TAX ATTORNEY AND CPA

THOMAS F. DILULLO ESQ.

C.P.A., M.B.A., J.D., AND LL.M.

Specializing In Personal & Business Income Tax Law For Over 30 Years


Bank Levies

Part 5. Collecting Process

Chapter 11. Notice of Levy

Section 4. Bank Levies

5.11.4  Bank Levies

5.11.4.1 Holding Period
5.11.4.2 Bank Liaison
5.11.4.3 Amount that Must be Surrendered
5.11.4.4 Crediting Levy Payments
5.11.4.5 Income Deposited in a Bank Account
5.11.4.6 Mortgage Escrow Accounts
5.11.4.7 Schools' Bank Accounts
5.11.4.8 Reimbursing Bank Charges Because of Erroneous Levies
5.11.4.9 Deposit Secured Loans
5.11.4.10 Bank Compliance and the Levy Process
Exhibit 5.11.4-1 Department of Education Regional Offices
Exhibit 5.11.4-2 Pattern Letter 2179(P)
Exhibit 5.11.4-3 Pattern Letter 2180(P)

5.11.4.1  (07-26-2002)
Holding Period

  1. A bank must wait 21 calendar days after a levy is served before sending payment. Then, on the next business day, it must turn over the taxpayer's money. The depositor(s) can waive this waiting period. The bank will not send money that is subject to attachment or execution under judicial process. "Bank" includes credit unions, savings and loan associations, trust companies, and others described in IRC 408(n) and Treas. Reg. §301.6332–3(b).

  2. During the holding period, a levy might be released, or the amount owed could decrease.

    Note:

    If the bank receives no release, it must send the payment after the holding period. No additional notice is required.

  3. Consider the holding period when deciding how long to project the accruals on a bank levy.

5.11.4.2  (07-26-2002)
Bank Liaison

  1. The holding period was created to settle disputes about ownership of bank accounts before money is sent.

  2. Assign a bank liaison in each territory to settle these issues quickly.

  3. Sometimes ownership is not settled before the holding period ends. If this happens, ask the bank for more time.

5.11.4.3  (05-05-1998)
Amount that Must be Surrendered

  1. The bank must send the amount in the taxpayer's accounts. However, it must send no more than the amount shown on the notice of levy.

  2. The notice of levy only reaches the amount on deposit when the levy is received. Money deposited later is not surrendered, including deposits during the holding period. Another levy must be served to reach this money. Also, the levy only reaches deposits that have cleared and are available for the taxpayer to withdraw.

  3. Levy proceeds must not be reduced by any fee charged by the bank for processing the levy. See 5.11.4.3.3 below.

5.11.4.3.1  (05-05-1998)
Interest on Levy Proceeds

  1. The bank must turn over the interest earned on the account(s) during the holding period using the same method for figuring the interest it normally would. Even so, the amount paid is no more than the amount shown on the levy.

    If And Then
    A bank levy for $10,000 is served. The taxpayer has $5,000 in the bank. The bank sends $5,000 plus interest earned during the holding period.
    A bank levy for $10,000 is served. The taxpayer has $25,000 in the bank. The bank sends $10,000. No interest is sent. Only $10,000 is frozen during the holding period.
    A bank levy for $10,000 is served. The taxpayer has $9,999 in the bank. The bank sends $10,000 if at least $1 of interest is earned on the account during the holding period.
  2. The date the bank normally credits interest to accounts does not matter. If interest is earned, it must be paid over as shown in (3).

  3. To compute the interest, the bank treats the Service as though:

    • The Service is the depositor.

    • The money is left on deposit during the holding period.

    • On the day the money is being sent, the depositor closes the account.

5.11.4.3.2  (03-30-2001)
Bank Methods Used to Avoid Paying Interest

  1. Before interest was paid on levies, some banks:

    • Moved the levied money from the depositor's account to another account while the depositor was notified, and

    • Paid the depositor no interest while the money was in this "holding" account.

