Along with tax penalties and tax lien filings, the IRS’s ability to seize a taxpayer’s property is one of its most potent weapons to encourage tax compliance. That is, in part, what makes a recent report from the Treasury Inspector General for Tax Administration (“TIGTA”) on IRS property seizures particularly troubling.
Among other things, TIGTA’s review indicated that it found a number of violations in IRS seizure procedures. Its report detailed that:
TIGTA identified instances in which the IRS did not comply with a particular Internal Revenue Code section, an internal procedure, or there was no guidance present, resulting in violations of taxpayers’ rights and taxpayer burden. Errors identified were related to Collection Due Process rights, nonjudicial sale notices, and property valuations.
TIGTA Report, Review of Compliance With Legal Guidelines When Conducting Seizures of Taxpayers’ Property.
TIGTA’s findings underscore the need for competent legal counsel when facing a potential IRS levy or seizure. Often, a knowledgeable tax attorney can prevent an imminent IRS seizure, and may be able to craft a long-term resolution to a tax problem that avoids a seizure altogether. And where the IRS engages in an improper seizure, such as those at issue in the TIGTA report, the law provides potential recourse.
Freeman Law is experienced in navigating the IRS seizure laws. Indeed, Freeman Law is at the forefront of the issues, fighting for and protecting its clients’ rights. In a recent high-profile case, Freeman Law took on and sued the IRS/government and recovered against the IRS for its violations in a wrongful seizure. As the Dallas Morning News’s coverage of the case reported, in that case the IRS had seized more than 1,600 bridal gowns from a mom-and-pop bridal salon in Dallas, Texas on the premise that the inventory was “perishable goods” that was subject to seizure and immediate sale. The case received extensive media attention and coverage. (See, e.g., Fox news coverage, Feds Getting Sued for Improper IRS Seizure, IRS Wipes Out Elderly Couple’s Dress Shop).
Freeman Law filed a Complaint in federal district court, a copy of which is available here, setting out the following summary of the case:
Tony and Mii’s, Inc. (a.k.a Mii’s, Inc. or Mii’s Bridal Salon; referred to herein as “Mii’s”), Tony Thangsongcharoen, and Somnuek Thangsongcharoen, by and through their undersigned counsel, file this Original Complaint against the United States of America (“Defendant”), and allege as follows:
- This is an action under 26 U.S.C. §§ 7433 and 7426 for damages resulting from the reckless, intentional, and/or negligent disregard of the Internal Revenue Code (I.R.C.) and governing Regulations by officers, agents and/or employees of the Internal Revenue Service (“IRS”).
- Following a directive from a supervisory IRS officer to “shut down this failing business [Mii’s],” IRS agents wrongfully classified a stock of more than 1,600 designer bridal gowns as “perishable goods” and invoked a streamlined seizure and sale process designed for perishable goods—not designer dresses—in order to avoid complying with statutorily-prescribed safeguards (like posting public notice and waiting a required period of time) that normally govern such sales. Despite the fact that IRS agents had initially performed a physical inspection of the inventory, valuing it at over $615,000 (and documenting a possible value above $1 million) and characterizing the entire stock as in “new and . . . good condition,” IRS agents subsequently engaged in a bad faith effort to lower its value for internal purposes to $6,000 (less than 1% of the IRS’s initially documented valuation), in order to support its decision to institute a perishable goods procedure.
- Armed agents then seized the inventory from Mii’s owners, an elderly and feeble immigrant couple from Thailand, and sold and liquidated the entire stock within four hours. The lead agent brought four children to join the armed agents and tag along during the entire process. Remarkably, seizing agents bid on and purchased property during the sale. They also knowingly seized a war veteran’s uniform hat that did not belong to Mii’s and numerous items that were clearly outside of the scope of the items in the wrongfully obtained order granting entry onto the premises. Unfortunately, the small tax debt at issue turned out not to even be owed in the first place. And shortly after the traumatic incident, and as a direct result thereof, Tony, Mii’s president, was forced to undergo a quadruple bypass surgery, effectively ending his ability to lead Mii’s into recovery. The couple, Tony and Somnuek, were left destitute—everything that they had built since immigrating to the United States and beginning their business in 1983 wiped out before their very eyes.
