In Part 1 of this series of posts on levies, I wrote about the ability of and the restrictions on levies on retirement plans by the IRS. In this post, I will discuss the ability of the IRS to levy upon a taxpayer’s social security payments, the choice the IRS has in how to do that, and the restrictions the IRS places upon itself as it decides to impose these levies. The big difference between levying on retirement accounts and on social security derives from the source of the funds. Retirement accounts rest with private parties while it is the government itself that makes the social security payments while at the same time being the party owed the unpaid taxes. In many ways, taking all or a part of a taxpayer’s social security payments is a form of offset; however, the Code does not treat it as an offset the same way it treats the offset of a refund in one year and a liability for a prior period.
IRC § 6331(h)(2)(A), as prescribed by the Taxpayer Relief Act of 1997, Pub. L. No. 105-34, § 1024, authorizes the IRS to issue continuous levies on certain federal payments. The Bureau of the Fiscal Service (BFS) (formed from the consolidation of the Financial Management Service and the Bureau of the Public Debt) is the Department of Treasury agency that processes payments for various federal agencies. Payments subject to FPLP include any federal payments other than those for which eligibility is based on the income or assets of the recipients. With a regular offset, the IRS simply programs its computers to check for any liabilities before it sends the refund to BFS for payment to the taxpayer. With social security, the IRS sends notice of the liability to BFS and the taking of the funds occurs at that level outside of the IRS since the funds, although coming from the federal government, come from another agency.
IRC Section 6334(a)(11) exempts from levy certain needs based payments such as Supplemental Security Income payments to the aged, blind, and disabled as well as State or local government public assistance or public welfare programs for which eligibility is determined by a needs or income test. The exemptions in section 6334 do not apply to regular social security payments since they are based on contributions and not based on need. Some taxpayers receiving social security do not need their social security payments to meet basic needs but many do. The IRS knows that many social security recipients will face hardship if all or a part of their social security payments are taken to satisfy tax liabilities. The debate concerns how to take the money of the taxpayers who do not need it while identifying the taxpayers who need it in order to avoid hardship.
As with the discussion on retirement accounts, this discussion is built upon a report issued by the Treasury Inspector General for Tax Administration (TIGTA). On June 30, 2016, TIGTA issued “Revenue Officer Levies of Social Security Benefits Indicate That Further Modification to Procedures Is Warranted” in which it discusses in detail the rules governing the IRS levy upon social security benefits and reviews how the IRS has done in following those rules. The discussion starts with a reminder of the federal payment levy program (FPLP). For the publication on FPLP created by the Taxpayer Advocate’s office look here.
Federal Payment Levy Program and Social Security
The TIGTA report describes the FPLP as follows:
“The FPLP is an automated program that includes taxpayers in both the Automated Collection System and the Collection Field function along with inventory that is currently not being worked by either Automated Collection System or the Collection Field function….
Through the FPLP, the IRS can issue a continuous levy of 15 percent on Social Security benefits. During Fiscal Year 2014, the majority of revenue collected by the FPLP program was from Social Security benefits. Between Calendar Years 2002 and 2006, the IRS had a low-income filter for Social Security benefits levied through the FPLP, but that particular filter was found to be inaccurate by the Government Accountability Office. The Government Accountability Office’s recommendation advised the IRS to eliminate the exclusion until a more accurate criterion could be developed. “
The IRS reinstated the filter in 2011, and it causes taxpayers whose income presents itself to the IRS as under 250% of poverty to bypass the FPLP in order that they can receive their full payment.
IRM 184.108.40.206 contains the description of all of the automatic offset programs operated between the IRS and Treasury. While the offset of funds from social security payments is the largest of these programs, it is only one of several including many designed to capture past due taxes from federal employees. According to IRM 220.127.116.11.3.4.2, the IRS sends the name of social security recipients with past due taxes over to the IRS after sending out a notice of intent to levy letter:
“For Social Security payments matched, a FPLP levy will be transmitted to BFS at least eight (8) weeks but no more than twenty-six (26) weeks from when the CP 91 or 298, Intent to seize up to 15% of your Social Security benefits, was issued (indicated by the unreversed TC 971 AC 169 posting cycle). A FPLP levy TC 971 AC 662 will post on the module with the literal “SSA” displayed in the Miscellaneous Field and TIN in the XREF TIN field.”