  2. Some banks have rules that they will not pay interest to depositors during holding periods for levies.

  3. Both of these methods result in changing the terms of the account and not treating the Service as the depositor because of the levy. These are not grounds to avoid paying interest on levy proceeds.

5.11.4.3.3  (05-05-1998)
Fees for Processing Levies

  1. Many banks charge their customers a fee for processing levies. The bank is not entitled to reduce the levy proceeds to collect the fee.

    If And Then
    A levy is served for $1000. The taxpayer has $1500 in the bank. The bank must send $1000 and collect its fee from the other $500.
    A levy is served for $1000. The taxpayer has $800 in the bank. The bank must send $800 (plus interest).
  2. Letter 4030(CG), Letter to Bank to Remit Service Charge, is available for use when you learn that the levy proceeds have been reduced by a processing fee. The letter informs the financial institution that a charge against levy proceeds is contrary to the provisions of the Internal Revenue Code and failure to remit an amount equal to the service charge may result in the Service filing a suit for failure to honor a levy.

5.11.4.4  (07-26-2002)
Crediting Levy Payments

  1. Credit the levy payment on the date it is received.

  2. Credit the money in the most advantageous way to the government. Generally, apply the money to the oldest assessment first. The taxpayer can not designate how the money is applied because this is not a voluntary payment.

  3. Use designated payment code (DPC) 05 for levy payments. Use DPC 15 for other payments caused by a levy if they are not levy proceeds.

    Example:

    A bank levy is served. When the taxpayer receives a copy, she pays the amount owed. Use DPC 15.

5.11.4.5  (03-01-2006)
Income Deposited in a Bank Account

  1. Part of taxpayer's income is exempt from levy. See IRM 5.11.5.4Exempt Amount. Once income is deposited in a bank, there is no exempt amount. On the other hand, unlike a levy on wages and salary, a bank levy is not continuous.

  2. When an entire paycheck is deposited, a hardship may exist because all of the money is levied. If this happens, release the levy in whole or in part, as appropriate, to avoid creating a hardship.

    Note:

    Within the Taxpayer Advocate Service (TAS), hardship can be defined as "economic" or "systemic." For more information regarding taxpayer hardships within TAS, please refer to IRM 13.1.7Taxpayer Advocate Case Processing. You may also refer to the Service Level Agreement Between the National Taxpayer Advocate and the Commissioner, Small Business/Self-Employed for instructions on working cases received from TAS.

5.11.4.6  (05-05-1998)
Mortgage Escrow Accounts

  1. Banks generally require a portion of property taxes and insurance to be paid with each mortgage payment. This is held in escrow until the tax and insurance are paid. As long as the taxpayer can not withdraw money in these accounts, a levy can notreach it.

  2. Sometimes the account is overpaid. The taxpayer may have the option to get this refunded. A levy can reach this.

  3. Also, when property is sold, there may be escrow money that will be refunded to the taxpayer. A levy can reach this, too.

5.11.4.7  (03-30-2001)
Schools' Bank Accounts

  1. Bank accounts may be levied to collect taxes that colleges, universities, and other schools owe. These schools' accounts may include money belonging to the Department of Education (ED). ED gives money to some schools for student aid. This is not the school's money.

  2. The bank might honor the levy. If it does, process the payment.

    1. Call the regional ED office, and tell them about the levy. See Exhibit 5.11.4–1. Mail a copy of the levy to the regional office.

    2. Allow ED 60 days to look into this and certify its interest in the money. Another time period can be agreed on, as well.

    3. ED will send a notice of the amount and nature of its money in the account. The letter will explain how it determined this.

