The IRS Seizure
In Cleveland, Ohio, about seven thirty in the morning, two revenue officers of the IRS, accompanied by their manager and several armed special agents, knock on the door of a taxpayer's home. When the taxpayer, a fifty-six year old businessman, answers, the revenue officer in charge of the case shows him a writ of entry issued by the U.S. District Court and demands entry. The taxpayer is taken aback and becomes somewhat disoriented, but he does not offer resistance. He allows them to come in.
Once they are inside, he becomes an unwilling actor in a surreal play taking place in his own home. The IRS agents inform him that they are there to seize his property. They begin to inventory the furniture and other items that they consider to be potentially valuable and call in the movers who are waiting in a van parked by the house. Upon orders of one of the revenue officer, the movers start to carry out the furniture and other personal property belonging to the taxpayer and his wife.
The taxpayer's wife comes out of the bedroom and becomes upset by what she sees. She starts to cry, then retreats back to the bedroom in an effort to compose herself. Wanting to comfort her, the husband follows.
But if they thought that they would get a moment of privacy in their own home, they are mistaken. The armed special agents follow them both into the bedroom. Under the circumstances, they are concerned that the taxpayer, or even his wife, may have a weapon in the bedroom and will come out shooting.
Welcome to the world of the IRS' Collection Division. Pretty scary stuff, isn't it? The seizure is one of the most powerful and confrontational weapons in IRS' collection arsenal. It enables the IRS to seize virtually any property, real or personal, tangible or intangible, in which the taxpayer has an interest - or even a partial interest. It is an administrative weapon, which means that, unlike the example above, the IRS does not have to get a court's permission to use it. It can make its own decision to seize property of the taxpayer, without judicial due process, and execute it with its own personnel, without the help of law enforcement officials. [See In the Matter of the Tax Indebtedness of Dell W. Carlson and Robert Torres, 580 F.2d 1365 (10th Cir. 1978), citing Springer v. United States, 102 U.S. 586(1880) and Unites States v. Manufacturers Trust Co., 198 F.2d 366 (2nd Cir. 1952)] It is a self-help remedy somewhat akin to the power of the repo man to take possession of a car, except that the IRS can seize virtually anything belonging to the taxpayer, not just a car. The only time IRS needs permission of the court is when it wishes to seize property of the taxpayer maintained in a "private area", such as the home or other area that is not accessible to the general public. The car parked in the street, the tables and chairs in a restaurant or a waiting room, or virtually any real property is fair game for the IRS. In those cases where it does need a court order (i.e.: a Writ of Entry), the hearing is ex parte and does not entitle the taxpayer to representation. [See IRC §7402(a), United States v. First National City Bank, 568 F.2d 853 (2nd Cir. 1977) and United States v. Mellon Bank, N.A., 521 F.2d 708 (3rd Cir. 1975)] That means that the Judge will only hear one side of the story, i.e.: IRS' side.
(NOTE: The administrative power of the IRS to carry out its own seizures has been modified somewhat by the IRS Restructuring and Reform Act of 1998. The seizure of a taxpayer's principal residence is now prohibited without a court order. In addition, the taxpayer now has jurisdiction to seek judicial relief prior to IRS' seizure, although he must affirmatively initiate the process.)
What happens during the actual seizure?
Bradley left his house and drove to the home of a friend. He gave the rifle to his friend as a '"souvenir." He then returned to his home and was arrested by the police. He was convicted of second-degree murder. (See People of the State of New York v. Bradley, 626 N.Y.S. 2d 921, 211 AD 2d 388)
Fortunately, the incidents involving shooting or death have been few and far in between. More common are incidents involving assault on the revenue officers or attempts to forcibly rescue property seized by the IRS. One such case involved two female revenue officers in St. Louis, Missouri and a business, which owed payroll taxes. Revenue officer Deborah Barrett granted DEK Electric, the taxpayer, a payment agreement, but DEK defaulted. Barrett then mailed a 30-day final demand letter to DEK, by certified mail, informing it that a seizure would follow if the tax were not paid. The letter was returned to the IRS unclaimed. After the 30-day period Barrett and Roberta Collett, another revenue officer, traveled to the home of Edmund Burk, one of the principals of DEK, to either collect the money or to seize a utility truck which was registered in the name of DEK. They arrived about 7:30 in the morning and parked in Burk's driveway, behind the utility truck. After they were admitted to the house, they demanded payment of the money due. When Burk did not pay the money, they informed him that they would seize the utility truck. At this point Burk became angry. As Barrett and Collett prepared to leave to tag the truck for seizure, Burk and his son Douglas blocked the door. Douglas began yelling obscenities at Barrett and told her that if she and Collett were not women he would "punch" their "lights out." Douglass approached Barrett with a large wad of money clenched in his fist and shouted, "Here, you want money, take this money, just take it!" He then hit Barrett in the chin with his fist and the money, causing her to lose her balance and step back. Edmund, the father, blocked Collett's path, pushing her back with his stomach, and momentarily took her IRS credentials away from her.
The son Douglas then left the house. Barrett and Collett repeatedly requested to leave the house but Edmund refused to let them leave, saying that he wanted them to review some records. When Barrett and Collett were finally able to leave, after about a half-hour, Douglas and the utility truck were gone. Barrett's car had been moved and one of its taillight's had been smashed. A government briefcase she had left in the car containing IRS cash receipts and other items was also missing.
The next day, IRS internal inspection agents and several local police officers arrived at Burk's home to serve a federal arrest warrant on him. After forcing entry into his house, they arrested him when he emerged from his bathroom.
Both Edmund and Douglas were indicted under 26 U.S.C. §7212(a) and 18 U.S.C. §111. Edmund pleaded guilty and Douglas was convicted at trial. Douglas was sentenced to eleven months in prison and one year of supervised release. (See United States of America v. Douglas J. Burk, 91-1 USTC)
But even those types of incidents are not that common. More common are the mini-dramas, such as the one involving the 56-year-old businessman, described above. More often than not, the taxpayer or his agent is the ones who are usually intimidated and cooperate with the revenue officer that goes about the job he has to do. The revenue officer identifies himself or herself and displays a badge. He explains that he is there to seize the taxpayer's assets and will proceed to do so unless immediate payment is made of the full balance due. In the unlikely event that the taxpayer is able to come up with all the money, the revenue officer will generally accept only cash or certified funds. (There have been too many cases of gullible revenue officers who discontinued a seizure based on a check that later bounced.)
