The IRS sent you a letter titled Final Notice of Intent to Levy and Notice of Your Right to a Hearing (LT11 or Letter 1058). What should you do now? This article will help you understand the importance of this notice, assess whether the IRS followed the proper procedures, and explain what you should do.
What happened before the IRS sent a Final Notice of Intent to Levy?
The IRS's issuance of Final Notice of Intent to Levy means that you are in "advanced stages" of IRS collection procedure. The first step to IRS collection is an assessment. An assessment is the process of the IRS recording tax that you owe in its computer system. Assessments may be based on income tax returns that you filed (self-filed returns), IRS audits, Tax Court decisions, or an IRS determination that you made a math error.
Once the IRS makes an assessment, it must issue "notice and demand." I.R.C. § 6303. Although notice and demand is tax lingo, it is, for all practical purposes, simply a bill. The notice and demand informs taxpayers of the assessed taxes, and demands payment of the tax liability within 10 days to avoid interest. There is no particular form required for notice and demand. The IRS generally satisfies this requirement with one of its many form letters. The IRS must either leave the notice and demand at the taxpayer's residence or usual place of business, or mail it to the taxpayer at his or her last known address.
Last known address generally means the address that appears on the taxpayer's most recently filed and properly processed Federal tax return, unless the Internal Revenue Service (IRS) is given clear and concise notification of a different address. See Treas. Reg. § 301.6212-2. The IRS will send anywhere from one to four letters that satisfy the notice and demand requirement. One of the most important things to remember when it comes to notice and demand is that there is no requirement that the IRS prove that you actually received the notice and demand. The IRS only must show that it sent notice and demand to your last known address.
Who should receive notice and demand? The IRS must send notice and demand to each person liable for the unpaid tax. I.R.C. § 6303.
- Joint returns. If married taxpayers filed a joint income tax return, the IRS may send a single notice that lists both spouses unless the IRS knows that the spouses are residing at separate addresses. Sometimes the IRS is required to send separate notices even when the spouses are living together at the same address. For example, if one spouse forges the signature of another spouse, the IRS must send separate notice and demand to each spouse. See Bauer v. Foley, 404 F.2d 1215 (2d Cir. 1968).
- Lender liability. If a lender loans net wages to a taxpayer who fails to send the trust fund taxes to the government, the IRS may collect unpaid taxes from the lender under I.R.C. § 3505. But the IRS does not have to provide notice and demand to the lender because the lender is liable for a penalty equal to the tax, not the actual tax. See Jersey Shore State Bank v. United States, 479 U.S. 442 (1987).
- Community Property. Arizona is one of nine community property states. California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin are its fellow community property states. In community property states, the IRS must send notice and demand to the spouse that is liable for the taxes. The other spouse is not entitled to notice and demand, even if his or her income is subject to the tax lien. Medaris v. United States, 884 F.2d 832 (5th Cir. 1989).
When must the IRS send notice and demand? I.R.C. § 6303 says that the IRS must send notice and demand as soon as practicable, and within 60 days. If the IRS fails to send notice within 60 days, however, taxpayers are unlikely to escape the wrath of the tax liability. The Treasury Regulation provides that the IRS's failure to provide notice and demand within the 60-day period does not invalidate the notice. Treas. Reg. §301.6303-1(a). The Treasury Regulation has been upheld by courts. See United States v. Friedman, 739 F.2d 252 (7th Cir. 1984).
At this point, the IRS has made an assessment, and sent notice and demand. Next, the taxpayer must fail to pay within the 10-day period following the notice. Once a taxpayer fails to pay after given an opportunity, a tax lien arises. Although these procedures may be completed a month or more after the IRS makes an assessment, the lien relates back to the date of assessment. I.R.C. § 6322. If the IRS decides to notify the public about the tax lien, it will file a Notice of Federal Tax Lien, and the date of assessment will be recorded on the Notice of Federal Tax Lien. The date that the lien arises (the assessment date) and the date that the Notice of Federal Tax Lien is filed may affect the IRS's priority position against other creditors.
Before the IRS can proceed with a levy, the taxpayer must be provided with a notice of intent to levy, and notice of the right to request a Collection Due Process (CDP) hearing. The IRS may provide the notice of intent to levy, which is required by I.R.C. § 6331(d), prior to providing a CDP notice. The CDP notice is part of the Final Notice of Intent to Levy and Notice of Your Right to a Hearing (LT11 or L1058). The notice of intent to levy must be provided 30 days in advance of the levy. Similarly, the notice of the right to request a CDP must provide you with 30 days to request a CDP hearing. If you choose not to request a CDP hearing, then the IRS has cleared all procedural obstacles and it may proceed with a levy.
There some caveats to these procedures: in rare circumstances, the IRS may implement jeopardy procedures. If the IRS believes that the collection of the tax liability is in jeopardy, it can forgo the 10-day waiting period after notice and demand, and the 30-day CDP hearing waiting period. In these rare cases, the IRS will immediately levy on taxpayer property under I.R.C. § 6331(d)(3). If this occurs, the taxpayer must be provided with an opportunity for a CDP hearing within a reasonable time after the levy. Other exceptions to these procedures include levies on state tax refunds, disqualified employment tax levies, and levies on federal contractors.
What is a levy?
A levy is simply the procedure that the IRS takes to seize property. Federal tax liens are not self-executing. Although the tax lien will protect the government's interest in property, it doesn't automatically result in funds being transferred to the government's coffers. The levy is the procedure that takes the money out of your bank account, and puts it in the government's bank account.