    4. Refund ED's money.

  3. The bank might not honor the levy because of ED funds in the account.

    1. Call the regional ED office, and tell them about the levy. Mail a copy of the levy to the regional office.

    2. Allow ED at least 60 days to look into this.

    3. Release or enforce the levy after ED certifies its interest in the account.

  4. A bank might not honor a levy on a school official because of ED's interest in an account. Handle this as in (3).

5.11.4.8  (03-30-2001)
Reimbursing Bank Charges Because of Erroneous Levies

  1. Policy Statement P–5–39 says taxpayers will be reimbursed for bank charges caused by erroneous levies.

    • The Service must have caused the error.

    • Taxpayers must not have contributed to continuing or compounding the error.

    • Before the levy, taxpayers must have responded timely to contacts and given information requested to establish their position.

    Example:

    The taxpayer paid the amount owed, but the payment was not posted timely.

    Example:

    An installment agreement was secured, but it was not loaded on IDRS timely.

  2. Reimburse the taxpayer for fees the bank charged for

    • processing the levy and

    • bad check charges directly caused by the levy.

    Reminder:

    See IRM 3.17.10.8 for Reimbursement of Bank Charges Due to Service Loss or Misplacement of Taxpayer Checks

5.11.4.8.1  (03-30-2001)
Filing the Claim

  1. The claim must be filed within one year after the fees are charged.

  2. The claim is filed on Form 8546, Claim for Reimbursement.

    Note:

    The 2–93 revision of Form 8546 is obsolete.

5.11.4.8.2  (03-01-2006)
Processing the Claim

  1. Approving officials are shown in Servicewide Delegation Order Number 1–4. See IRM 1.2.40, Delegation of Authorities for Organization, Finance, and Management Activities.

  2. The approving official may ask for a memorandum to explain what happened. This may not be needed if

    • The case file is readily available.

    • An employee familiar with the case can orally brief the approving official.

    • The claim is too small to warrant a memorandum.

  3. A claim may be missing some of the required information. Rather than just rejecting it, try to get the missing information from the taxpayer.

    Example:

    Proof of the bank charges must be included with the claim.

  4. Area Counsel (General Legal Services) must review all claims and recommend:

    • approval

    • rejection

    • compromise.

5.11.4.8.3  (07-26-2002)
After the Claim is Approved

  1. If the amount that the taxpayer claims is approved, send Pattern Letter 2179(P), without the INSERTs, to the taxpayer. No voucher needs to be enclosed with this letter. Send Pattern Letter 2180(P) to the Financial Management Service (FMS), and enclose one copy of Form 8546 and one copy of FMS Form 197. Form 8546 needs to be sent, so FMS has a signed agreement from the taxpayer accepting the payment as settlement for the claim. See Exhibits 5.11.4-2 and -3.

  2. If the claim is approved for an amount that is different from what the taxpayer claimed, send Pattern Letter 2179(P), with the INSERTs, to the taxpayer. Enclose three copies of FMS Form 197 with this letter. This FMS form includes a place for the taxpayer to sign accepting the amount as settlement of the claim. Send Pattern Letter 2180(P) to FMS, and enclose one copy of Form 197 with it, after the signed copies are received from the taxpayer.

  3. The FMS forms are available at the web site — www.fms.treas.gov/judgefund. This site also contains instructions for following up on claims that have been sent for payment.

  4. If the claim will be paid by check, rather than electronic funds transfer, enter the taxpayer's address in the space on Form 197 for, "Agency/Office Mailing Address."

  5. Each Form 197 sent for payment must have a unique claim number. The number will be the first initial of the Business Operating Division that issues the number, then the Area Office Number, followed by the fiscal year (FY) the claim is approved and a sequential number.

    Example:

    The first claim approved in SBSE Area Office 02 during FY 2005 is S-02–2005–1.

  6. At the Area Director's discretion, claim numbers can be issued by each territory. If that is done, the territory number will be added after the Area Office Number, so each claim will have a unique number.

    Example:

    The first claim approved in Territory 01 of SBSE Area Office 02 during FY 2005 is S-02–01–2005–1.