If, as is more likely, the taxpayer is not able to come up with full payment, the revenue officer then displays Form 668-B, Levy, and reads the statement on the form to the taxpayer. The statement reads as follows:
The amounts shown above are now due, owing, and unpaid to the United States from the above taxpayer for internal revenue taxes. Notice and demand have been made for payment. Chapter 64 of the Internal Revenue Code provides a lien for the above tax and statutory additions. Section 6331 of the Code authorizes collection of taxes by levy on all property or rights to property of a taxpayer, except property that is exempt under Code section 6334. Therefore, under the provisions of Code Section 6331, so much of the property or rights to property, either real or personal, as may be necessary to pay the unpaid balance of assessment shown, with additions provided by law, including fees, costs, and expenses of this levy, are levied upon to pay the taxes and additions.
The revenue officer then provides a copy of the form to the taxpayer, as required by IRC §6335(a). Thereafter, he proceeds to inventory the property to be seized. This is necessary for several reasons. First, it is considered part of the seizure process. It demonstrates the IRS' effort to exercise dominion and control over the property (See 30 Am Jur 2d §238). Second, the IRS assumes the responsibility for safeguarding the property after it is seized and it needs to have a detailed list of the property under its care. [See Legal Reference Guide, IRM 57(16), Sec. 338.22(2)] Third, it will have to provide a detailed description of the property when it advertises the sale.
The inventory is listed on IRS' Form 2433, Notice of Seizure. Usually the revenue officers ask the taxpayer or his representative to be present during the inventory. (See IRM 126.96.36.199.) This helps to reduce the likelihood that the taxpayer will challenge the IRS as to which items were seized, especially if the seized items are returned to the taxpayer following a release or a redemption. The taxpayer is provided with a copy of the completed form. In addition to being listed on the form, large, bulky property, such as machinery and equipment is often tagged with IRS' tags, especially if the property is to remain on the premises. [See IRM 188.8.131.52(11)]
How does a seizure come about?
. . . The Service is committed to educating and assisting taxpayers that make a good faith effort to comply. However, enforcement action should be taken promptly, in accordance with Internal Revenue Manual guidelines, against taxpayers who have not shown a good faith effort to comply. These actions include enforcement necessary to move the taxpayer toward compliance. . . .
Policy Statement P-5-34 states, in relevant parts:
The facts of a case and alternative collection methods must be thoroughly considered before deciding to seize the assets of a going business and offer them for sale. . . . Opposing considerations must be carefully weighed, and the official responsible for making the decision must be satisfied that a reasonable effort has been made to collect the delinquent taxes without seizing the business. . . .
It should be remembered, however, that these Policy Statements are not the law. IRS is not precluded by statute from seizing first and taking other enforcement action later. Aggressive seizures were looked upon with particular favor in order to prevent what IRS calls "pyramiding," i.e.: allowing a business to accrue payroll tax liabilities quarter after quarter. In those cases IRS encouraged seizures of the business' assets even if other enforcement actions had not been previously taken and even if there was little or no equity in those assets with which the taxes would be paid. Policy Statement P-5-34 states, in relevant part, that "failure to turn over trust fund taxes is a high priority tax delinquency, and a business will not be allowed to continue pyramiding these taxes." IRM 184.108.40.206.1 states, in relevant part, the following:
. . . However, if additional unpaid trust fund liability accrues after contact with the taxpayer, seizure(s) to prevent pyramiding per IRM 5.10 should be made without hesitation . . .
In addition, Policy Statements and other administrative procedure documents are often written in broader terms and are subject to interpretation and judgment of the employees. Some revenue officers and/or their managers used to be tougher than others and interpreted the Policy Statements and other Internal Revenue Manual ("IRM") provisions more aggressively. It is also a fact that seizures used to ebb and swell within particular districts of the IRS depending on the aggressiveness of the district director or the collection division chief. Sometimes seizures increased in frequency if the regional office's statistics showed that a particular district has had fewer seizures than other districts of comparable size.
During the swell phase of a particular district's seizure policy the employees were not beyond playing technical games in order to draw in a taxpayer's situation within the seizure parameters. In one case in Chicago, for example, a business with about twenty employees and annual sales of over one and a half million dollars, had a good record of compliance, with perhaps only occasional lapses in making timely tax deposits. In those cases in which the taxpayer was tardy with the tax deposits, IRS penalized the taxpayer for late deposits, but the taxpayer always paid the penalties promptly. In late 1994 and early 1995, however, the taxpayer experienced some financial problems. One of its larger clients had begun to deteriorate financially, leaving the taxpayer with large losses. The taxpayer, in turn, accrued payroll tax liabilities for two consecutive quarters.
During this period the taxpayer took action to correct the problem. It dropped the deteriorating client in order to cut its losses and reduced its own payroll. Thereafter the taxpayer again resumed making current tax deposits and paid all the accrued tax, though it paid some of it a little late. The taxpayer was again profitable and only wanted a payment agreement with the IRS to pay off the tax liabilities of the two quarters. It was prepared to pay about $5,000.00 per month and could have paid off the entire liability, including interest and penalties, within approximately fourteen months.
After almost a year of delay in IRS' collection system, the case was finally assigned to a revenue officer who refused to consider a payment agreement. She informed me that either the taxpayer pay the full amount due, including interest and penalties, or she would close the business down. The taxpayer had thirty days to come up with an amount slightly in excess of $75,000.00.
I called the manager and asked him to reconsider the revenue officer's decision. The manager informed me that it was the district's policy to seize a business if it accrued three or more consecutive quarters of payroll tax liabilities. When I advised him that there were only two consecutive quarters, he explained that there had also been some late deposit penalties following those two quarters and therefore this taxpayer fell within the "pyramiding" criteria.
