When a taxpayer fails to satisfy his or her tax liabilities, the IRS has an array of administrative tools that it can call upon to obtain the taxpayer’s compliance. One method is levying the taxpayer’s wages at the source under Internal Revenue Code provisions that require employers to help the IRS in its tax collection efforts. This item addresses an employer’s rights and responsibilities when required to comply with an IRS wage levy.
IRC § 6332 provides that “any person in possession of (or obligated with respect to) property or rights to property subject to levy upon which a levy has been made shall, upon demand of the Secretary, surrender such property or rights … to the Secretary.” Employers fall squarely within the category of persons required to comply with a levy: Upon levy, the employer must withhold and remit amounts specified in the IRS tables (Publication 1494) until the outstanding tax liability has been satisfied or the levy is released.
Employers who do not comply or who refuse to surrender property subject to a levy can be held personally liable for the value of the property not surrendered and may additionally be subject to a penalty equal to 50% of that property’s value (IRC § 6332(d)(2)). It is not uncommon for employees to argue with employers against compliance with an IRS levy. Employees may appeal to the employer’s sympathies for the hardship the levy will cause or threaten legal action. Employers are stuck in a quandary: Do they acquiesce to an employee’s wishes and risk personal liability or comply with the levy and strain their relationship with the employee? Fortunately, section 6332(e) relieves the employer (or any third party subject to a levy) from having to make the decision: An employer who complies with a levy “shall be discharged from any obligation or liability to the delinquent taxpayer and any other person with respect to such property or rights to property arising from such surrender or payment” (emphasis added).
This point was recently affirmed in a case where the court held not only that section 6332(e) precluded the taxpayer from seeking relief against his employer but also, more broadly, held that, “Even where a levy is determined to be invalid, the custodian of the property is still immune from liability from actions arising from its compliance with the levy” (Hunter v. University of Louisville, No. 2010-CA-001613-MR, slip op. at 4 (Ky. Ct. App. 8/5/11)).
In practice, employers do not have a choice in deciding whether to comply with an IRS levy; they have much to lose and nothing to gain from noncompliance. Notwithstanding their broad immunity from employees’ claims, employers should nonetheless be cognizant of their legal responsibilities to both the IRS and their employees in dealing with levies.
For a detailed discussion of the issues in this area, see “Employers Immune from Suit for Complying with IRS Levy,” by Michael P. Mansour in the November 2011 issue of The Tax Adviser.
—Alistair M. Nevius, editor-in-chief
The Tax Adviser
Also look for articles on the following topics in the November 2011 issue of The Tax Adviser:
- An examination of 100% bonus depreciation and the minimum tax credit.
- An update on employee benefits and pension developments.
- A discussion of S corporation issues.
The Tax Adviser is the AICPA’s monthly journal of tax planning, trends and techniques. AICPA members can subscribe to The Tax Adviser for a discounted price of $85 per year. Tax Section members can subscribe for a discounted price of $30 per year. Call 800-513-3037 or email email@example.com for a subscription to the magazine or to become a member of the Tax Section.
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