5.11.4.9  (03-01-2006)
Deposit Secured Loans

  1. The Internal Revenue Restructuring and Reform Act of 1998 amended IRC § 6323(b)(10) to conform to current banking practices and procedures. The IRC provides a super-priority status for a financial institution as described in IRC sections 581 or 591 that takes a deposit, share, or other account, to the amount of the loan made by the institution, provided the following conditions exist,

    • The loan is made to a depositor;

    • The depositor pledged an account as collateral;

    • The institution making the loan and the institution holding the account are one and the same;

    • The financial institution had no actual knowledge of the lien; and

    • The loan is a commercial loan.

  2. If the lending institution did not have actual notice of the tax lien, then the super-priority status is valid against both the statutory lien and a filed notice of federal tax lien.

  3. Under previous banking procedures, the depositor surrendered the passbook to the bank, preventing the depositor from having access to the account until the loan was paid. The revised IRC section acknowledges that passbooks generally no longer are used for account control and provides lenders with additional security.

  4. Under new banking procedures, the bank is not required to have exclusive control over the deposit account as existed under previous procedures; therefore, the debtor may have access to funds in the account, but the bank retains a super-priority interest to the extent of the funds on deposit.

  5. Despite their similarity to checking accounts, cash management accounts held by a broker are specifically excluded from provisions relating to deposit secured loans.

  6. The bank's super-priority is not a defense to a levy. However, the levy can be released in whole or in part if the bank satisfactorily proves the bank meets the state requirement for having a security interest and alleges that it had no actual knowledge of the Federal Tax Lien when the loan was made. If the bank fails to honor the levy and does not prove the above points, then consider initiating a suit for failure to honor a levy.

5.11.4.10  (03-01-2006)
Bank Compliance and the Levy Process

  1. While banks may request all notices of levy by mail be sent to a centralized address, this does not mean a notice of levy cannot be served in person at a local branch or office. A notice of levy may be served in person upon a person authorized to accept receipt. The expectation is the authorized person will acknowledge receipt, immediately process the levy and freeze the affected accounts. If a bank employee refuses to accept service, leave the levy at the bank and inform the employee that the bank will be liable for all funds on deposit as of that date and time.

    Note:

    "Bank" includes credit unions, savings and loan associations, trust companies, and other entities described in IRC 408(n).

  2. If a levy has been served or is about to be served and the bank employee refuses to provide account balance information or other records as provided by IRC 6333, consider following up the levy with a summons for information to determine if the correct amount of levy proceeds were remitted. See IRM 25.5.2.4,Description of Information Requested. If a lesser amount was remitted, the bank will be liable for the difference. See IRM 5.17.4.12,Action to Enforce a Levy.

  3. A summons may also be used to obtain relevant information to determine if the bank did a thorough search for all accounts belonging to the taxpayer.

  4. When serving a notice of levy by certified mail, return receipt requested, the date of delivery on the receipt is considered the date the levy is made.

  5. When serving a notice of levy by regular mail, the date and time the authorized person signs the levy form is considered the date and time the levy is made.

  6. Collection Field function local management should attempt to resolve recurrent compliance problems with a local bank.

Exhibit 5.11.4-1  (03-01-2006)
Department of Education Regional Offices

(Reference 5.11.4.7)
 
Region I: CT, MA, ME, NH, RI, VT
Regional Director/Institutional Review Branch Chief
U. S. Department of Education
Federal Student Aid
Boston Regional Office
33 Arch Street, Suite 1008
Boston, MA 02110
(617) 289–0133
 
Region II: NJ, NY, PR, VI, Panama Canal Zone
Regional Director/Institutional Review Branch Chief
U. S. Department of Education
Federal Student Aid
32 Old Slip, 25th Floor
New York, New York 10005–3534
(646) 428–3750
 
Region III: DE, DC, MD, PA, VA, WV
Regional Director/Institutional Review Branch Chief
U. S. Department of Education
Federal Student Aid
The Wanamaker Building, Suite 511
100 Penn Square East
Philadelphia, PA 19107
(215) 656–6442
 