This is clearly a form of gamesmanship. Any late deposit penalties after the two delinquent quarters were paid by the taxpayer. And even if they had not been paid, the tax had. Throwing paid late deposit penalties into the delinquent quarter computation was a bald attempt at trying to build up the district's seizure statistics. Fortunately, the taxpayer in this case was able to come up with the full amount of tax due and was able to survive without resorting to Chapter 11 bankruptcy. But it's unfortunate that good judgment is sometimes supplanted by bureaucratic gamesmanship.
(NOTE) Since the passage of the RRA98, it is questionable whether the practices described above will survive. The climate at IRS seems to have changed and whole sections of the IRM dealing with seizures have been revised. It remains to be seen what posture IRS will takes vis a vis seizures. However, recent statistics indicate that seizures have dropped dramatically nationwide.
What is the IRS' authority for seizure?
The authority to seize property of the taxpayer comes from Sec. 6331 of the Internal Revenue Code ("IRC"). Sec. 6331(a) states, in relevant part, the following:
(a) AUTHORITY OF SECRETARY. - If any person liable to pay any tax neglects or refuses to pay the same within 10 days after notice and demand, it shall be lawful for the Secretary to collect such tax (and such further sum as shall be sufficient to cover the expenses of the levy) by levy upon all property and rights to property . . . . belonging to such person or on which there is a lien provided in this chapter for the payment of such tax. . . .
Sec. 6331(b) states, in relevant part, the following:
(b) SEIZURE AND SALE OF PROPERTY. - The term "levy" as used in this title includes the power of distraint and seizure by any means. . . . In any case in which the Secretary may levy upon property or rights to property, he may seize and sell such property or rights to property (whether real or personal, tangible or intangible).
Incidentally, those of you not familiar with the Internal Revenue Code (and those of us who are) realize that it is a difficult document to read and understand. It contains many terms that are unfamiliar to most of us, some of them archaic or technical. It is written in a dry, mechanical manner, with many parenthetical phrases or cross-references to other sections which, in turn, contain other parenthetical expressions or further cross-references. It is also a document that has been amended many times and, consequently, has acquired some inconsistencies - or at least some ambiguities. Therefore I will try to explain those words or sections that I feel need to be clarified. The above two citations, for example, contain several words that should be clarified, or explained, including the terms "levy", "person" and "Secretary."
The term "levy" is not precise term and has a number of meanings. Used as a verb, it may mean to assess, raise, execute, exact, seize or collect tax, Black's Law Dictionary, 5th Edition. As a noun, it may mean a legislative imposition of tax or a seizure of assets to collect tax already assessed, Id. As used in the IRC, the term means the distraint and seizure of assets belonging to a taxpayer. It does not distinguish between assets in the possession of the taxpayer and those in the possession of third parties. The IRS does make such a distinction - at least administratively. Any effort to take assets in the possession of the taxpayer is called a "seizure", while an attempt to get hold of the taxpayer's assets held by a third party is called a "levy." To make things even more confusing (nothing is simple with the IRS), a seizure is accomplished with a document called a Levy (IRS Form 668-B), while a levy on third parties is done with a document called a Notice of Levy (IRS Form 668-A or 668-W).
The term "person" is used in Sec. 6331(a) of the IRC, which begins by stating that "If any person liable to pay any tax neglects or refuses to pay the same . . ." The logical question may be what if a corporation or a partnership neglects or refuses to pay the tax? Is the Secretary prohibited from seizing assets of those entities? For the answer to that question we turn to Sec. 7701(a)(1) of the IRC, which states that "The term "person" shall be construed to mean and include an individual, a trust, estate, partnership, association, company or corporation." Some lawyer in some congressional tax committee spotted the ambiguity and defined the term by amending the Code. Thus the answer to that question is in the Code itself; you just have to know where to find it.
With regard to the term "Secretary", the above citations give him (or her) the authority to levy, seize and sell property. Who is this Secretary and why isn't he (or she) the one that actually levies, seizes or sells the property of the taxpayers? Under Sec. 7701(a)(11)(B) of the IRC, the term "Secretary" means "the Secretary of the Treasury or his delegate." Pursuant to IRC §7701(a)(12)(A), the term "or his delegate" means . . . "any officer, employee, or agency of the Treasury Department duly authorized by the Secretary of the Treasury directly, or indirectly by one or more redelegations of authority, to perform the function mentioned or described in the context . . ." The IRC and the Treasury Regulations are two vehicles by which the district director of the IRS may be given delegated authority. Treas. Reg. 301.6331-1(a)(1) delegates the levy authority to the district director of the IRS. The district director has redelegated the seizure authority, through the chain of command, down to the revenue officer that is actually the one that conducts the seizure in most instances. (See Exhibit 5300-18 in the IRM)
Does the IRS need to take any steps before conducting a seizure?
1. Pre-seizure notification to the taxpayer;
(NOTE) The actions to be taken by the Revenue Officer prior to any seizure have expanded dramatically since the passage of RRA98 and include many new procedures to accommodate the numerous due process rights spelled out in the Act. Most of these procedures are spelled out in IRM 5.10.1 and Exhibit 5.10.1-2.
1. Pre-Seizure Notification to the Taxpayer
Sec. 6331(a) of the IRC requires that the taxpayer be given 10 days notice and demand for payment prior to seizure (a/k/a "levy"). The more recent Sec. 6331(d) of the IRC requires a 30-day written notice and demand delivered in person, left at the dwelling or usual place of business of the taxpayer, or sent by certified mail. The interplay between these two sections is not clear. There appears to be some redundancy here. It appears that Sec. 6331(d) is the more stringent requirement placed on the IRS and has supplanted Sec. 6331(a). However, Sec. 6331(a) has not been repealed and remains there as a source of some minor confusion. The standard IRS "final" notice seems to make demand for payment from the taxpayer both within 10 days and also within 30 days.
While there is case law to support the legality of the notice requirements, as a practical matter, it is usually not an issue. The local IRS service center almost always mails the taxpayer a 10/30-day demand letter by certified mail long before the case is assigned to a revenue officer. By the time the revenue officer decides to seize property, the taxpayer has had much more than 30 days notice. As a practical matter, the opposite may be true in the routine cases, i.e.: the notice and demand for payment are made and no action is taken for many months thereafter. Cases may sit at the service center, the queue of the Automated Collection System (ACS) or the inventory of the revenue officer more than 180 days before any action is taken. By the time the case is begun to be worked actively, the taxpayer may have been lulled into a false sense of feeling that IRS will not do anything.
