Ask The EDD Lawyer – If I Owe The IRS Or EDD, Can They Take My IRA? And If They Do, Am I Taxed On What They Take?
By Robert S. Schriebman
2017
Introduction
Taxpayers who owe the IRS, FTB and EDD worry. They worry about their ability to pay, they worry about when and if the taxman will find them, and they worry about levies and seizures. When it comes to enforced collection action, the usual route the tax collector will take is to file a tax lien, levy a bank account, and garnish wages. It is very rare these days for a collector to seize a taxpayer’s vehicle and rarer still to seize a taxpayer’s residence.
As a long standing policy, the EDD will not take a taxpayer’s home unless that taxpayer is a high profile violator such as a drug dealer or celebrity. I have never seen a case where the EDD has taken a taxpayer’s vehicle. Unlike the IRS, the EDD and the FTB can place a “keeper” on the taxpayer’s business premises to collect monies as they come through the door.
What about the seizure of a taxpayer’s public or private retirement account? Does the IRS take a taxpayer’s IRA? This is a very rare occurrence, but it did happen in the recent case of Joel David Joseph v. Commissioner of Internal Revenue US Court of Appeals, Ninth Circuit, 2017-1 U.S.T.C 50, 250 (May 31, 2017).
Can the Taxman Take My IRA?
The rights of creditors, whether they be the IRS, FTB or EDD, depend upon state laws. California has laws exempting many assets from the claims of creditors. When it comes to retirement plans and the rights of creditors, the rules are found in the Code of Civil Procedure and specifically sections 704.010-704.210. With regard to private retirement plans including profit sharing plans, pension plans, self-employed retirement plans and individual retirement annuities or accounts, the rules are found at section 704.115.
Putting it in its most simplistic manner, these retirement plans are exempt from the claims of creditors. Generally speaking, a creditor can only get or attach what is currently available to the plan beneficiary. For example, if taxpayer A is the beneficiary of a retirement plan, and the plan benefits are only available to him at age 59, a creditor cannot attach A’s benefits until he attains the age of 59 and thereafter. If A is only 40 years old when he owes the EDD or IRS, the taxman cannot get a dime from the retirement plan regardless if there is more than enough money to pay off the tax debt. If on the other hand, A is 65 and owes taxes, the IRS or the EDD has a right to claim every dollar currently available to A to pay all or part of the tax bill. It is all about age and the availability of benefits at a specific age.
The taxman can only seize what a retirement plan beneficiary has a current right to receive. If the IRS or EDD can successfully seize retirement plan benefits, and take them by force, is a taxpayer subject to income taxes on what is taken by enforced collection? Let us take a look at the case of Joel David Joseph.
The Case of Joel David Joseph
Joel David Joseph (Joel) owed the IRS for the years 2002 through 2007. In 2010, because he did not pay his back taxes, the IRS levied on his IRA account and took out the amount of $152,000. The Court did not discuss the issue of whether or not the IRS was legally within its rights to make the seizure. In this respect, the decision is unclear and is open to speculation. Apparently Joel had an opportunity to raise this issue in a collection due process hearing (CDP), but did not do so.
As if to pour salt on an open wound, not only did the IRS take $152,000 from his IRA, they assessed him almost $40,000 in additional taxes in 2010 for failing to report additional unreported IRA distributions, and the IRS also assessed him an $8,000 accuracy related negligence penalty pursuant to IRC § 6662(a). I am sure that the FTB issued a “me too” assessment against Joel. WOW!
Must Joel Pay Federal and State Income Taxes On The Seized IRA Proceeds?
During the Court hearing, Joel did not raise the issue of whether or not the IRS made a legal seizure of his IRA. He did argue that he should not have to pay income taxes from monies taken by enforced collection. After all he did not voluntarily takeout the $152,000.
The Court held that amounts levied by the IRS from Joel’s IRA, to pay his tax liabilities are includable in gross income and subject to both federal and state income taxes. See IRC § 61(a) and Larotonda v. Commissioner 89 T.C. 287, 291 (1987).
The Court also affirmed the $8,000 negligence penalty.
Conclusion
Everything that happened to Joel was legal and within proper IRS procedures. Joel was lucky if he had any money at all remaining in his IRA. We learned from this case that IRA and retirement benefits generally can indeed be a target for tax collection. We have also learned that even monies taken by enforced collection action are taxable and can carry harsh additional penalties.
Why did this disaster happen to Joel? The Court did not say. However, I have been doing this type of work and representing taxpayers before the IRS, FTB and EDD for decades. I have learned that the most important thing that a taxpayer can do to avoid what happened to Joel is communication with the tax collector. Joel got what he got because he ignored the IRS collector to the point where the IRS had no choice except to come down hard on his IRA.
They say in the restaurant business, that the three most important factors are location, location and location. When it comes to owing taxes, the three most important factors are communication, communication and communication!
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Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 40 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments.
Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
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