Region IV: AL, FL, GA, MS, NC, SC
Regional Director/Institutional Review Branch Chief
U. S. Department of Education
Federal Student Aid
61 Forsyth Street, SW
Room 18T, 20B
Atlanta, GA 30303
(404) 3562–6315
 
Region V: IL, MN, OH, WI
Regional Director/Institutional Review Branch Chief
U. S. Department of Education
Federal Student Aid
111 N. Canal Street
Room 830
Chicago, IL 60606
(312) 353–7111
 
Region VI: AR, LA, NM, OK, TX
Regional Director/Institutional Review Branch Chief
U. S. Department of Education
Federal Student Aid
1999 Bryan Street, Suite 14100
Dallas, TX 75201–6817
(214) 767–3811
 
Region VII: IA, KS, MO, NE, KY, TN
Regional Director/Institutional Review Branch Chief
U. S. Department of Education
Federal Student Aid
8930 Ward Parkway, Suite 2028
Kansas City, MO 64114–3392
(816) 268–0410
 
Region VIII: CO, MI, MT, ND, SD, UT, WY
Regional Director/Institutional Review Branch Chief
U.S. Department of Education
Federal Student Aid
1391 Speer Boulevard, Suite 800
Denver, CO 80204–3582
(303) 844–3677
 
Region IX: CA, AZ, NV, HI, the Pacific Islands of Guam, Micronesia, Marshall Islands, Northern Marianas, Palau, American Samoa
Regional Director/Institutional Review Branch Chief
U.S. Department of Education
Federal Student Aid
50 United Nations Plaza
Room 266
San Francisco, CA 04102
(415) 556–8382
 
Region X: AL, ID, IN, OR, WA
Regional Director/Institutional Review Branch Chief
U. S. Department of Education
Federal Student Aid
701 Fifth Avenue, Suite 1600
Seattle, WA 98174–1099
(206) 615–2594

Exhibit 5.11.4-2  (02-28-2001)
Pattern Letter 2179(P)

(Reference IRM 5.11.4.8.3)
  Date::
  Person to Contact:
  Contact Telephone No.:
  Employee Identification Number:
   
Dear [Name of Taxpayer]:
   
  We have received your claim under the Small Claims Act for $[amount] and are allowing $[amount] for reimbursement of bank charges.
   
  [Insert the following if the approved amount is different from what the taxpayer claimed."Please sign and date Section B on two copies of the enclosed voucher and return them in the enclosed envelope within ten days. The third copy is yours to keep." ] You should receive [Insert"a check" or"a deposit to your bank account by electronic funds transfer" ] in nine to twelve weeks.
   
  We regret our error and apologize for the inconvenience.
   
  If you have questions about this letter, please contact the person whose name and telephone number are shown above.
   
   
  Sincerely yours,
   
    
   
   
   
[Insert if Vouchers are Enclosed
"Enclosures:
Vouchers
Envelope" ]
 

Exhibit 5.11.4-3  (02-28-2001)
Pattern Letter 2180(P)

(Reference IRM 5.11.4.8.3)  
  Date:
  Person to Contact:
  Contact Telephone No.:
   
   
Judgment Fund Group
Department of the Treasury
Financial Management Service
Prince George's Metro Center 2
3700 East-West Highway Mailstop 6D37
Hyattsville, MD 20782
   
Dear Sir or Madam:
   
  Form 197 [Insert"is" or"and Form 8546 are" ] enclosed for payment. [Name of Claimant] has signed Form [Insert"197" or"8546" ] accepting $[ ] in settlement of a $[ ] claim filed against the IRS arising from bank fees.
   
  I have approved the voucher on behalf of the IRS Commissioner under the Small Claims Act.
   
  Please process the voucher for payment.
   
  Sincerely yours,
   
   
   
   
[Insert"Enclosure" or"Enclosures" ]:  
Voucher
["Form 8546" ]
 

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