As a result of this practical reality, the IRS implemented an internal procedure that requires the IRS to issue another notice and demand for payment to the taxpayer if one had not been issued in the last 180 days. [See Sec. 220.127.116.11(5) of the IRM] This appears to be an administrative effort on the part of the IRS to ensure that the taxpayer is not ambushed by a seizure. It was implemented following the passage of the so-called "Taxpayer Bill of Rights" in 1989, which, among other things, enacted the 30-day notice requirement of IRC 6331(d) into law. Sec. 18.104.22.168(7) further requires the revenue officer to attempt to contact the taxpayer personally and advise him that seizure is the next action planned and inform him of his rights, including the right of managerial review, the availability of the Problem Resolution Office in cases of hardship, etc. This further takes away any element of surprise, which sometimes had been used as a tactic by the IRS.
There is an exception, however, to the statutory and administrative notice and demand requirements. If the IRS determines that the collection of tax is in "jeopardy," it may proceed to seize or levy property without waiting for the requisite 10/30-day period (and, presumably, the 180-day rule). Sec. 6331(a) states, in relevant part, the following:
. . . If the Secretary makes a finding that the collection of such tax is in jeopardy, notice and demand for immediate payment of such tax may be made by the Secretary and, upon failure or refusal to pay such tax, collection thereof by levy shall be lawful without regard to the 10-day period provided in this section.
Sec. 6331(d)(3) makes the above applicable to the 30 day rule.
The next logical question is, of course, what constitutes "jeopardy." Without some of specific guidelines, the potential for abuse of this authority is rife. Not to fear. Sec. 5313.1(3) of the IRM states that, in order to invoke the jeopardy authority, at least one of the following conditions must exist:
(a) the taxpayer is or appears to be designing quickly to depart from the United States or to conceal himself/herself.
(b) 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.
(c) the taxpayer's financial solvency is or appears to be imperiled. (This does not include cases where the taxpayer becomes insolvent by virtue of the accrual of the proposed assessment of tax, penalty and interest.)
(d) the taxpayer is in physical possession of cash, or its equivalent, in excess of $10,000 who does not claim it as his/hers or as belonging to another person whose identity can be readily ascertained and who acknowledges ownership of it, so that the collection of tax on it is presumed to be in jeopardy within the meaning of IRC 6867.
(While IRM 5313.1 refers to the standards to be followed for making jeopardy assessments, IRM 22.214.171.124 makes it clear that the same standards apply to jeopardy levy.)
That helps to flesh out the meaning of jeopardy, although there still are ambiguities, especially the phrase "or appears to be." That leaves a lot of room for subjective interpretation. If it's any consolation, however, any jeopardy seizure or levy, without a prior jeopardy or termination assessment, requires the approval of the chief of the collection division. (See IRM 126.96.36.199) Jeopardy assessment under IRC 6861 or termination assessment under IRC 6851 require the approval of the district director. (See Policy Statements P-4-88 and P-4-89) The jeopardy authority is not used frequently by revenue officers. The one personal experience I had involved a Colombian national. He was an alleged drug dealer or courier who was detained in Puerto Rico by the DEA and other federal authorities. He had in his possession several million dollars worth of drugs and close to that amount in cash. IRS did a termination assessment against him. Upon assessment, we revenue officers served a demand for immediate payment on the taxpayer, who was incarcerated at the time. Of course, he could not pay it since the money was seized by the DEA under the federal forfeiture statutes (U.S. Federal law applies to Puerto Rico). Therefore we served a notice of levy on DEA to seize the money without regard to the 10 days' notice requirement. (The 30-day statute did not exist at the time.)
2. Determination of Equity in the Assets to be Seized
Sec. 6331(f) of the IRC requires the IRS to make a determination that the property it wishes to seize has equity beyond the cost and expenses IRS expects to incur to conduct the seizure and sale of that property. Sec. 6331(f) states the following:
(f)UNECONOMICAL LEVY. -No levy may be made on any property if the amount of the expenses which the Secretary estimates (at the time of levy) would be incurred by the Secretary with respect to the levy and sale of such property exceeds the fair market value of such property at the time of levy.
Sec. 188.8.131.52 of the IRM states, in relevant part, that, "There must be sufficient equity in the property to be seized to yield net proceeds from sale to apply to the unpaid tax liabilities."
While this rule was generally observed by the IRS, it was not universally observed, especially in cases of taxpayers who were pyramiding employment tax liabilities. Sec. 56(12)2.2 of the IRM prior to the post RRA98 revisions stated, in relevant part, the following:
(2) Because outstanding employment tax liabilities require immediate attention, especially cases where the taxpayer is pyramiding, it may be appropriate in certain cases to take seizure action, not only for the purpose of collecting the outstanding tax liability, but also to prevent further pyramiding.
(3) For these reasons, a seizure of an in-business taxpayer may be made, even though such action may ultimately not result in any funds to apply to the outstanding tax liabilities.
There were no federal statutes that make a "pyramiding" exception to Sec. 6331(f) of the IRC. Therefore, IRS' position on non-equity seizures was quite aggressive. IRS rationalized its position by arguing that equity is sometimes difficult to ascertain. Sec. 56(12)2.2 of the old IRM stated, in relevant part, the following:
(1)Many businesses which are pyramiding employment taxes . . . are heavily indebted to other creditors and large "blanket" security interests may be recorded, covering most of the assets of the business. Due to the uncertainty inherent in determining which assets may be subject to recorded security interests and the difficulties encountered in ascertaining the forced sale value of assets such as stock in trade, inventory, furniture and equipment, it may not be possible for the revenue officer to make a precise determination of equity . . .
While this was undoubtedly true, it wais also true that IRS sometimes used this gray area to its perceived advantage, especially during the swell phase of the seizure cycle. Some revenue officers and their managers routinely seized, or threaten to seize, assets even when it was clear, or fairly clear that there was little or no equity in those assets. It was easier and faster than seeking a court injunction against the taxpayer under Sec. 7402 of the IRC, or criminal prosecution under Sections 7201, 7202 or 7215. Putting the taxpayer out of business, or into Chapter 11 bankruptcy, closed the collection case and solved the revenue officer's problem. Although, in all fairness to the IRS, many of these taxpayers should have been out of business.
