The National Taxpayer Advocate has recently written a couple of blog posts on the application of the Federal Payment Levy Program (FPLP) to veterans which can be found here and here. The posts provide significant detail and insight into the application of the program to veterans and argue persuasively that the IRS has applied the program too broadly by failing to use filters that it has adopted for other similar FPLP programs. If you are not generally familiar with FPLP the first post provides a good deal of background into the program generally.
In May, 2017, the Service expanded it application of the FPLP to include military retirement payments paid by the Defense Finance and Accounting Service. The decision to expand FPLP to these payments makes good sense. It stems from a recommendation in an audit by the Treasury Inspector General for Tax Administration (TIGTA). This seems to be one of those situations in which the auditors of the IRS did an excellent job of noticing a hole in the collection system, the IRS relatively quickly followed up to implement a program which will collect money from people receiving federal payments who have not fulfilled their tax obligations at little cost to the Treasury.
If the program is so good, why is the NTA complaining and why do I think her complaint is valid? The problem is not the program itself but the scope of the program. In implementing this program, the Service made a decision not to exclude from the levy program military retirees whose incomes fall below 250 percent of the federal poverty level. The decision to apply the FPLP to all military retirees means that money will be taken from the pensions of many retirees who are quite vulnerable. The second post goes into details about the numbers of military retirees whose income falls below 250% of poverty. When the IRS levies on a person whose income is that low, it almost always comes into the prohibition on levy when the taxpayer is in a hardship situation. A high percentage of the military retirees whose income falls below 250% of poverty will have allowable expenses that exceed their income. This qualifies them to have the IRS remove the levy. Many of the military retirees, like many of the recipients of Social Security payments, lack familiarity with IRC 6343. So, they will not raise it. For those that do raise the hardship issue, with or without knowing the statutory basis, the IRS will expend its precious resources undoing the levy and probably cost itself more in that process than it obtains from several others. For these reasons the IRS has chosen not to levy on similarly situated individuals in other settings.
The Service developed a filter to the FPLP which it uses to screen out low income taxpayers receiving Social Security old age or disability benefits and Railroad Retirement Board benefits. I applaud the use of this filter because applying the FPLP to the vast majority of taxpayers with income under 250% of poverty would implicate the hardship restriction on levy imposed by IRC 6343. It does not make good business sense or good policy to levy on these individuals with a high likelihood that hardship exists and require them to raise the hardship exception to levy.
For the same reasons that it makes good business sense and policy not to impose the FPLP on recipients of federal payments under the Social Security or Railroad Retirement Board, it also makes sense to extend the application of the exclusion to military retirement payments made to military retirees whose income is less than 250% of poverty. Military retirees, having served our country in such an important way, do not deserve to be discriminated against in this way. They have the same financial constraints as non-military retirees whose income is less than 250% of poverty. We should not honor their service by making it harder for them to receive the hardship relief granted by the Internal Revenue Code. The same presumptions that they would qualify for such relief should apply to this group as well.
The expansion of the FPLP to military retirement payments followed an internal audit criticizing the Service for failing to capture these payments under the FPLP. The internal audit, however, did not suggest that the same exclusions offered to individuals in the lowest economic strata of our society should be ignored when those individuals were recipients of a military pension based on their long and honorable service to the country. Many military retirees fall into the low income category and should receive the same treatment with regard to the low income filter as other recipients of federal benefits.
The NTA has marshalled the data showing that the levy will fall hard on the low income military retirees just as it falls hard on other persons receiving federal payments. The IRS should reconsider its decision not to apply the filter. The removal of the filter does not give the group with less than 250% of poverty in earnings a free pass and the decision is not a static decision that applies for the 10 year statute of limitations. If the IRS has information about the military retiree’s assets or other sources of support suggesting that imposition of the levy would not produce a hardship, nothing prevents the IRS from imposing FPLP or other collection remedies at any time.