The ERISA consultants at the Learning Center Resource Desk, which is available through Columbia Threadneedle Investments, regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with a financial advisor in Washington is representative of a common question regarding regarding IRS levies. The advisor asked:
“Does the IRS follow specific procedures with respect to levying retirement plan assets?”
Highlights of Discussion
- The IRS does have a process for levying retirement plan assets. The process is outlined in its Internal Revenue Manual (IRM) for tax collection agents under Part 5: Collecting Process > Chapter 11: Notice of Levy > Section 6: > Notice of Levy in Special Cases > Subsection 5.11.6.2: Funds in Pension or Retirement Plans. The manual clearly indicates that collection agents should explore all other means of satisfying the tax liability before levying retirement plan assets.
- In general, before the IRS can levy qualified retirement plan assets, IRAs or IRA-based plan assets, it must take the following steps. Please see the applicable section of the IRM for complete details.
Step 1: Determine what property, retirement assets and non-retirement assets, are available to collect the liability. If there is property other than retirement assets that can be used to collect the liability or if a payment agreement can be reached, consider these alternatives before issuing a levy on retirement accounts. Also consider the expense of pursuing other assets, as well as the amount to be collected.
Step 2: Determine whether the taxpayer’s conduct has been flagrant. If the taxpayer has not engaged in flagrant conduct, do not levy the retirement accounts. Deciding whether the taxpayer has engaged in flagrant conduct must be done on a case-by-case basis. Some examples of flagrant conduct include, but are not limited to, continuing to make contributions to retirement accounts while asserting an inability to pay an amount that is owed, tax evasion for tax debt or placing assets beyond the reach of the government.
Step 3: Determine whether the taxpayer depends on the money in the retirement account (or will in the near future) for necessary living expenses. If the taxpayer is dependent on the funds in the retirement account (or will be in the near future), do not levy the retirement account. Also consider any special circumstances in the taxpayer's specific situation, such as extraordinary expenses or additional sources of income that will be available to pay expenses during retirement.
- The manual also suggests the collection agent consider discussing the case with the Employee Plans Group before issuing the levy.
- A tax levy can only reach the taxpayer's present rights under the retirement plan. This means that the plan participant must be vested in the assets and have a distribution-triggering event under the terms of the plan that would allow him or her to withdraw the assets. IRA assets are always 100% vested and are distributable upon demand.
- The standard IRS tax levy forms do not address money in pension or retirement plans. Therefore, levying such assets requires the collection agent to obtain managerial approval and sign-off in order to proceed.
- When money is withdrawn from a retirement account, the taxpayer may be liable for income tax on the withdrawal. There is an exception to the early withdrawal penalty tax, however, for taxpayers younger than age 59? [IRC 72(t)(2)(A)vii].
Conclusion
While qualified retirement plan and IRA assets can be subject to IRS tax levies, collection agents must follow a specific procedure before such assets may be collected. For all intents and purposes, IRS collection agents are instructed to levy retirement plan assets only as a last resort.
The Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC (RLC), a third-party industry consultant that is not affiliated with Columbia Threadneedle. Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Columbia Threadneedle does not provide tax or legal advice. Consumers consult with their tax advisor or attorney regarding their specific situation.
Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Columbia Threadneedle.
Columbia Threadneedle Investments (Columbia Threadneedle) is the global brand name of the Columbia and Threadneedle group of companies.
©2015 Columbia Management Investment Advisers, LLC. Used with permission.
