IRS Liens and Levies
Many of us are only too familiar with the story of a friend or family
member who went to an ATM machine to take out some cash only to
discover that their balance had somehow dropped to "$0.00".
The IRS, without warning, had emptied their bank account. Others may
have had their weekly paycheck "attached" by the IRS.
Such individuals, in describing their intense feelings of anger and
frustration over the apparent outright theft of their personal property,
speak of having been "robbed", yet seemingly have no
In fact, there is recourse under the law for those Americans willing
to pursue their legal rights to their property - namely, their money,
the heard-earned fruits of their labor. The Internal Revenue
Code (Title 26) is the body of
law that contains the legal authority for the Secretary of the Treasury to
administer provisions pertaining to the collection of income taxes. It
is, however, not unusual for the Service to cite the Internal Revenue
Manual as their legal authority for various aspects of a collection
procedure. At least six Courts have now ruled that the Manual
is only "directory" in nature and that it does not
convey any such legal authority. The following article which
appeared in a recent issue of "Reasonable
Action", the membership newsletter of the Save-A-Patriot
Fellowship, will demonstrate how devastating such rulings are
to the IRS. It will also relate the specific effect that this
will have on agency employees who fail to recognize the limited nature of
their authority and other provisions pertaining to, for example, liens and levies.
It goes without saying that one of the most dreaded forms that any
person can receive from the IRS is the Form 668-W.
This form is the "Notice of Levy"
that is sent to third parties for the purpose of collecting taxes
that are allegedly owed. The legal authority for its use is
extremely limited, but since the general public is unaware of the
statutory provisions for "levying" upon the wages,
accrued salary, or other property of an individual, the legal impotence of
the IRS is unknown to them.
The reason is: when the form was designed, the
cite of authority that would reveal its limited application was
conveniently omitted - a cite that must, by law, accompany the notice.
But, then again, if the IRS actually cited the authority for
the levy on the form, it is doubtful they could coerce people into
honoring the levy. The individual who actually receives the "Notice of Levy"
is, of course, a third party [i.e., a bank manager]. But
rarely, if ever, does that third party realize the responsibility for
correctly determining that the validity of the levy is theirs. Nor
do they fully realize the importance of making a correct legal
determination, since an incorrect determination can lead to a personal
liability. Even worse, it could lead to a criminal charge called
"conversion of property."
The majority of people have little or no understanding of the law and
so they are not cognizant of the requisite statutory authority or its
limitations. As far as the "Notice of Levy"
is concerned, most people assume that the responsibility for these
determinations rests with the IRS. It naturally follows, in
their mind, that the IRS is then legally responsible for that "determination."
What they fail to consider, is that, since they are in possession of
the property, it is they who are ultimately responsible for any
determination having to do with its disposition, not
The agent who sends a levy is merely acting on the "presumption"
that the authority may be valid. If the agent was knowledgeable, it
might be considered unethical, but unless the agent had full knowledge of
all of the circumstances and the actual limitation of the authority in
question, his or her actions could be considered to be within the law.
It is easy for someone who is cognizant of the limitations to jump
to conclusions and assume that such action is illegal. Maybe it is,
but did the IRS agent ever suggest that the authority for the levy
was valid or applicable? Probably not! Nor did he or she
necessarily suggest that the property of the individual that was under the
control of the third party was "subject to levy."
For that matter, the agent was probably as ignorant of the law as
the third party who received the levy! It was not the agent's
responsibility to tell the third party that the levy was invalid
without the necessary court order, and more than likely, the agent
didn't even know that himself. Rather, because the third party
is in control of the property, it is their responsibility to know the law
and act in accordance with the law, or, if unfamiliar with the law, to
seek competent legal advice (assuming any can be found).
