Can a Notice of an IRS Bank Levy Extend to Savings Acounts or Certificates of Deposits Pledged as Security for Loan?
There are really a couple of issues here and one has to do with lien priority. This is a battle between the Uniform Commercial Code (UCC), Article 9, and the Internal Revenue Code (IRC). Because we have a limited amount of space, suffice it to say what matters is whether the bank perfected its security interest in the certificate of deposit (CD) or other collateral prior to the notice of federal tax lien (NFTL) being filed. There are other variables that also matter, but in most cases that is the bottom line. However, that is not the whole story. An equally important issue is whether just an IRS notice of bank levy is enough to get the CD. In some cases the IRS has to jump through a few more hoops.
If intangible property is represented by a negotiable document, actual seizure of the document must be made. Service of notice of levy upon the maker of the note, the corporation or the bank is ineffective to reduce the property right to possession. Money on deposit in a bank represented by a nonnegotiable certificate of deposit in the hands of a delinquent taxpayer is subject to the levy. Rev. Rul. 73-12, 1973-1 C.B. 601. The holding in Rev. Rul. 73-12 is not applicable to negotiable certificates. Rev. Rul. 75-355, 1975-2 C.B. 478. A levy by the government on funds represented by a negotiable certificate of deposit must be made by presentation of the negotiable certificate and surrender of such certificate to the maker.
A second and more common issue is what happens when a bank receives a notice of bank levy and the funds in your savings account are subject to setoff pursuant to a security agreement with the bank. In this case, if the federal tax lien attached to a taxpayer’s property prior to setoff, then a bank takes funds encumbered with a federal tax lien. The government may still levy on the bank to obtain the encumbered funds. United States v. Donahue Industries, Inc., 905 F.2d 1325 (9th Cir. 1990); Rev. Rul. 2006-42. See also IRM 188.8.131.52.4.
Pledging collateral to a bank does not make it immune from IRS collection activity. Be mindful that the IRS has a very long reach and your bank might be surprised to learn that it is not always first in line! If the bank loses its collateral to the IRS, your loan may go into default and the bank is then likely to call the loan. If you are a small business owner that owes back taxes to the IRS and don’t have an installment agreement (IA) in place or a collection hold, you and your bank may be in for a nasty surprise.
President Obama recently signed into law the 5-year infrastructure spending Bill. It adds a new section 7345 to the Internal Revenue Code. It is part of H.R. 22 – Fixing America’s Surface Transportation Act, the “FAST Act.” What you need to know about the FAST Act is that the IRS now has the ability to revoke your U.S. passport for an unpaid tax bill. More specifically, the IRS can now ask the State Department to do it for them if the IRS certifies you as having a seriously delinquent tax debt in an amount in excess of $50,000 and the IRS has filed a notice of lien.
Not planning on traveling out of the country any time soon? The Act’s potential effects are wide ranging and in some states in 2016 and beyond it may even be necessary to have a valid passport to board a domestic flight. If you are contesting a tax assessment, then don’t worry; the Act applies to a tax assessment that is final. So, if you are in Tax Court still arguing over your liability, then you are safe for the moment.
How all this is going to work is not yet known. Whether this is constitutional is also the subject of a heated debate in some quarters. However, if this new law may apply to you, and you have not yet entered into an installment agreement (IA) with the IRS exempting you from its effects, you may want to discuss the issue with your CPA and your tax attorney.
Does a single member limited liability company (SMLLC) afford protection to taxpayers who owe the IRS personally?
Question: Does a Single Member Limited Liability Company (SMLLC) afford protection to taxpayers who owe the IRS personally?
Answer: State law will control whether the IRS or any creditor has the right to LLC assets. In general, the answer is that creditors of an LLC member have no rights to the “assets” of the LLC. They may be able to intercept payments the LLC makes to a member through what is known as a charging order or other means.
The IRS must look to state law to determine whether a person has an ownership interest in any particular asset. Aquilino v. United States, 363 U.S. 509 (Sup. Ct. 1960). If state law does not vest an ownership interest in an asset in favor of the person who owes the tax, the IRS cannot seize that asset. But, not everyone working at the IRS understands the law in detail and a zealous IRS Revenue Officer may go after your accounts.
Can the IRS attempt to levy the LLC bank account? Yes, they can. Would they be correct in doing so? Assuming the LLC was run properly and not as a personal piggy bank, then the IRS would not be justified in doing so. However, just because the IRS may not be able to successfully levy the Company’s bank account does not mean you are out of the woods.
If the LLC is paying you a salary, the IRS could garnish you wages. The IRS could also attempt to collect as against any distributions made by the LLC to you on account of your ownership interest in the LLC.