A levy is an administrative collection tool. The IRS does not need to seek a judgment. It simply notifies the holder of the property that it is levying the property. Generally, a levy is issued through Form 668-A or Form 668-W (Notice of Levy) to take a taxpayer's property. For example, the IRS will send these forms to a bank or employer to levy a bank account or wages.
If the taxpayer's property is in the possession of the taxpayer, the IRS will need to seize the property. For example, if the taxpayer owns a car, the IRS will seize the car by forcibly taking control over it, rather than issue a Form 668-A to the taxpayer for the car.
What happens if a third party, like an employer, fails to abidde by a levy? They become personally liable for the lesser of (1) the value of the property not surrendered, or (2) the amount of tax for which the levy was served. I.R.C. § 6332(d)(1). In addition to liability for the property not surrendered or the tax, the recipient of the levy is liable for interest on the amount not surrendered, and may be held liable for a 50% penalty of the amount of personal liability. I.R.C. § 6332(d)(2). The recipient of a levy may have a reasonable cause argument for not honoring the levy.
What are my rights?
The IRS Restructuring and Reform Act of 1998 (RRA 1998) requires that the IRS provide notice of its intent to levy 30 days prior to the levy, and inform the taxpayer about Collection Due Process (CDP) rights. The IRS satisfies this requirement through its Final Notice of Intent to Levy and Notice of Your Right to a Hearing (LT11 or Letter 1058). The LT11 is the final notice issued by the IRS's Automated Collection System (ACS), whereas a Letter 1058 is generally issued by a revenue officer.
A taxpayer is entitled to one CDP notice, and one CDP hearing for one lien, and one levy per tax period and tax. This means that a taxpayer may have a right to two CDP notices and hearings, assuming the IRS files a Notice of Federal Tax Lien and pursues a levy, per tax and tax period. There are some exceptions, as noted above, including jeopardy levies, levies on state tax refunds, disqualified employment tax levies, and levies on federal contractors.
Once a taxpayer receives a CDP notice, the taxpayer has 30 days to file a timely CDP hearing request. The 30 day period generally starts on the date printed on the notice unless the IRS mails it after the date printed, then the 30 day period starts on the date of mailing. Weiss v. Commissioner, 147 T.C. No. 6 (2016). When you mail your CDP request, you must ensure that the request is postmarked within the 30 day response period.
The IRS prefers that taxpayers submit Form 12153 to request a hearing, but that form is not required. The request must, however, be in writing and contain the following information:
- Taxpayer's name
- Taxpayer's identification number (SSN, ITIN, EIN)
- Taxpayer's address
- Taxpayer's daytime telephone number
- Be dated and signed by the taxpayer or a taxpayer's authorized representative
- Specify the tax and tax periods involved
- Include a statement that the taxpayer requests a hearing with Appeals for the lien or proposed levy
- Provide the reasons why the taxpayer disagrees with the proposed collection action
If a timely request is submitted, but does not contain all of the requested information, the IRS will attempt to contact the taxpayer to cure the defect. Note that if the IRS determines that the submission is frivolous, you may be subject to a penalty of $5,000 for frivolous submissions under I.R.C. § 6702.
A premature CDP hearing request—one that is submitted before the IRS provides CDP rights—is not valid.
The taxpayer should mail the CDP hearing request to the address listed on the notice. If the notice does not contain the address, the taxpayer can call 1-800-829-1040 to determine the appropriate address.
What if your CDP request is not timely? You may request a CDP equivalent hearing. The IRS will generally treat your untimely CDP hearing request as a request for an equivalent hearing, but if you know your request is not timely when you submit it, you should request an equivalent hearing, and provide all of the same information that you would provide for a CDP hearing. You have one year from the date of the CDP levy notice to request an equivalent hearing.
What is the difference between a CDP hearing and an equivalent hearing? Your rights to challenge Appeals' determination in a court. If you are unhappy with Appeals' determination in your CDP hearing, you may appeal the determination to the United States Tax Court. If you are unhappy with Appeals' determination in your CDP equivalent hearing, you have no right to petition a court.
What if the IRS levied your property, and you think it was wrongful? I.R.C. § 7426 allows any person who claims an interest in property to bring a wrongful levy suit. A wrongful levy suit must be initiated within 9 months of the date of the levy under I.R.C. § 6532(c). But if a person requests that the IRS return the property under I.R.C. § 6343(b), then the 9 month period is extended for 12 months from the date of filing of the request, or for 6 months from the date that the IRS denies the request, which is shorter. I.R.C. § 6532(c)(2).
What should I do now?
You should gather all of the notices that the IRS has sent and attempt to determine whether the IRS has followed the proper procedures laid out above. You should consider whether you have grounds, and time to file either a CDP hearing request, or a CDP equivalent hearing request. Because these are time sensitive requests, you should not delay! Failure to request a CDP hearing or CDP equivalent hearing may result in the loss of certain rights and recourse if the IRS failed to follow the necessary procedures.
Your CDP hearing request can include a request for collection alternatives, like installment agreements, and offers in compromise. You also may request that the IRS determine that your account is Currently Not Collectible (CNC) based on your financial status.
If the time period to file a CDP hearing or equivalent hearing request has passed, you should consider your collection alternatives. Consider requesting a collection hold to allow you additional time to determine the appropriate course of action, consider whether an installment agreement (IA) or offer in compromise (OIC) might appropriately address your situation and avoid a levy. Consider whether a request for innocent spouse relief would be appropriate.
If you have questions regarding your particular situation, call Brandon Keim today at (602) 892-1500 to schedule a free consultation.