The NTA has written extensively on social security levies and particularly on the issue of the filters imposed to allow certain accounts to bypass the social security levy. For background, an interested reader might want to check out her report found here from the 2014 annual report to Congress. The discussion in the report focuses heavily on the decision of the IRS to exclude from its filters those taxpayers with unfiled returns. This discussion which also gets some play in the TIGTA report focuses on the reason for these levies and whether levies on retirement accounts and social security payments where taxpayers are known to be especially vulnerable should be used for general enforcement. The IRS has long used the levy as a means of promoting compliance because it wakes up the taxpayer by moving the IRS from its status as “pen pal” by sending many letters requesting payment, to the status of law enforcement when the taxpayer feels the pain of lost funds.
Collection by Revenue Officers
The TIGTA report focuses on the collection by revenue officers of social security payments. As discussed previously, the cases in the hands of revenue officers, the IRS field collection agents, will primarily be accounts in which a large amount of tax is due. TIGTA points out that revenue officers have no special instructions regarding pursuit of collection from social security payments. It made the following diverse findings from its interviews of 26 collection employees at various levels:
When making Social Security levy determinations, revenue officers are not required to consider whether the taxpayers’ income level is below 250 percent of the Federal poverty level . Field Collection procedures require that they determine if the FPLP process will be part of their strategy to resolve the case. Some other observations made in our audit interviews include:
- Some Field Collection group managers require that all other taxpayer resources be levied before attempting to levy Social Security benefits, while others do not.
- Some group managers believed that, in upwards of 90 percent of their cases in which paper levies are made on taxpayers, the taxpayer possesses no other source of income.
- Some group managers stated that the case had to be “egregious” before Social Security Benefits would be levied above the 15 percent FPLP levy.
- Some group managers indicated that Social Security levies were used to get a taxpayer’s attention, while others believed such use of a levy is not appropriate.
- Some revenue officers use 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.
- Most interviewees indicated that most cases involving Social Security benefits already have an FPLP levy on the case when the case is assigned.
- In one territory, the territory manager indicated that the groups in that territory never levy 100 percent of Social Security benefits. A revenue officer within that same territory indicated that he had issued as many as five Social Security levies in the past year and used Form 668-A to levy the maximum amount.
- All interviewees indicated that a financial analysis should be performed on a Collection Information Statement to assess the taxpayer’s ability to pay the tax, and all stated that the“250 percent above Federal poverty level” criterion is not factored into their analysis.
In most of the cases in which the revenue officers were assigned, the IRS had already begun collecting 15% through the FPLP process and the question for the revenue officer was whether to take the entire social security payment. The median amount owed of the accounts sampled by TIGTA was over $80,000. TIGTA found that in 85% of the cases in which the revenue officer decided to levy, the decision fell within the guidance; however, in 15% of the cases the levy exacerbated or caused hardship. TIGTA noted that in the cases in which it determined the levy caused hardship the notes of the revenue officer usually supported the conclusion reached by TIGTA. TIGTA recommended better guidance for revenue officers on when to pursue a taxpayer’s social security and the IRS management agreed.
The ability to determine between a “can’t pay” and a “won’t pay” taxpayer is a difficult decision that requires both training and judgment. Both TIGTA and the NTA have written about the failure of the IRS to train and the failure of revenue officers and their managers to use appropriate judgment. If a revenue officer levies on a client’s social security payments because the client did not cooperate or did not file past due returns, use the decision in Vinatieri v. Commissioner, 133 T.C. 392 (2009) as well as the relevant manual provisions to convince the revenue officer to remove the levy. TIGTA’s report shows that the IRS gets the decision right most of the time but if the 15% error rate is correct, that still leaves a large number of taxpayers, many of whom are unrepresented, losing necessary funds to make ends meet. Providing revenue officers with better training and better oversight requires funds which is a problem we have discussed many times before.