TRA '97: relief for some; more aggravation for others.

With all the talk of tax cuts in the Taxpayer Relief Act of 1997 (TRA '97), nobody is discussing the new powers given to the IRS to collect taxes due. The TRA '97 substantially changes the rules on collection (the two major changes are discussed below), benefiting the Service at taxpayers' expense.

1. Under prior law, the following property was always exempt from levy:

a. worker's compensation (Sec. 6334(a)(7)).

b. annuities or pension payments under the Railroad Retirement Act and benefits under the Railroad Unemployment Insurance Act (Sec. 6334(a)(6)).

c. unemployment benefits (Sec. 6334(a)(4)).

d. means-tested public assistance payments (Sec. 6334(a)(11)).

Under the TRA '97, the properties listed are subject to levy. Therefore, delinquent taxpayers will need to respond (with assistance from their accountants) to IRS requests for information to avoid a levy.

Note: New Sec. 6331(h) provides for levy on these items only with the approval of the Secretary; see Sec 6334(f). Therefore, a collection agent should not impose the levy without prior approval of the Secretary. An accountant dealing with a collection agent should request written verification of this approval.

2. Under prior law, except for wages and salaries, a levy was a one-hit item (Sec. 6331(b)); thus, it did not apply to property acquired after the date of its issuance. This has been significantly changed, with new Sec. 6331(h)(1) providing for a continuous levy on a "specified payment."

The definition of "specified payment" is somewhat limited, however Under new Sec. 6331(h)(2), a specified payment is defined as:

a. items under Sec. 6334(a)(4), (7), (9) or (11), including worker's compensation payments, unemployment benefits, wages/salary, supplemental security income, and needs- or income-tested public assistance;

b. annuity and pensions under the Railroad Retirement Act and benefits under the Railroad Unemployment Insurance Act (partially repealing Sec. 6334(a)(6)); and

c. other Federal payments--not based on income or assets.

Sec. 6331(h)(2)(A) is very specific; the payments must be made by the Federal government and not under a general assistance program. The TRA '97 Committee Report gives Social Security payments as an example.

Of particular importance is that the items listed above are only subject to a continuous levy of "15% of any specified payment due to the taxpayer" (Sec. 6331(h)(1)). Therefore, tax practitioners need to review the amount of funds taken by the Service, to determine whether the levy is in excess of 15%. There is no indication in the law or Committee Report as to how this 15% is to be calculated--gross payment or net payment after deductions. Hopefully, regulations will clarify this issue.

Interestingly, the Committee Report discusses the continuous levy on other "federal payments" without reference to the 15% limitation. However, Sec. 6331(h)(1) refers directly to "specified payments" and these "federal payments" are defined under "specified payments." Therefore, any continuous levy should be limited to 15% of Federal payments such as Social Security. In the event the IRS attempts a 100% levy on Federal payments, practitioners should be aware of the Committee Report's language.

After the TRA '97, there is much less protection for taxpayers against the Service's collection efforts (although the clothes on a person's back are still protected under Sec. 6334(a)(1)). With these changes, even basic funds for living expenses, such as public assistance and Social Security, are subject to levy However, a tax adviser can help clients by reviewing the levy documents to be certain that the levies on specified payments were approved by the Secretary and do not exceed the 15% statutory amount. Hopefully, this will give some protection to a client while the practitioner negotiates with the IRS, short of filing an immediate petition for bankruptcy protection.

From Robert M. Singer, Esq., Hamden, Conn. (not affiliated with AFAI)