Since the passage of RRA98, however, the old sections of the IRM cited above were eliminated. The current IRM 184.108.40.206.1 (1) states, in relevant part, that "if additional unpaid trust fund liability accrues after contact with the taxpayer, seizure(s) to prevent pyramiding per IRM 5.10 should be made without hesitation when there is equity in assets, as long as all requirements before seizing property are satisfied . . . " (Emphasis added.)
3. Filing of a Federal Tax Lien
Although it is not a statutory requirement, it is the policy of the IRS that a federal tax lien should be filed against the taxpayer prior to the seizure of his property. [See Policy Statement P-5-47 and IRM Sec. 220.127.116.11(4) and Exhibit 5.10.1-2. A fuller discussion of the Federal Tax Lien is beyond the scope of this article.
4. Asking Permission from the Taxpayer to Seize the Assets Held in a Private Area
Before the revenue officer can proceed to seize the assets of a taxpayer held in a "private," area he must contact the taxpayer personally and ask his permission to do so. This requirement seems like an anomaly. It's an anomaly is several ways. First, the revenue officer, who has been the aggressor in the case, is suddenly put into the position of seeking permission from the person he/she has been making demands on. This is a sudden role reversal that confuses the taxpayer and galls the revenue officer who likes to feel that he/she is in control and has the moral high ground. He/she must now seek permission from the perpetrator/sinner. There is something ironic about that, if not biblical.
Second, the revenue officer is put into the unenviable position of asking permission to do nasty things to the taxpayer, something akin to saying, "would you please allow me to break your arm."
This rather strange scenario comes about because of a landmark decision by the U.S. Supreme Court. In G.M. Leasing v. United States, 429 U.S. 338 (1977), the court held that an entry without a warrant onto the private areas of personal or business premises of a taxpayer for the purpose of seizing property to satisfy a tax liability is in violation of the Fourth Amendment to the Constitution. This decision effectively stopped a long-standing practice of the IRS to not only seize all the assets of the business, whether they were in a public or private area, but simply to shut the business down by padlocking the premises.
The case involved a delinquent taxpayer, George I. Norman, Jr., against whom a termination assessment was made for income taxes for the years 1971 and 1972. The amounts assessed for those two years was close to $1,000,000.00. IRS made an immediate demand for payment, without allowing him the 10 days notice. When he did not pay, the IRS proceeded to seize his collection of antique or collectors' automobiles, including several Rolls Royces, several Studzes and a Jaguar. They also entered the private premises of his office and carried away some documents and records that he held in his cabinets.
The Supreme Court ruled that the seizures of the automobiles, which were conducted in parking lots or public streets, were executed properly. The seizure of the papers and documents, on the other hand, was improper because it was done on the private premises of the taxpayer (or his alter ego corporation) without a warrant and was therefore in violation of the Fourth Amendment to the Constitution.
The Fourth Amendment states the following:
The right of the people to be secure in their persons, houses, papers, And effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.
The U.S. Justice Department argued (on behalf of the IRS), that Sec. 6331 of the IRC (among other things) is a broad exceptions to the Fourth Amendment. The Court concluded, however, that Sec. 6331 of the Code authorizes the IRS to make warrantless seizures, but not warrantless entries.
In order to make a seizure of property in the private area of a taxpayer, the IRS must now seek permission from the taxpayer or from the U.S. District Court. The IRS has implemented internal procedures that require the revenue officer to seek written permission from the taxpayer first. Only if that permission is refused will the IRS then seek permission from the District Court. [See Sec. 18.104.22.168.1(7) an (8) of the IRM]
It's not clear why this particular procedure was implemented, but one can speculate. First, it's a prudent thing to do. If the IRS is forced to go to the District Court, it can argue that it is not attempting to barge in suddenly and unexpectedly; that the taxpayer's permission was sought and he was on notice that a seizure was to follow. This negates the image of the IRS as Gestapo troopers barging in to the homes of innocent citizens at midnight - something that is of particular sensitivity following the Senate Finance Committee hearings and the passage of RRA98.
Second, the Fourth Amendment requires a description of the place to be searched and of the things to be seized. While the IRS (with the support of some courts) has resisted this notion, a number of other courts have ruled that the petition for a writ of entry requires a list of the specific assets to be seized. [See United States v. Condo, 782 F.2d 1502(1986), In the Matter of Gerwig, 461 F.Supp. 449(1978) and In the Matter of the Tax Indebtedness of Stubblefield, Inc., 810 F.Supp. 277 (1992)] Rather than fight every court, the IRS has taken the prudent position that it is better to be safe than sorry. Thus a visit by the revenue officer to the premises affords him/her the opportunity (if he/she has not already had one) to get that information.
Finally, the third reason is a no-brainer. If the taxpayer consents to the seizure, it will save IRS the trouble of having to go through the effort of securing permission from the District Court. While this may sound somewhat far-fetched, it's not. You'd be amazed at how many taxpayers, uninformed about their rights, under stress, and intimidated by the IRS, consent to seizures in private areas.
Seeking Permission from Court to Enter Private Area
If, however, the taxpayer refuses to grant permission voluntarily, the IRS must go to an U.S. District Court judge and seek what's called a Writ of Entry. A Writ of Entry is not a Warrant. Why does the IRS seek a Writ of Entry rather than a Warrant, as required by the Fourth Amendment? It's not clear. The answer is probably historical. The Warrant referred to in the Fourth Amendment is probably the equivalent of what is today a Search Warrant. A Search Warrant is used only in criminal cases and is issued only to law enforcement officials who are seeking evidence related to the commission of a crime. IRS' seizure is an administrative action and does not involve enforcement of criminal statutes. Furthermore, IRS is there to seize, not to search. A Writ of Entry authorizes the revenue officer to enter the private premises of a taxpayer for the purpose of seizing the assets located there. It does not authorize a search of the premises prior to the seizure.
What is "Private" Area?