The bottom line is, were it not for the many parties involved and
the various legal aspects that seem to confuse the average attorney, it
would be impossible for the IRS to seize property under the guise of
collecting taxes. The question that most people ask is: who is
to blame? Is the agent at fault because his or her training was
incomplete? Was it their instructor's fault, or was the instructor
only doing what he or she was told? To a large degree the
"misperceptions" we've discussed result from ignorance
that has been perpetuated as much by natural processes as by any design,
and it has gone on for such a long time that no one is willing to admit
that they really can not explain why certain actions and procedural
anomalies (for which they may be responsible) seem to
conflict with the law. The best that any IRS employee can hope
to do, is pretend that they know what they're doing and hope that they can
convince everyone else that what they have been doing is proper and
lawful. Is the third party to blame? Perhaps, but then,
how can anyone expect the average person to understand these limitations
when the agents themselves do not understand?
The lawyers that are called upon to give legal advice concerning
levies have virtually no experience in tax law and end up calling the
very agents that were just mentioned because they don't know either.
Ironically, everyone seems to have a sincere desire to obey the law,
even many of the agents. They just refuse to believe that what
they've been doing for years is outside the law -- surely there must
be some other law that would permit them to continue doing things the way
they were told! Like the childrens' fairy tale about the
emperor who had no clothes, the people involved just can't believe their
own eyes. The lower level agents believe their supervisors wouldn't
lie to them, and the supervisors believe that what they have been told is
correct and on up the ladder it goes. In the case of the fairy tale
emperor, the people just couldn't believe that the emperor was really as
naked as their eyes would seem to suggest. After all, there must be
some other explanation. Surely he (or in this case the
average IRS agent) wasn't that gullible! The real problem
is that none of the authorities involved are willing to admit the
possibility that they are wrong. That would be dangerously close to
admitting that they had been needlessly destroying the lives of their
fellow countryman, and the more evidence that surfaces to prove or
disprove the various points in contention, the more obsessive the
bureaucrats desire to blindly, and without basis, insist otherwise.
The funny thing about a lie, is that, the more a person repeats it,
the greater the tendency there is to believe it. For some, the
misapplication of the income tax has been a nightmare, not a fairy tale,
but it has been perpetuated by what in some cases seem to be well meaning,
yes, bureaucrats. Consider former Commissioner
Shirley Peterson's recent speech at Southern Methodist
University. She blasted the income tax and said that it
must be done away with, echoing none other than former President
Jimmy Carter's own words when he said "the income tax
is a disgrace to the human race." It was once
difficult for us to believe that officials as high as Ms. Peterson
were capable of such gross ignorance of the law, but in a recent court
ordered interrogatory, she stated that "wages" and "salaries"
were clearly includable in "section 61(a)"
(gross income). We pointed out to the present
commissioner that not only were "wages" and "salaries"
not mentioned in the text of section 61,
which is Subtitle A, but that
they were by definition, strictly limited to Subtitle C.
Moreover, a person cannot even have what is legally defined as a
"wage" unless he has applied to participate in the
We added that: knowing she would not
deliberately lie to the court, her statements could only result from gross
ignorance of the law. That being the case, it may be that
even the highest level officials within the IRS may be under the
false impression that they are in compliance with the law (as hard
as that may be for some to believe). In the fairy tale,
you may recall, it was the innocent admission of a young boy who
pointed to the emperor and asked where his clothes were. The boy was
unconcerned with any potential fear of reprisal and his candid observation
"exposed" the bare truth for all to see. Of
course, everyone already knew that the royal rascal was buck naked
because they could see it with their own eyes. They were just
unwilling to admit it because they were afraid of what the emperor might
do. Everyone was astounded by the youngster's honesty and when
everyone began to admit the truth, the emperor had no choice but to
realize he had been rather foolish.