- Under 26 U.S.C. § 7433, if any officer or employee of the IRS recklessly or intentionally, or by reason of negligence, disregards any provision or regulation under Title 26 in connection with the collection of federal tax with respect to a taxpayer, such taxpayer may bring a civil action for damages against the United States.
- Under 26 U.S.C. § 7426, if the IRS wrongfully levied on property or wrongfully sold property pursuant to a levy, any person claiming an interest in such property may bring a civil action against the United States.
Predictably, the government responded forcefully to the Complaint, arguing that the plaintiffs were not entitled to a jury trial. Freeman Law, however, argued that a jury trial was indeed appropriate. (See Freeman Law Brief, here). Throughout the proceedings, Freeman Law took depositions of several IRS employees (examples are available here and here), and took the deposition of the IRS’s expert witness (available here). Freeman Law also took the unorthodox, but ultimately wise, strategy of allowing certain members of the press to attend deposition proceedings, which led to several court filings (such as here) regarding the press’ position that First Amendment rights warranted their attendance. Ultimately, Freeman Law successfully recovered on behalf of their client as a result of the government’s seizure.
IRS Seizures and Collection Notices
The collection of unpaid tax by the Internal Revenue Service (IRS) generally begins with collection notices, after which the case will usually be assigned either to the IRS’s Automated Collection System, Field Collection, or Collection Queue. Taxpayers may have an opportunity to seek an installment agreement, offer in compromise, or other alternative. Eventually, the IRS may seek to seize the taxpayer’s property to satisfy the outstanding tax obligation.
Taking a taxpayer’s property for unpaid tax is commonly referred to as a seizure. To ensure that taxpayers’ rights are protected, the IRS Restructuring and Reform Act of 1998 amended the seizure provisions in Internal Revenue Code Sections 6330 through 6344. These provisions govern many aspects of the seizure process, from notification of the taxpayer through sale or redemption of the property.
Taxpayers have a statutory right to a Collection Due Process hearing on the first issuance of a Notice of Intent to Levy on a delinquent account, pursuant to Internal Revenue Code Section 6330, as well as upon the first Notice of Federal Tax Lien, pursuant to Section 6320. Taxpayers additionally have certain administrative rights, such as an appeal through the IRS’s Collection Appeal Program.
Below is a summary of the primary statutory provisions governing IRS seizures:
I.R.C. § 6330
Requires the IRS to issue the taxpayer a notice of his or her right to a hearing prior to any seizure action. The notice must be: 1) given in person, 2) left at the taxpayer’s home or business, or 3) mailed as certified–return receipt requested no fewer than 30 calendar days before the day of the first levy. The notice must explain in simple terms: 1) the amount owed, 2) the right to request a hearing during the 30-calendar-day period, and 3) the proposed action by the IRS and the taxpayer’s rights with respect to such action.
The statute of limitations for collection is suspended from the time a taxpayer requests a hearing and while such hearings and appeals are pending, except when the underlying tax liability is not at issue in the appeal and the court determines that the IRS has shown good cause not to suspend the seizure. No limitation period may expire before 90 calendar days after a final determination. These procedures do not apply if the collection of tax is in jeopardy.
I.R.C. § 6331
Authorizes the IRS to seize a taxpayer’s property for unpaid tax after sending the taxpayer a 30-calendar-day notice of intent to levy. This section also prohibits seizure: 1) during a pending suit for the refund of any payment of a divisible tax, 2) before a thorough investigation of the status of any property subject to seizure, or 3) while either an OIC or an installment agreement is being evaluated and, if necessary, for 30 additional calendar days during which the taxpayer may appeal the rejection of the OIC or installment agreement.
I.R.C. § 6332
Requires that the third party in possession of property subject to seizure surrender such property when a levy notice is received. It contains sanctions against third parties who do not surrender such property when a levy notice is received.
I.R.C. § 6333
requires that the third party with control of books or records containing evidence or statements relating to property subject to seizure exhibit such books or records to the IRS when a levy notice is received.