The next question is, what is a "private" area as opposed to a public area? In many instances, the answer is fairly clear. The inside of a home is a private area. The street is a public area. However, the issue is not always that clear. How about a private parking lot? Is that public or private? If it's private, but not the taxpayer's, can the IRS seize the taxpayer's car which is parked there? Does the IRS need permission to enter from the owner of the lot? What if he is not there? Can an employee of the owner give such permission? Is the employee authorized to do so? What about the taxpayer's driveway? Is that public or private? What about the cash register in a restaurant? Is that located in public or private area?
As can be seen from just a sample sprinkling of questions, not all locations can be unambiguously classified as private or public and it is expected that courts will struggle with this issue for years to come. Some case law has already appeared. In United States of America v. Alan N. Scott, LLR No. 9209046.C01 (1992), the US Court of Appeals, First Circuit, held that a warrantless examination by the IRS of shredded papers discarded by a taxpayer in his garbage can was not a violation of the Fourth Amendment. The garbage can was located on the street in front of the taxpayer's home. The Court relied on another garbage search case decided by the U.S. Supreme Court, California v. Greenwood, 486 U.S. 35 (1988).
IRS' own internal guidelines seem prudent. With regard to the seizure of a cash register, the regulations state that it should not be done without a writ of entry. (See IRM 22.214.171.124) With regard to a vehicle parked in a taxpayer's driveway, the old IRM 56(12)4.8(3)(a) used to state the following:
Seizure of a motor vehicle parked in an unobstructed driveway or front yard is permissible without written consent or writ. There must not be any obstruction, such as a fence, chain or rope, which would indicate that entry onto the driveway or front yard would constitute an invasion of the taxpayer's privacy. In addition, the vehicle must not be enclosed by any structure, such as a garage or carport.
This position was supported by case law, including Maisano v. Welcher, et. al., 940 F.2d 499 (9th Cir. 1991). However, since the passage of RRA98 this section of the IRM seems to have been removed.
Regarding the seizure of a taxpayer's vehicle parked in a parking lot, the old IRM 56(12)4.8(3)(b) used to state the following:
Vehicles located on an unsupervised portion of a third party's premise which is accessible to the general public in the ordinary course of business, such as a shopping center parking lot, may be seized by using form 668-B, during the time the premise is accessible to the general public. A vehicle within the control and custody of a third party may be seized by also using Form 668-B. If an attendant is in possession of the keys to the vehicle, a Notice of Levy, Form 668-A, will be served on the attendant. To comply with the Notice of Levy, the attendant should be asked to surrender the keys to the Revenue Officer. . . . When the parking lot is a "park and lock" facility. and the attendant is not in possession of the vehicle (sic) keys, but is basically performing a custodial function, Form 668-B will be used to seize the vehicle.
Since the passage of RRA98, this section was removed, as well.
What about real estate owned by the taxpayer? Does the IRS need a writ of entry to seize it? After all, it is generally not accessible to the public, at least not without the taxpayer's permission. The answer is that IRS does not need a writ of entry. Real estate owned by the taxpayer may be seized without a writ of entry since the IRS does not need to take physical possession of the property or any improvement upon it in order to effectuate a seizure. All it needs to do is take custody of it. Custody means the exercise dominion and control over the property. In the case of realty, this may simply be a matter of giving notice of the seizure to the taxpayer. [See IRM 57(16) - Legal Reference Guide for Revenue Officers - Sec. 338.22 and 30 Am Jur 2d Sec. 240, et sec]
Thus, a seizure of real estate is purely a paper transaction. The revenue officer may simply leave forms 668-B (Levy) and 2433 (Notice of Seizure) with the taxpayer or mail them by certified mail to his address. (As will be seen later, however, the seizure of the taxpayer's principal residence requires the approval of the district director or the assistant district director.)
5. Obtaining the Proper Authorization
The entire seizure file of the revenue officer must be submitted to the group manager for review. If the manager approves of the seizure he/she will sign form 668-B. If the property to be seized is the taxpayer's personal residence, approval must be sought and obtained from the district director or the assistant district director. If it is approved, form 668-B must then bear his/her signature, rather than the group manager's. If a writ of entry is needed, it must be sought from and approved by a judge of the District Court. The writ will likely have time limitations, usually 10 days from the date of the signature. Any attempted seizure after the expiration of that date would be invalid.
6. Requesting Seizure Assistance
Internal policy of the IRS requires that the revenue officer conducting a seizure obtain the assistance of at least one other Service employee, preferably another revenue officer or the group manager. This is required for several reasons. One is that the seizure is a confrontational action. Things can go wrong and the unexpected can and does happen. The second revenue officer or group manager is there to assist and back up the revenue officer conducting the seizure. The second reason is that other Service employee is a witness to the proceeding and can testify if the matter ends up in court for some reason. The taxpayer may make allegations about irregularities in the seizure and the IRS wants to have corroborating witnesses.
If another revenue officer or a group manager are not available, the IRS usually request assistance of non-collection employees or even non-agency employees, such as local law enforcement officials. If the seizure is particularly large the revenue officer may bring along a number of people. When I seized a warehouse on the island of Guam, I had the assistance of another revenue officer, a revenue agent and several local police officers.
Another factor to consider is the safety of the revenue officer. If the taxpayer has some history of violence, or if the seizure is inherently dangerous, the revenue officer will request the assistance of armed agents of the IRS, either special agents of the Criminal Investigation Division or Internal Inspection agents. If those are not available at the post of duty, the revenue officer can request the assistance of ATF agents or even local police officers. It was my practice as a revenue officer to request the assistance of special agents even when I did not expect any violence. Those things cannot be predicted with complete accuracy. In addition, I routinely notified the local police of any seizure I was about to conduct. Even if we did not request their assistance, at least they were on notice if some violence did break out, or, in case of a role reversal, the taxpayer called them to complain about the action.
Seizing a tavern, for example, can be particularly dangerous. On one occasion, I seized a tavern in Puerto Rico. The owner was not present during the seizure and it proceeded without incident. The following day, however, the owner called me and asked me to come to his office. He said that he wanted to pay me everything that was owed. I asked him to come to the IRS' office with the money, but he gave me some vague explanation about why he could not do that.