The binding psychological principle that is at work here is not
dissimilar with the authority, the misapplication, and the subsequent
"I'm just doing what I was told"
response that is usually received when government employees are confronted
with the facts in question. Pride, fear, and confusion do not allow
the ego-driven authoritarian (i.e. in this case, the professional bureaucrat)
to admit that they are wrong. To do so, would be to subject
themselves to the embarrassment and ridicule that would deflate the
ego-trip that is the driving force behind this type of individual, and to
admit to such utter negligence or ignorance is simply unthinkable. But
just like in the fairy tale, when everyone was forced to confront the
naked truth, the emperor had no recourse but to admit that he had
been the fool. So just how naked is the emperor?
THE AUTHORITY FOR THE LEVY
The authority to levy is restricted to and contained within Section
6331(a) of the Internal Revenue Code.
of Secretary. If any person liable to pay any tax
neglects or refuses to pay the same within 10 days after notice
and demand, it shall be lawful for the Secretary to collect such tax
(and such further sum as shall be sufficient to cover the
expenses of the levy) by levy upon all property and rights to property
(except such property as is exempt under section 6334)
belonging to such person or on which there is a lien provided in this
chapter for the payment of such tax. Levy
may be made upon the accrued salary or wages of any officer, employee,
or elected official, of the United States, the District
of Columbia, or any agency or instrumentality of the United States
or the District of Columbia, by serving a notice of levy on
the employer (as defined in section
3401(d)) of such officer, employee, or elected official).
If the Secretary makes a finding that the collection of such tax
is in jeopardy, notice and demand for immediate payment of such tax
may be made by the Secretary and, upon failure or refusal to pay such
tax, collection thereof by levy shall be lawful without regard to the
10-day period provided in this section. [Emphasis Added]
Section 6331 is the only authority
in the entire IR Code that provides for the levy of wages and
salaries etc., and the "limitation" of that
authority should be rather obvious since it pertains ONLY
to certain officers, employees, and elected officials of the
government and of course, their employer, the government.
MORAL RESPONSIBILITY VS. LEGAL
It could be said that the IRS has a moral responsibility, however, in
reality, there is a difference between a moral responsibility, and a legal
obligation. Therefore, ethical questions may be reduced to the
actual "intent" or the "frame of mind"
of any given agent who mistakenly exercises such authority. Certainly,
the IRS agent has a moral responsibility to refrain from misusing
authority, but if he or she is unaware of the limitations of that
authority, then technically, the actual legal obligation to make a correct
determination and accept that authority (if appropriate) or
not accept that authority (if inappropriate) remains that of
the third party.
It is equally important to understand that despite this ethical "loop hole"
which would seem to exonerate and provide an escape for an agent errantly
exercising a "presumed" authority, there are other
provisions that do hold him responsible for its administration. Specifically,
these provisions deal with what are called "delegation orders"
because no agent may administer a provision of law without a proper order
delegating such authority.
THE DELEGATION ORDER
The authority to "administer" the provisions of Section 6331,
regardless of its applicability, is further restricted by national and
local "delegation orders" designed to ensure agency
compliance with the limited application of the law.
As with all authority under the IR Code, it is the Secretary who
must administer the provisions for the levy or delegate the authority if
and when appropriate. The "delegation orders"
that do exist for liens and levies are remarkably limited. Interestingly,
the back of the levy form itself also shows a similar peculiarity.
On the 668-W levy form,
the authority listed includes 6331(b)
through 6331(e) but omits the
elusive 6331(a) which is the
actual authority for a levy and the Section upon which the others rely and
refer to. Why is it not cited on the form?
In the "delegation order," the remainder of the
cite references the "Internal Revenue Manual"
which is of course only "directive" in nature. Since
it is not the law, it cannot possibly convey actual legal authority.
It can only clarify, for the benefit of agents seeking to identify
such authority, what that authority is or how it is limited, and whether
they would be acting within their authority when administering its
provisions. A search of each "delegation order"
nationwide reveals that Section 6331(a)
has indeed been omitted from each and every one, but then again, if the
authority for the levy pertains only to government agencies within
the territories (which is what it actually says),
then it should certainly come as no surprise that "delegation orders"
pertaining to service centers and district offices
within the 50 states cannot authorize such a levy. If an agent
is puzzled by this, his only other source for clarification is the "Internal Revenue Manual."
