In certain instances, the IRS can issue a jeopardy levy to seize available assets without the taxpayer’s knowledge. The IRS does not use this form of enforced collection action often but, when the IRS uses it, the consequences can be devastating. In most instances, prior to proceeding with levy action, the Internal Revenue Service (IRS) has to provide a taxpayer 30 days’ notice. For more information, please see our earlier blog article regarding levy notices. Unfortunately, the usual notice requirements do not always apply.
The authority for proceeding with a jeopardy levy is in I.R.C. §6331(d)(3) and §7429(a)(1)(A). Under those sections, the IRS can forego the 30-day notice requirement and issue a levy against a taxpayer’s available assets.
Taxpayers are not without options. Under the authority in I.R.C. §7429, the taxpayer subject to the jeopardy levy has administrative and judicial options for disputing the action. Procedurally, to secure judicial review of the jeopardy levy, the taxpayer must first request an administrative review of the levy. If a taxpayer requests that administrative review, the question that must be answered is whether, under the circumstances, the IRS’s decision to proceed with the jeopardy levy was reasonable.
Unfortunately, the standard for determining whether the jeopardy levy is reasonable is not specifically defined in the statute itself. McWilliams v. Comm’r of Internal Revenue, 103 T.C. 416, 424,1994 WL 466350 (1994). I.R.C. §7429(g)(1) states that the IRS has the burden to demonstrate that the jeopardy levy action was reasonable under Treas. Reg. §1.6851-1(a).
There are three conditions in Treas. Reg. §1.6851-1(a) that could support the reasonableness of the jeopardy levy. Those three conditions are as follows:
- Flight Risk. The taxpayer is or appears to be designing quickly to depart from the United States or to conceal himself or herself. Treas. Reg. §1.6851-1(a)(i).
- Dissipation of Assets. The taxpayer is or appears to be designing quickly to place his, her, or its property beyond the reach of the Government either by removing it from the United States, by concealing it, by dissipating it, or by transferring it to other persons. Treas. Reg. §1.6851-1(a)(ii).
- Financial Insolvency. The taxpayer’s financial solvency is or appears to be imperiled. Treas. Reg. §1.6851-1(a)(iii).
The IRS Appeals Office or a court will uphold the IRS’s jeopardy levy if any one of the above conditions are satisfied. Only one of the above conditions needs to be present for the IRS Appeals Officer or the court to find the jeopardy action reasonable.
The standard of review for determining whether the IRS adequately satisfied one of the conditions detailed above is something more than “not arbitrary and capricious” and something less than “supported by substantial evidence.” Chavarria v. U.S., C-83-5728, 1984 WL 3642 (N.D. Cal. Feb. 9,1984). The review of whether the IRS’s actions were reasonable is limited to the record currently before the IRS Appeals Officer or the relevant court of jurisdiction. Id.
If the IRS cannot demonstrate to the IRS Appeals Office or the court that the one of the above conditions existed, the jeopardy levy will not be upheld and the IRS will refund the funds that were seized. Even after the jeopardy levy is released, in most cases, the taxpayer will still need to negotiate a reasonable alternative to enforced collection action to avoid IRS levies.