Although I was suspicious, I went anyway. I was accompanied by another revenue officer, though he was rather young and inexperienced. When we arrived at the taxpayer's office, the taxpayer was seated at his desk. Displayed prominently behind him was a large rifle. My recollection is that there were also some bullets in a box along side it. The taxpayer, a relatively young man in his 30s, made no effort to reach for the gun, but he talked for about twenty minutes explaining how he was upset about the seizure and how he does not like to be upset. He said that we should have made more of an effort to work it out with him. He did not make any direct verbal threats either, but the message he sent was very unambiguous. I also believe that he wanted to see fear in our eyes.
The young revenue officer with me was a Puerto Rican national and he was scared. If the taxpayer wanted to see fear in our eyes, he saw it in the young revenue officer who spoke very rapidly and made an effort to agree with everything the taxpayer said. I am not sure if I showed fear in my eyes. I made an effort not to, but the situation was intimidating, to say the least. In the end, the taxpayer paid all the money he owed IRS. We reported the incident to our manager, but I don't believe that anything came of it. The taxpayer was too smart to make direct threats and not crazy enough to shoot us. Perhaps I was lucky.
In most situations, however, it is the taxpayer that feels intimidated and is caught off guard - especially if the revenue officer is accompanied by a large entourage. On one occasion when we seized a restaurant, I was accompanied by another revenue officer, the group manager and several armed special agents. As soon as we entered the premises I identified myself and told the manager that I was there to seize the premises. As I spoke to the manager the two special agents walked briskly behind the counter and searched the drawers for possible weapons. The manager and employees offered no resistance and followed our instructions.
If resistance is made, the revenue officers are instructed to make no effort to seize the assets forcefully and to withdraw. If the revenue officer is accosted physically, he is instructed to use such force as is necessary to defend himself. Any use or attempted use of physical violence is reported to the IRS' Inspection Service which then investigates the incident and, presumably, files a report for possible prosecution by the U.S. Attorney.
7. Contracting for Seizure Related Services
Most seizures require the assistance of private vendors. The seizure of a vehicle, for example, requires the services of a tow truck operator. The seizure of other personal property may require the services of a moving van. Any property physically carried away by the IRS must then be stored either at private or government warehousing facilities. If IRS wishes to seize the property of the taxpayer and finds that the premises are locked it will likely need the services of a locksmith who will either have to pick the lock or break it. Very often the IRS alerts the locksmith to be on standby in the event that they need his services. If the property is left on the premises of the taxpayer, the locksmith is then called to change the lock or otherwise secure the premises. If there is a danger of a break-in to the premises, the services of a private custodial service may be sought, either armed or unarmed.
8. Considering Other Steps to be Taken
The revenue officer may also have to consider a number of other issues before seizure. For example, the seizure may include perishable goods, such as food, or animals or pets that need to be cared for. The revenue officer must consider beforehand the provisions for their care and their disposition. I've had cases of pet stores and flower shops being seized, for example. In addition, some machinery may need special care or maintenance, such as a constant room temperature or regular maintenance. Offices with large computers, for example, may require the air conditioning to be maintained within several degrees. There is also a question as to whether the utilities, i.e.: gas, heat, water and electricity, should be turned off, especially during winter or summer months. If they are turned off, damage may occur. If they are not turned off, there is a question as to who must pay for their continued use. Liquor, firearms and drugs and medicine are controlled substances to a lesser or greater extent. If a liquor store, drug store or gun shop is seized, special precautions must be taken to safeguard and/or dispose of the property. [See IRM 56(16)0, et sec]
Which brings up the next issue. What does IRS do with the property after it is seized? Does it leave the property on the premises? Does it haul it away and store it somewhere? The answer is, it depends on the property and the circumstances. As we have already seen, the IRS almost always hauls away a seized vehicle and stores it in the garage or some government facility. In the case of real estate, there is no need to haul it away. The IRS could hardly haul it away even if it wanted to. In the case of personal property in a store, a business or a restaurant, the revenue officer must decide between leaving the property on the premises or hauling it away. If the store, business or restaurant will continue to operate after the seizure of the property, the IRS usually cannot allow it to remain there. It cannot guarantee the safety of the property if the business owner and/or the public continue to frequent the premises.
On the other hand, it is not likely in most circumstances that the store, business or restaurant will be able to continue the business as usual after the IRS has seized the property essential to its business operation. For example, if the IRS seizes the goods and inventory of a store, it has nothing left to sell. If it seizes the office furniture, machinery and equipment of a business it can rarely continue to function without them. And if it seizes the tables, chairs, oven, freezer food and silverware of a restaurant, the restaurant can hardly continue to have the premises open to the public.
Therefore, the IRS will usually leave the seized property on the premises and make arrangements with the landlord to allow the property to remain there until the IRS holds the sale. [See IRM 56(12)5.2(2)] Sometimes the rent has already been prepaid by the taxpayer until the end of the month and the landlord does not make any effort to collect any additional rent. Very often the landlord is not even aware of the seizure or, if he is, is not aware of his potential right to be compensated by the government for its use of the leased premises to store the seized property. [See Smith v. United States 458 F. 2d 1231 (9th Cir. 1972)]
What about padlocking the premises? If the IRS seizes the contents of a plant, for example, such as heavy machinery and equipment, can it just shut the business down by changing the locks on the door? That would take care of the problem of safeguarding the property. The alternative, hauling away the heavy machinery, is very tedious, time consuming and expensive. And since the business cannot usually operate after the seizure anyway, what would be the harm?
The answer is not that simple. If the premises are not owned by the taxpayer, the IRS cannot bar access to the landlord, especially if the rent has not been paid. The landlord may want to take possession of the premises. For that matter, the IRS does not seize the taxpayer's right to possession of the premises and, in theory, the taxpayer has every right to go onto the premises after the seizure. He may want to read his mail, answer his phone calls and even continue to conduct his business. In addition, the taxpayer may have subleased part of the premises to a third party. The IRS cannot bar access to the premises to an innocent third party that may have a separate business on the premises. [See IRM 56(12)5.1(14)]
However, the IRS is reluctant to allow free access to the taxpayer, the landlord or others. Short of posting an around-the-clock security guard, it cannot safeguard the property it has seized from vandalism, theft or other damage. Prior to G.M. Leasing v. United States life was a lot simpler for the IRS. The revenue officers routinely padlocked the premises and denied access to anyone without his/her consent and presence. In Guam, for example, I seized a large warehouse and padlocked all the doors. Items in storage, most of them belonging to third parties, were not accessible without my consent. Despite repeated calls from third parties, including the island's daily newspaper (which had huge rolls of paper in storage), I refused to release any property. In fact, I had posted an around-the-clock guard to make sure that no one attempted to take any property or vandalize it. (The value of that property may have been in the hundreds of thousands of dollars.) This put a lot of pressure on the taxpayer who, in fact, paid all the taxes due, including interest and penalties, within several days after the seizure.