THE INTERNAL REVENUE MANUAL
As long as there is some illusion of authority, it is easy for an IRS agent
to justify (in his or her own mind) that certain actions
are within the scope of their authority, and as mention previously, the
"delegation orders" do list another "authority,"
specifically the "IR Manual." But now that
research has revealed that at least 6 courts have ruled that the
Manual does not have the force of law, these agents are going to
have to swallow one more wake-up pill.
The courts have correctly ruled that the provisions of the "Internal Revenue Code"
are only "directory in nature" and NOT mandatory.
[See Lurhing v. Glotzbach,
304 F.2d 360 (4th Cir. 1962); Einhorn v. DeWitt,
618 F.2d 347 (5th Cir. 1980); and United States v. Goldstein,
342 F. Supp. 661 (E.D.N.Y. 1972)]. Courts have
also held that the provisions of the "Internal Revenue Manual"
are not mandatory and lack the force of law. [See Boulez v. C.I.R.,
810 F.2d 209 (D.C. Cir. 1987); United States v. Will,
671 F.2d 963, 967,(6th Cir. 1982)]. These
decisions are of course absolutely correct. The fact is, the Manual
may not be relied upon as the legal authority for any part of a
collection action. The only problem is, that leaves Section 6331(a),
as the sole authority for a levy, and as we've just seen, this Section is
rather severely limited. So it would seem that the awesome
nonjudicial collection powers of the IRS are not as awesome as some
IRS officials would like the public to believe. Or is it just
another case of the emperor deluding himself. Either way, it doesn't
end there! The "Notice and Demand" is another
nail in the coffin.
THE "NOTICE AND
The "nonjudicial" collection authority is wholly
dependent upon a statute (Section 6321)
which provides for a lien to automatically arise when a taxpayer fails to
make payment of a tax that is demanded via a "Notice and Demand"
under Section 6303. If such
"demand" is not, or cannot be made, then a lien cannot
automatically arise and subsequent collection activity cannot occur.
All of the available case law confirms this. In Linwood Blackstone et.al., v. United States
of America, (778 F.Supp 244 [D. Md. 1991]),
the Court held that:
"The general rule is that no tax lien arises until the IRS
makes a demand for payment.
"Without a valid notice and demand, there can be no tax
lien; without a tax lien, the IRS cannot levy against the
taxpayer's property ... this Court concludes, consistent with
the views expressed in Berman, Marvel,
and Chila that the appropriate
"sanction" against the IRS for its failure to
comply with the 6303(a) notice and demand
requirement is to take away its awesome nonjudicial collection
Myrick v. United States,
[62-1 USTC 9112],
296 F 2d 312 (5th Cir. 1961).
The Internal Revenue Code section 6303
is the law that requires a "Notice and Demand"
to be issued, however, the IRS does not issue such notices for
reasons which are beyond the scope of this article.
(a) General Rule ... the Secretary
shall ... give notice to each person liable for unpaid tax,
stating the amount and demanding payment thereof.
As evident from the Court case just mentioned, it would be, and is,
impossible for the IRS to move forward with the legal action
that is required by Section 7403
if they have not issued a "Notice and Demand."
The "Notice of Levy"
that is given to a third party, in most (if not all cases),
falsely states that a "Notice and Demand" has
been issued, but if the IRS errs by failing to issue the required
"Notice and Demand" pursuant to IRC 6303,
then they can not possibly obtain the necessary legal sanction through a
court of law to enforce the levy. Why? Because in
order to obtain the sanction of the court they would need to produce a
copy of the "Notice and Demand" that was
referenced on the levy form, and they can't do that if it doesn't
exist. If the IRS is unable to send the "Notice and Demand,"
then it naturally follows that it would be impossible to obtain the
necessary Court Order.
