ASK THE EDD ATTORNEY – CAN AN EMPLOYER BE PERSONALLY LIABLE FOR FAILING TO HONOR AN IRS OR FTB EMPLOYEE WAGE LEVY?
By Robert S. Schriebman
November 9, 2016
Can an employer be personally liable for failing to honor an IRS or FTB employee wage levy? Absolutely! The recent case of Daniel Dent is a clear warning to employers or others who ignore IRS, FTB, or even EDD enforced collection action.
Daniel Dent Gets Into Trouble With The IRS
Daniel Dent was the managing shareholder of 911 Management, LLC. His fellow shareholders, Thomas and Kathy Weathers, owed the IRS for delinquent income taxes. A Revenue Officer served a Notice of Levy on Daniel to capture “the wages and salary that have been earned but not paid, as well as wages and salary earned in the future until the IRS levy is released.” In addition, the IRS levy also attached to “other income that you have now or for which you are obligated.” Dent turned over Thomas and Kathy’s current wages but did not turn over LLC membership distributions or licensing income because that income and those distributions were not yet known, but expected after it became ascertained. When the distribution was eventually determined and payable Dent paid it over to Thomas and Kathy instead of the IRS. The IRS took Dent to federal court and the judge found him personally liable for failing to turn over the distributions to the IRS. USA, Plantiff-Appellant v. Dent, Defendant-Appellant, 2016-2 U.S.T.C., para 50,456, US Court of Appeals, Ninth Circuit (Oct. 19, 2016).
What Did Dent Do Wrong?
Daniel Dent properly turned over Kathy and Thomas’s paycheck to the IRS. He got into trouble because he did not turn over a future distribution because at the time of the levy, Dent reasoned, the amount of the distribution was uncertain and in fact there may have been none at all depending on business. The IRS won because it argued that even though the dollar amount of the distribution was unknown at the time the levy was served, there was no question, at that time, that Thomas and Kathy had a right to the distribution once it became known.
Two Types Of Levies
The IRS and the EDD have two types of levies: one-shot and continuous. The levies are not the same for the EDD and for the IRS. If the IRS levies on a bank account or pension fund, this is known as a one-shot levy. The levy is only good for one seizure on the day the levy is served. For example: If I owe the IRS and they levy my bank account on Monday when I have only $50 in my account – that is all they get. If I deposit $500 on Tuesday, the IRS cannot get those funds. On the other hand, an EDD bank account levy is usually a continuous levy and grabs my deposit on Tuesday and stays on the account until it is lifted by the EDD.
An IRS levy on a retirement plan, such as a pension plan, grabs only what the employee is entitled to at the time of the levy. If retirement benefits begin at age 65, but the taxpayer is only 64 at the time of levy, the IRS is not entitled to anything and the levy must be released.
An IRS or EDD wage garnishment, on the other hand, is a continuous levy forcing the taxpayer-debtor to negotiate a payment arrangement with the IRS or the EDD so that the levy can be released.
The Dent case was a confusing decision because of what the court determined to be income. The court defined income by making reference to dictionaries such as, Black’s Law Dictionary and Webster’s. “Income: is a broad term that includes payments other than wages and salary from employment, business, investments, royalties, gifts, and the like.” The court concluded that membership distributions and licensing fees fall well within the scope of “income.” Yet, the Internal Revenue Code has its own definition of income defined in IRC § 61(a), “Gross Income Defined.” That section defines income as “…gross income means all income from whatever source derived” the sections goes on to include 15 categories of income none of which involve LLC distributions. Perhaps that why the court used the dictionary, but what are IRS Code sections for anyway?
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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