If you owe money to the IRS, the IRS is free to take enforced collection action against you, which can include placing a levy on your bank account or retirement account.
However, certain payments are somewhat protected by levy, including Social Security benefits. The IRS can levy on your Social Security benefits, but can only receive up to 15% of those payments. VA disability payments are statutorily exempt from levy.
The purpose of these laws is to protect taxpayers from irreparable injury if the government is not enjoined from levying on government benefits that the taxpayer relies upon for his maintenance and survival. But what if those benefits are deposited into a bank account?
Can the IRS levy on the entire benefit deposited into a taxpayer’s bank account even if the IRS is prohibited from levying on those government benefits before they are deposited into the bank account?
In the case of Maehr vs. IRS, the taxpayer’s VA disability benefits, which are statutorily exempt from levy, were deposited into his bank account. The IRS subsequently levied on his bank accounts and attempted to take all of his VA disability payments in his bank account. The Court of Appeals for the 10th Circuit remanded the case to the District Court to resolve the question as to whether the IRS improperly levied on the taxpayer’s exempt VA disability benefits by placing a levy on all of the funds in the bank account where his disability benefits were deposited.
Although the court did not express an opinion as to the resolution of this issue, it felt that this is an unresolved issue that should be dealt with by the District Court. Although the court remanded this issue to the District Court for further consideration, it dismissed the rest of Mr. Maehr’s arguments as legally frivolous.
In our experience, the IRS takes the position that exempt funds on which it is prohibited from levying are subject to levy in their entirety after being deposited into a bank account. We agree with Mr. Maehr’s argument that the IRS should be prohibited from levying on his VA disability benefits after they are deposited into his bank account. What do you think?
Has the IRS placed a levy on your bank or retirement account? Contact Chicago tax lawyer Patrick T. Sheehan & Associates today!
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