Throughout this explanation, it is important to keep in mind that no
single IRS official is necessarily guilty of fraud. It is more
accurate to say that the process itself is constructively fraudulent.
In other words, it is not necessarily intentional. Whether it
was designed with that in mind is not for us to say. It is
sufficient to explain that there are many IRS employees involved and
that the employee responsible for any given part of the "presumed correctness"
of any given action, rarely, if ever, has any communication with any of
the other employees who then act on those "presumptions."
Those who have worked in a typical busy office environment know that
the responsibility for getting things done often falls to a low level
employee who is trying to do the work of 10 people. The
shortcuts they teach their fellow workers are not necessarily in the best
interest of their employer but since they are unfamiliar with the details
of their companies inner workings, the reason that it is a detriment
is beyond their understanding. Of course, if there is no economic
detriment to their actions, the likelihood that their ingenious "procedure"
will be corrected by a superior is slim.
When new employees are hired, they learn the same defective way
of doing things. The government is more prone to this situation than
any business in the private sector because its employees are
generally less productive. In the situation we are examining, the
law is written to protect people from these inadvertent "shortcuts"
made by lower level employees, and that is why a Court Order is
necessary to affect levy.
COURT ORDER NECESSARY
Page 57(16) of the Internal Revenue Manual
entitled "Legal Reference Guide for
Revenue Officers" confirms (in the upper
right hand corner of the page) that a Court Order (warrant of distraint)
is necessary. We say "confirms" because the Manual
is merely referring to established principles of law, it is not in and off
itself the law that requires it. Moreover, the IR Manual
shows that the IRS even agrees with those established principles and
encourages their agents to abide by those principles by citing the
authority of United States v. O' Dell
which says that a proper levy against amounts held as due and owing by
employers, banks, stockbrokers, etc., must issue from a warrant of distraint
(Court Order) and not by mere notice. The O'Dell Court
specifically stated that:
"The method of accomplishing a levy ...
is the issuing of warrants of distraint ..."
and that the Internal Revenue Service must also serve
"... with the notice of levy, [a] copy of
the warrants of distraint and [the] notice of lien."
The court emphasized that the
"... Levy is not effected by mere notice."
Agents who bother to read the Manual know that the "warrant of distraint"
mentioned above, is the Court Order which is required pursuant
to IRC 7403.
IRC 7403 - Action to enforce lien or to
subject property to payment of tax
(c) Adjudication and decree: The
court shall, after the parties have been duly notified of the action,
proceed to adjudicate all matters involved therein and finally
determine the merits of all claims to and liens upon the property.
In a more recent decision involving the tax indebtedness of Stephens Equipment Co., Inc., debtor,"
(54 BR, 626 [D.C. 1985]), the court said:
"The role of the district court in issuing an order for
the seizure of property in satisfaction of tax indebtedness is
substantially similar to the court's role in issuing a criminal
search warrant. In either case, there must be a sufficient
showing of probable cause."
More importantly, the court held that in order to substantiate such an
Order, the IRS must present the court with certain validation. The
court stated that
"... to effect a levy on the taxpayer's property [an Order]
must contain specific facts providing the following information:
- An assessment of tax has been made against the taxpayer,
including the date on which the assessment was made, the amount of
the assessment, and the taxable period for which the assessment
- Notice and demand have been properly made, including the date
of such notice and demand and the manner in which notice was given
and demand made;
- The taxpayer has neglected or refused to pay said assessment
within ten days after notice and demand; ...
- Property, subject to seizure and particularly described
presently exists at the premises sought to be searched and that
said property either belongs to the taxpayer or is property upon
which a lien exists for the payment of the taxes; and
- Facts establishing that probable cause exists to believe that
the taxpayer is liable for the tax assessed.
