IRS Law Blog

I would like to share my response to a reader who was experiencing financial hardship because the IRS had levied his state income tax refund, and he needed the money to get his house out of foreclosure.

As the reader correctly pointed out, the problem with the IRS levy was that it was made while he was in an installment agreement.

One benefit of being in an payment agreement with the IRS is that the agreement stops the IRS from levying your property.

The protection against levy while in an installment agreement is required by law:  Internal Revenue Code Section 6331(k) states that the IRS cannot levy while an installment agreement is in place.

Internal IRS guidelines support this law.  Internal Revenue Manual 5.19.9.1.1(2) specifically states that bankruptcy, installment agreements and offers in compromise accounts are excluded from the Automatic Levy Program.

So why was the state income tax refund being levied?

Let’s look at a little background into how the IRS administers its state tax levy program:  State tax refunds are seized by the IRS under the State Income Tax Levy Program (SITLP).  The SITLP is part of the IRS’s Automated Levy Program (ALP).   (The IRS loves acronyms.)

Here is an example of the state income tax levy program works:  Ohio will sign an agreement with the IRS to permit an Ohio tax refund to be applied to a federal tax liability.  Every week or two, the IRS will send Ohio an electronic file of the potential tax debts and notice of the levy. If there is a match, the result is an automated “taking” of the Ohio state refund by the IRS to pay the IRS debt.  Ohio would send a notice to the taxpayer notifying him that his state refund was sent to the IRS.

And a state tax refund can be seized without the IRS first sending notice.  Internal Revenue Code 6331(f)(2).  This is an exception to almost every other type of IRS levy where law requires that the IRS send notice before it can levy.

Everyone realizes that the IRS is a huge government agency, and sometimes important issues slip through the cracks and are not administered properly.  Call it a left-hand not knowing what the right-hand is doing kind of thing.  In other words, the levy was likely a systemic, administrative problem within the IRS.   I see that happen all the time.

The solution is to go to the best place to resolve systemic, administrative IRS problems:  a call to the IRS Office of the Taxpayer Advocate.  The Taxpayer Advocate does as its name implies – advocates for taxpayers who are experiencing hardship because of breakdown by the IRS.  In situations like this, the IRS Taxpayer Advocate should be immediately contacted at 800-829-4059.  The Taxpayer Advocate also has local offices that can be contacted to request that a case file be opened on your behalf.  The IRS also has coordinators for its state income tax levy program, but does not publish the phone numbers.  The IRS Taxpayer Advocate should be encouraged to work with the coordinator to resolve levy problems.

The IRS will send Letter CP 92, Notice of Levy on Your State Tax Refund Notice of Your Right to a Hearing after it issues a state tax levy.  This letter is important – it provides a 30 day right to appeal the levy.  The basis for the appeal would be that would be that the levy was not permitted by law (Internal Revenue Code 6331(k) and Internal Revenue Manual 5.19.9.1.1(2) as your refund was taken while you were in an installment agreement).  You are asking for the funds to be returned to you.

Systemic failures in the IRS administrative process are often the most difficult problems to address because they do not involve an individual making a decision, but rather the way an entire government agency administers the tax laws. These breakdowns are expected and not intentional, the result of complex tax laws.  If you are in an installment agreement, or in bankruptcy, or have an offer in compromise pending, the IRS should not be levying your state income tax refund.