I.R.C. § 6334
Enumerates property exempt from seizure. The exemption amounts are adjusted each year and include $9,200 in fuel, provisions, furniture, and personal effects and $4,600 in books and tools necessary for business purposes for Calendar Year 2017. For Calendar Year 2018, the amounts are $9,380 for fuel, provisions, etc., and $4,690 for books and tools of a trade. Also, any primary residence, not just the taxpayer’s, is exempt from seizure when the amount owed is $5,000 or less other than real property which is rented. Seizure of the taxpayer’s principal residence is allowed only with the approval of a U.S. District Court judge or magistrate. Property used in the individual taxpayer’s business is exempt except with written approval of the Area Director, and the seizure may only be approved if other assets are not sufficient to pay the liability.
I.R.C. § 6335
Contains procedures for the sale of seized property. Notice must be given to the taxpayer; the property must be advertised in the county newspaper or posted at the nearest U.S. Postal Service office; and such notices shall specify the time, place, manner, and conditions of sale. This section requires that the property be sold no fewer than 10 calendar days or no more than 40 calendar days from the time of giving public notice. Finally, this section expressly prohibits selling seized property for less than the minimum bid.
I.R.C. § 6336
contains procedures for the accelerated disposition of perishable property. This is property such as fresh food products or any property that requires prohibitive expenses to maintain during the normal sale time period. The property may either be sold quickly or returned to the taxpayer in exchange for payment of a bond.
I.R.C. § 6337
allows the taxpayer to redeem seized property prior to sale by paying the amount due plus the expenses of the seizure. It also allows a taxpayer to redeem real property within 180 calendar days of the sale by paying the successful bidder the purchase price plus 20 percent per annum interest.
I.R.C. § 6338
requires that the IRS give purchasers of seized property a certificate of sale upon full payment of the purchase price. This includes issuing a deed to real property after expiration of the 180-calendar-day period required by I.R.C. § 6337. The deed is exchanged for the certificate of sale issued at the time of the sale.
I.R.C. § 6339
provides the legal effect of the certificate of sale for personal property and the transfer deed for real property.
I.R.C. § 6340
Requires that each Area Office keep a record of all sales of seized property. This record must include the tax for which such sale was made, the dates of seizure and sale, the name of the party assessed, all proceedings in making such sale, the amount of expenses, the names of the purchasers, and the date of the deed or certificate of sale of personal property. The taxpayer will be furnished: 1) the previous listed information except for the purchasers’ names, 2) the amount of such sale applied to the taxpayer’s liability, and 3) the remaining balance of such liability.
I.R.C. § 6341
Allows expenses for all seizure and sale cases.
I.R.C. § 6342
Enumerates how the proceeds of a seizure and sale are to be applied to a taxpayer’s account. Proceeds are applied first to the expenses of the seizure and sale proceedings. Any remainder is then applied to the taxpayer’s liability.
I.R.C. § 6343
Outlines various conditions under which a seizure may be released and property returned to the taxpayer. These conditions include full payment of the liability, determination of a wrongful seizure, levy is creating an economic hardship due to the financial condition of the taxpayer, etc. This section allows a consent agreement between the United States and either the taxpayer or the National Taxpayer Advocate when the return of seized property would be in the taxpayer’s best interest.
I.R.C. § 6344
Contains cross-references for I.R.C. §§ 6330 through 6344.
I.R.C. § 6622
Requires when computing the amount of any interest required to be paid under Title 26 or §§ 1961(c)(1) or 2411 of Title 28, United States Code, that the interest amount will be compounded daily.
Public Law Number 105-206 (IRS Restructuring and Reform Act of 1998) § 3421
Requires the IRS to employ a supervisory review of seizures before action is taken.
Public Law Number 105-206 (IRS Restructuring and Reform Act of 1998) § 3443
Required the IRS to implement a uniform asset disposal mechanism by July 22, 2000, for sales of seized property under I.R.C. § 6335. This mechanism was designed to remove revenue officers from participating in the sales of seized assets.