Originally published on Forbes.com Aug 27th, 2014
If the decision in a recent case against JPMorgan Chase stands, banks may be more inclined to be lickety-split when the IRS comes knocking with claims against a depositor’s money. I had a tough time deciding who to root for in this case, so maybe you can tell me what you think.
We start with James Waterman who reported $21,584 of adjusted gross income on his 2008 return while claiming a refund of $78,169, which he received in August of 2009. Shortly thereafter, the IRS determined that Mr. Waterman actually owed $92,770. Collection officer Ted Hanson was assigned to the case. The Office of Chief Counsel gave Mr. Hanson authority to issue a jeopardy levy. There is potential for quite a bit of process when the IRS proposes to just take your stuff in order to satisfy a tax liability. A jeopardy levy, which is called for when there are indications that the taxpayer might be moving assets out of harm’s way, is quickly effective without the issuance of a notice informing the taxpayer of the right to a collection due process hearing, which can slow matters to a snail’s pace.
At around 9:30 AM on September 9, 2009, Mr. Hanson visited Mr. Waterman to demand payment of the amount owed. Mr. Waterman did not pay so Mr. Hanson served him with a series of documents, including a notice that IRS intended to levy his bank account.
Race To The Bank?
Mr. Hanson then drove to the local Chase branch where Mr. Waterman had two accounts totaling $47,375.47. The jeopardy levy was served on one of Chase’s employees. Two hours later Mr. Waterman withdrew $40,000 from one of the accounts.
Chase was not in as much of a hurry as the other two players in the drama. Chase froze Mr. Waterman’s account two days later on September 11 and remitted the balance of $7,659.48, which included $0.32 of interest that had posted in the interim, to the IRS on October 1.
Who’s Responsible?
The thing about an IRS levy is that if you are holding somebody’s property and you fail to turn it over to the IRS, the IRS can get it from you. So the IRS is looking for Chase to make up the 40 grand that left the account two hours after it had notice of the levy. Chase thinks that the IRS is being a little unreasonable and that IRS bears some of the blame.
It turns out that because this was a jeopardy levy, the collection officer was not required to explicitly give notice to Mr. Waterman that he intended to levy his bank accounts. Mr. Hanson, the collection officer, did so anyway, perhaps prompting Waterman to withdraw the money before Chase had time to freeze the account.
The District Court indicated that Mr. Hanson telling Mr. Waterman about the levy was improper. It went on to note that there are only two defenses to the levy. One is that the entity being levied does not actually have anything that belongs to the taxpayer and the other is that there is a prior claim against the property.
Chase contended that it was entitled to a reasonable amount of time to react to the levy and that the IRS tipping Waterman off is what led to the loss. Chase’s argument did not go far with the judge.
The fact of the matter, though, is that the IRS was required to tip Waterman off no matter what. Even when jeopardy assessments are made, the IRS must provide notice of demand for immediate payment before any levy may be imposed. 26 U.S.C. § 6331(a). While this notice does not necessarily inform the taxpayer that bank accounts will soon be levied, it certainly lets them know that something is afoot.
Moreover, Section 6332 does not contain any reasonableness element that would delay the vesting of the United States’ interest in property under a bank’s control. The only requirement is that a bank “surrender any property … subject to levy” or risk being held liable for the disappearance of that property. 26 U.S.C. § 6332(d)(1). While it is true that the bank need not immediately “surrender” the property, it must upon being given notice preserve that property or run the risk of paying the depositor’s tax bill. That is the state of affairs here. Waterman’s money was “property … subject to levy,” the IRS agent served the bank with the levy giving it notice of the government’s claimed interest in the property, and Chase allowed it to slip away. Section 6332 is therefore applicable.
A Reminder Of The Bad Old Days
Back before Congress put significant restraints on IRS collection activities in the mid-nineties, I remember a period when they tried automating the collection process. It could be extremely painful as money was grabbed from people who did not really owe it. As I read collection due process cases, it strikes me that we may have gone a bit too far in the other direction as taxpayers seem to be able to stretch the process interminably. I don’t see a lot of jeopardy assessments, but it appears that banks are going to be under pressure now to act on them very quickly. You have to wonder how this case would have turned out if Mr. Hanson had beaten Mr. Waterman to the bank by two minutes instead of two hours. Clearly, though Chase had to respond much more quickly than two days.