Is it any wonder that the IRS cannot seek a Court Order? Nevertheless,
the "Court Order" is a statutory requirement for the
levy procedure because it establishes the validity of the IRS's claim
to the third party to whom the levy is presented. Proper
procedures assure the third party that the lien and subsequent levy
have been executed in a lawful manner. The "Court Order"
also protects the third party from a liability which may arise under C.F.R. 26
(Code of Federal Regulations) 301.6332-1(c)
which states in part:
"... Any person who mistakenly surrenders to the United States
property or rights to property not properly subject to levy [i.e., the
bank manager] is not relieved from liability to a third party
who owns the property ..."
And, the Court Order prevents some agent from taking a "shortcut"
as previously discussed. These details were brought to the attention
of a corporation who had received a "Notice of Levy"
on one its employees by the Fellowship's National
Worker's Rights Committee (NWRC).
The NWRC not only wrote to the employer, but in a
telephone conversation, one of our paralegals explained the limited nature
of the authority of Section 6331(a).
The president of the corporation was amazed and wrote to the IRS agent
who had issued the levy to inform him that they were not a federal "employer"
as mentioned within that Section and that they could not honor a levy
without proper authority. The agent began to harass the president of
the corporation by paying a visit to each of his neighbors but the
president would not budge. Instead, the president of the corporation
informed the agent that if he did not stop harassing him, he would sue the
agent, whereupon, the agent backed off.
It is amazing what happens when people insist that the IRS obey
the law, but what is more amazing is that more and more people are doing
this each and every day and the political pressure is now
becoming impossible for the IRS to ignore. According to
former Commissioner Shirley Peterson
in a speech before the National Association
of Enrolled Agents in Nevada, on August 26, 1993,
as of this year, 1 in 5 people have now stopped filing and the
situation is out of control. We would say just the opposite -
it is finally becoming controllable because the public seems to have
developed the will to know the law and confine the IRS within the law.
In this article we have reviewed the nature of, confusion surrounding,
and authority for the levy. We have examined it in light of its
application, the pertinent "Delegation Orders," the
missing "Notice and Demand" that is the
cornerstone of the process leading up to the lien/levy procedure, and
we have shown why the IRS may not obtain the necessary "Court Order"
without it. And finally, we have given an example of what happens
when a third party becomes knowledgeable enough to insist that the IRS
obey the law.
If we have been incorrect by assuming that high ranking IRS officials
know they are in violation of the law, then perhaps former Commissioner Shirley Peterson
summed it up best in her speech at Southern Methodist University
when she quoted former President Warren G. Harding
"I can't make a damn thing out of this tax problem. I
listen to one side and they seem right, and then ... I listen to
the other side and they seem right ... . I know
somewhere there is a book that will give me the truth, but I couldn't
read the book. I know somewhere there is an economist who knows
the truth, but I don't know where to find him and haven't the sense to
know him and trust him when I find him ... What a job!"
Warren G. Harding
reported in Joseph R. Conlin's,
"The Morrow Book of Quotations in American History"
and quoted in David F. Bradford's,
"Untangling the Income Tax".
Officials, like former Commissioner Peterson,
may feel the same way. However, regardless of whether Ms. Peterson
is correct or incorrect, she is at least far sighted enough to see
what will happen in the next few years if the government does not do
something. If they can't or won't reign in the ropes on IRS employees
who refuse to obey the letter of the law, then perhaps doing away with the
law is the only answer.
Public sentiment against the income tax, those who administer its
provisions, and government in general (for not addressing the problem)
has become so overwhelming that even the highest ranking officials within
the IRS are looking for a way to get off the sinking ship.
They know the situation is out of control. Ms.
Peterson's speech is just one of many that will echo the same
sentiments. No man's conscience would allow such a thing to
The limitation pertaining to the authority to levy that was examined
in this article is just one minor puzzle that they can't explain per
their own errant understanding of the law, and it is one more chink in the
armor of those who would ignorantly or intentionally misapply the law.
The only alternative is for the IRS to bow out gracefully
and support plans for an alternative system of taxation, and in case you
haven't heard, that is exactly what they are doing.