31 Aug Release of IRS Lien/Levy due to hardship
IRC Sec. 6343(a)(1) provides that, if under regulations prescribed by the secretary, the secretary has determined that a levy is creating an economic hardship due to the financial condition of the taxpayer, the secretary must release all or a part of the taxpayer’s property or rights to property.
A levy creates an economic hardship due to the financial condition of a taxpayer and must be released if “satisfaction of the levy in whole or in part will cause an individual taxpayer to be unable to pay his or her reasonable basic living expenses.”
If a taxpayer fails to pay taxes within ten days after notice and demand, IRC Sec. 6331 authorizes the secretary to collect the tax by levy upon all property and rights to property belonging to the taxpayer or on which there is a lien for the payment of the tax. However, IRC Sec. 6343(a)(1) provides that if the secretary has determined that the levy would create an economic hardship due to the financial condition of the taxpayer, the secretary must release a levy upon all or part of a taxpayer’s property or rights to property. A levy creates an economic hardship if it causes an individual taxpayer to be unable to pay his or her reasonable basic living expenses.
A taxpayer alleging that a levy would create an economic hardship must submit complete and current financial data to enable the commissioner to evaluate the taxpayer’s qualification for collection alternatives. If a taxpayer makes a request for an administrative hearing, the taxpayer may raise any relevant issue including appropriate spousal defenses and may make offers of collection alternatives. After the hearing, the Appeals office then issues a notice of determination indicating whether the proposed levy may proceed.
The taxpayer may petition the Tax Court to review the determination made by the Appeals office. If the underlying tax liability is not at issue, the Tax Court can review the Appeals Office’s determinations for abuse of discretion.2
An abuse of discretion occurs if the Appeals Office exercises its discretion “arbitrarily, capriciously, or without sound basis in fact or law.”3
If a taxpayer establishes in a pre-levy collection hearing that the proposed levy would create an economic hardship, it would be unreasonable for the settlement officer to proceed with the levy which the code section would require the IRS to release.
In this case, the commissioner argued that there was no abuse of discretion because the taxpayer was not in compliance with the filing requirements for all required tax returns.
2 Goza v. Commissioner, 114 T.C. 176 (2000)
3 Woodral v. Commissioner, 112 T.C. 19, 23 (1999)