As an employer, you may find yourself in the unpleasant position of having to withhold and turn over money from an employee's wages in response to a garnishment or levy. In some cases, the employee may challenge your right to do so. However, as a recent Texas district court case reaffirms, you can not be successfully sued by an employee for complying with an IRS levy, even if the levy was wrongfully issued.
Steps in IRS collection process
If a person fails to pay taxes, the IRS has the authority to take various actions to collect the money owed. If the taxpayer ignores requests for payment, issuing a tax lien on the person's real and personal property (and rights to property) is the first step in the collection process. However, a lien merely gives the IRS an interest in the property; this is far different from having the money in hand. Thus, the IRS generally takes additional measures to collect the tax debt. An administrative levy is one of the techniques that is often used.
A levy gives the government the right to actually seize the delinquent taxpayer's property. When the property is held by someone else -- in a bank account or as wages -- the IRS issues a notice of levy to the person (or entity) holding the property. The notice of levy creates a custodial relationship between the IRS and the person holding the property (the custodian). Rather than holding the money for the delinquent taxpayer, the custodian now holds the property for the IRS and must surrender all non-exempt property to the IRS. No court order (state or federal) is necessary for an administrative levy to be effective; simply receiving the notice of levy creates the obligation to turn over the funds to the IRS.
In Publication 1494, the IRS provides a table that can be used to determine what are non-exempt wages.
Impact on the employer
If you receive a notice of levy on the wages of an employee, you don't have any choice about obeying. Federal law requires that you comply with a notice of levy from the IRS. You must withhold all non-exempt amounts and must turn those amounts over to the IRS.
If you fail or refuse to surrender property or rights to property subject to levy, you become liable for the amount of property (or property rights) that you did not surrender. Even worse, unless you have reasonable cause for the failure, you can be hit with a penalty of 50 percent of that sum. So, if you were supposed to withhold and surrender $500, but you simply didn't do so, you will owe the IRS $500 plus an additional $250.
Needless to say, honoring an IRS levy can put you in a difficult position with the employee, who may be convinced that the IRS has no right to his or her money. Fortunately, the Internal Revenue Code provides you with immunity from liability to the employee because you honored the levy. You receive this protection whether or not the levy was validly imposed. This means that, even if your employee successfully fights the tax debt underlying the levy, you are still protected from liability for withholding money while the levy was in effect.