien in the property. The property may be redeemed upon payment of the IRS sale price to the purchaser, plus 20% annual interest. If the real property is not redeemed within 180 days, the purchaser will receive a deed to the property from the IRS upon surrender of the Certificate of Title. The deed conveys all "right, title, and interest" the taxpayer had in the property and also discharges any liens or encumbrances that were junior to the federal tax lien.

PROBLEMS WITH THE MINIMUM BID FORMULA

The GAO has reported that the IRS has purchased property for the government in less than one-half of one percent of the seizure cases. They reported that "one of the reasons for so few purchases is that . . . taxpayer's IRS-computed equity in seized property appears frequently to be undervalued." An understated equity resulted in computing an understated minimum price which in turn reduced the likelihood that the property would have to be purchased for the government.

Another reason for the low number of properties bid in for the government is the provision in the IRM that allows for a postponement of the sale to reestablish the minimum bid. The GAO surveyed revenue officers to discover the reasons why a sale would be postponed and the minimum bid price revised. They responded in this manner:

 To avoid another sale                                           16%
 (Another sale would be required at a later date if property
 is bid in for the U.S.)

 To avoid releasing the property to the taxpayer                 5%
 (Property would have to be released if the taxpayer's
 equity was insufficient to meet the expenses of sale.)

 To make sure some of the liability is collected                12%

 To avoid taking title for the government                       18%

The GAO reported that revenue officers' responses indicate that in some cases the actual practice of revenue officers is to sell seized property at any price even though the minimum bid procedure is designed to avoid selling property at substantially less than the forced sale value. Because of the "unwritten prohibition" in some districts against bidding in seized property, some revenue officers have been known to adjust the minimum bid price lower at the time of sale in order to guarantee a sale to the highest bidder and thereby prevent a bid in for the U. S. This practice is a violation of IRS policy and the intent of the law.

In order to protect the interests of the government and the rights of taxpayers, the GAO has recommended that Congress amend section 6335(e)(1) of the Internal Revenue Code "to provide that if no person offers to purchase property at a sale at the minimum bid price, the property shall be declared to be purchased at such a price for the U. S. or released back to the taxpayer if the IRS determines it is not in the best interest of the government to purchase the property." This is a good idea because it would allow the IRS to back out of a situation in which the taxpayers' rights would be violated if the sale were to be continued.

Another point needs to be made about the preservation of the taxpayer's equity in seized property. It is possible for the IRS to seize property whose value is far out of proportion to the amount of the tax lien encumbering the property. But the IRM directs that "the minimum bid price, in all instances, will be limited to an amount not to exceed the tax, penalty, interest, lien fees, expenses of sale, and other charges." (IRM 5361. 1: ( 1 )) This has the practical effect of penalizing a taxpayer who has a large amount of equity in property that is also worth far in excess of the tax liability. Ironically, the combination of high value and equity not only makes the property a prime candidate for seizure action, it also makes the taxpayer susceptible to a significant loss of his property equity in the event of a sale. For example, suppose a taxpayer owns a small building worth $450,000, with a first mortgage of $200,000 and a tax liability of $50,000. The minimum bid price would be computed as follows:

    Fair market value                           450,000
    Forced sales value
       ($450,000 less 25%)                      337,500
                                                   x 80%
    Forced sale equity                          270,000
       (prior encumbrance)                     -200,000
    Minimum bid price should be:                 70,000
      However, the minimum price
      cannot exceed the total tax
      liability of                             - 50,000

    Thus the possible loss of
       taxpayer's equity                      = $20,000

In this situation, the taxpayer loses at least $20,000 because he has a large amount of equity (property value less encumbrances) in the property. The situation worsens as the taxpayer's equity increases. Assuming a prior mortgage of only $150,000 instead of $200,000, this taxpayer's loss would be computed as follows:

    Fair market value                         $ 450,000
        Forced sale value
    (450,000 less 25%)                          337,500
                                                   x 80%
    Forced sale equity                          270,000
       (prior encumbrance)                    - 150,000
    Minimum bid price should be:                120,000
        The minimum bid
        price cannot exceed                    - 50,000

    Possible loss of
        taxpayer's equity                     =$ 70,000

It is clear that the greater the taxpayer's equity value in the property in proportion to the delinquent tax liability, the greater the taxpayer's chance of losing substantial sums of money if his property is seized and sold by the IRS. It is unclear why the minimum bid should not exceed the government's lien interest plus costs, since this restriction apparently works to the taxpayer's detriment. The IRS probably assumes that if the property were sold at an IRS sale, the auction or sealed bid procedure would automatically ensure competitive bidding, which should result in protection of the taxpayer's equity.

Although this is theoretically a sound idea, an IRS sale of seized property is a rare event that is not subject to the normal forces of supply and demand. A forced sale restricts the number and type of purchasers willing to bid on "as is" and "where is" property. Bids normally are made as a depressed value offering. Limitations of minimum bid computations only serve to protect the interests of the government, not the taxpayer. Ironically, in the above example, the taxpayer would have been better protected had he either owed more on the first mortgage or more to the IRS. The amount of lost taxpayer protection, as measured by lost equity value, is the difference between the government's lien interest (plus costs) and the original unrestricted computation of the minimum bid price.

In essence, the IRS is providing for two separate minimum bid prices, depending on the amount of outstanding taxes in relation to the taxpayer's equity in his property. This procedure protects the IRS should it have to bid in the property for the United States, because by limiting minimum bids to the government's lien interest, the government won't have to give the taxpayer credit for his equity in excess of any taxes owed.

A taxpayer whose property is seized and sold by the IRS needs greater protection than the IRS presently offers. The Internal Revenue Code does not restrict the computation of the minimum bid price, and neither should the IRS.