Voluntary Tax Payment Not Exempt From Early Withdrawal Penalty


Although paying a tax levy can exclude early IRA withdrawals from an otherwise applicable 10% penalty, a notice of intent to levy does not have the same effect, the Tax Court held.


If a taxpayer is under 59½ years old, IRC § 72(t) generally imposes an additional penalty tax of 10% on withdrawals. One of several exceptions is for withdrawals made on account of a levy by the IRS under section 6331.


The IRS sent James Willhite notices dated March 22, 2004, and July 4, 2005, stating that the government intended to levy any state tax refund to which he was entitled, to pay his federal tax liability. The notice also stated that the government would search for other assets to levy. During 2004, Willhite, who was under 59½, withdrew $397,994 from his IRA. He used $57,172 to pay his federal income taxes. The government imposed the 10% penalty under section 72(t). Willhite objected to the penalty on the amount used to pay his federal income taxes, citing the levy exception. The government disagreed that the exception applied.


The Tax Court noted that the 2005 notice was issued after the withdrawal, and the 2004 notice stated that the levy would apply to state tax refunds. The court also noted that before the government can levy a taxpayer’s assets, it must send the taxpayer a written notice of his or her right to a hearing. No such notice was sent. Therefore, the government could not have levied the IRA before the withdrawal, making the exception inapplicable.


Willhite argued that the Tax Court in Larotonda v. Commissioner (89 TC 287) and Francisco A. Murillo v. Commissioner (TC Memo 1998-13) had denied the penalty for levied amounts, but in both prior cases, the levy itself triggered the distribution that caused the tax, the Tax Court said.


 James A. Willhite v. Commissioner , TC Memo 2009-263


By Edward J. Schnee, CPA, Ph.D., Hugh Culverhouse Professor of Accounting and director, MTA Program, Culverhouse School of Accounting, University of Alabama, Tuscaloosa.


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