Now it's a little more complicated. IRM 56(12)4.3(2) states, in relevant part, that, "Unless the real estate housing the seized assets has also been seized, neither padlocking nor placing seizure warning tags on the premises is appropriate." It encourages the revenue officer to make arrangements with the taxpayer or landlord for voluntary consent to change the locks or padlock the doors to give IRS sole possession of the premises. It does not discuss what the revenue officer should do if such consent is denied. The law is not clear in this area and the courts have not had an opportunity to establish clear guidelines. However, the taxpayers and/or landlords often make life easier for the IRS. Lacking knowledge of their rights, they routinely consent to give IRS exclusive possession of the premises.
If the real property is owned by the taxpayer, the answer is easier. The IRS may seize the building as well and then lock it up. However, it still cannot lock out any innocent tenants. Personal belongings of the taxpayer or its employees, incidentally, may be removed. Property belonging to third parties may also be removed by them, provided they have evidence of ownership. Even the books and records of the taxpayer may be removed. [See IRM 56(12)5.2(6)] Mail delivered to the premises is generally turned over to the taxpayer, though the revenue officer often seizes any checks payable to the taxpayer. This is somewhat of a tricky proposition. The revenue officer can seize the check if he can, first, determine that it IS a check and, second, do so WITHOUT opening the letter - which would technically be a violation of the Fourth Amendment. My recollection of those situations is that I felt somewhat like a peeping Tom whenever I had to do it. [See IRM 56(12)5.1(11)]
Is any property exempt from seizure?
All facetiousness aside, the IRS does have some limitations on its seizure powers. They are enumerated in Sec. 6334 of the IRC. IRC §6334(a) states, in relevant part, the following:
(a) ENUMERATION. - There shall be exempt from levy -
(1) WEARING APPAREL AND SCHOOL BOOKS. - Such items of wearing apparel and such school books as are necessary for the taxpayer or for members of his family;
(2) FUEL, PROVISIONS, FURNITURE, AND PERSONAL EFFECTS. - If the taxpayer is the head of a family, so much of the fuel, provisions, furniture, and personal effects in his household, and of the arms for personal use, livestock, and poultry of the taxpayer, as does not exceed $1,650 . . . in value;
(3) BOOKS AND TOOLS OF TRADE, BUSINESS, OR PROFESSION. - So many of the books and tools necessary for the trade, business, or profession of the taxpayer as do not exceed in the aggregate $1,100 . . . in value.
. . . . .
(5) UNDELIVERED MAIL. - Mail, addressed to any person, which has not been delivered to the addressee.
. . . . .
(13) PRINCIPAL RESIDENCE EXEMPT IN ABSENCE OF CERTAIN APPROVAL OR JEOPARDY. - Except to the extent provided in subsection (e), the principal residence of the taxpayer. . . .
Subsection (e) of Sec. 6334 states the following:
(e) LEVY ALLOWED ON PRINCIPAL RESIDENCE IN CASE OF
JEOPARDY OR CERTAIN APPROVAL. - Property described in subsection (a)(13) shall not be exempt from levy if -
(1) a district director or assistant district director of the Internal Revenue Service personally approves (in writing) the levy of such property, or
(2) the Secretary finds that the collection of tax is in jeopardy.
There is very little documentation on the above subsections of the IRC, either in the IRM, the Treasury Regulations or in case law, probably because the exemptions are so miniscule as to be rendered meaningless to the average taxpayer. Also, as a practical matter, IRS rarely seizes things like wearing apparel, school books, furniture and undelivered mail - not because IRS is somehow kind or altruistic but because the market for such items is limited and has very little monetary value. IRS' sales of even marketable things such as machinery and equipment yield very little; the proceeds from a sale of used furniture and clothing would approach the nonsensical. Although it should also be stated that IRS is not insensitive to the image such seizures would portray. While it wants to be portrayed as tough, it does not want to foster an image of heartlessness. Seizing used clothing and furniture from little old ladies is near the bottom of its list. That's why the seizure of furniture and other belongings from a taxpayer's residence cited at the beginning of the chapter was very unusual. However, the circumstances were a little unusual as well. First, the taxpayer was the owner of several manufacturing plants and, second, the amount of tax due was close to $1,000,000.00. Therefore it was not exactly like taking candy from a baby.
Both subsection (2) and subsection (3) have dollar limitations. Subsection (2) limits the exemption to $1,650.00, while the limit for subsection (3) is $1,100.00. In today's dollars these exemptions would not even be enough to maintain a family at the poverty level. (Both sections have been amended by the recent "Taxpayer Bill of Rights 2", signed into law by President Clinton in July, 1996. The dollar limits have been raised to $2,500.00 and $1,250.00 respectively and both have been indexed for inflation.)
The exemption for undelivered mail is a curious one. I suppose it exempts IRS from seizing a taxpayer's mail at the post office. As was shown above, however, the IRS does seize a taxpayer's mail that's been delivered to his mailbox. If the revenue officer thinks there is a check in the envelope made payable to the taxpayer, the revenue officer will open the envelope and endorse the check with IRS' seizure stamp.
Regarding the exemption from seizure of a personal residence, even that has a giant loophole. All the IRS has to do is get the district director or the assistant to approve it in writing. While I'm sure that the various district directors use this power advisedly, it's also true that Sec. 6334(e) does not put any limitations on the district directors as to when they should deny such seizure. It is purely a judgment call and such seizures are, in fact, approved in many instances.
© Tony Mankus, Mankus & Marchan, Ltd.
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