Levying 1099 income and payment of several past due tax years

[caj11]

Hello everyone,

Situation is - client owes over $100K in past due taxes, penalties and interest for 2009, 2010 and 2011 and the IRS has sent a notice of Intent to Levy.

Client is a self-employed real estate agent. Sometimes they make tons of money in a month, sometimes they go months without a dime being paid to them, as is often the case with real estate agents. IRS Collections doesn't seem to know where they work nor has the Revenue Officer asked me. But the real estate agency does issue a Form 1099 every year, so it seems like they should know, although in my experience the IRS is notoriously known for the the left hand not talking to the right hand (but it works out to the client's benefit this time).

Client does not own a home or car and makes a point to pay estimated payments with money orders so the IRS can't figure out where they bank (at least they haven't seem to as of yet - I'm sure a credit report check could uncover it).

Since they are now sufficiently scared of the IRS, they've come to me and want to set up an installment agreement. Given the amount owed, they have to disclose their bank account information to the IRS now, among other things.

What I want to know is -

1. Does the IRS levy independent contractor/1099 income and if so, how much are they allowed to levy? The client's income is very erratic, like most real estate agents.

2. The client does want to start making monthly payments even before an Installment Agreement goes into effect, just to cut down on interest and late payment penalties (late-filing penalties are moot, since they did file). Does it make any sense to specify for payment to go toward 2011 liabilities first, since 2009 is closer to the maximum 25% on late payment penalties anyway? i.e., they may still be paying 2011 taxes when the 2009 late payment penalty "maxes out" at 25% of liability, so why not do their best to cut down on late payment penalties for 2011 first?

Thanks!

Chris Johnson, EA

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[Alan]

On 4/23/2013 3:32 PM, caj11 wrote:
> Hello everyone,
>
> Situation is - client owes over $100K in past due taxes, penalties and interest for 2009, 2010 and 2011 and the IRS has sent a notice of Intent to Levy.
>
> Client is a self-employed real estate agent. Sometimes they make tons of money in a month, sometimes they go months without a dime being paid to them, as is often the case with real estate agents. IRS Collections doesn't seem to know where they work nor has the Revenue Officer asked me. But the real estate agency does issue a Form 1099 every year, so it seems like they should know, although in my experience the IRS is notoriously known for the the left hand not talking to the right hand (but it works out to the client's benefit this time).
>
> Client does not own a home or car and makes a point to pay estimated payments with money orders so the IRS can't figure out where they bank (at least they haven't seem to as of yet - I'm sure a credit report check could uncover it).
>
> Since they are now sufficiently scared of the IRS, they've come to me and want to set up an installment agreement. Given the amount owed, they have to disclose their bank account information to the IRS now, among other things.
>
> What I want to know is -
>
> 1. Does the IRS levy independent contractor/1099 income and if so, how much are they allowed to levy? The client's income is very erratic, like most real estate agents.

Yes they levy the self-employed. However, theycan only levy the employer
when you have a fixed and determinable right to the money. Typically,
this means when you have completed the work required for you to be paid.
Think of a plumber who is called to a company site to fix a leak. The
plumber fixes the leak and hands the company a bill for $300. The IRS
could levy the company at that time. If the IRS gets there after you
have been paid, they get nothing.

There is no limit to how much the IRS can levy. The limit is how much
they will leave you. Based on your filing status they will leave you the
amount equal to your std deductions and number of exemptions.

>
> 2. The client does want to start making monthly payments even before an Installment Agreement goes into effect, just to cut down on interest and late payment penalties (late-filing penalties are moot, since they did file). Does it make any sense to specify for payment to go toward 2011 liabilities first, since 2009 is closer to the maximum 25% on late payment penalties anyway? i.e., they may still be paying 2011 taxes when the 2009 late payment penalty "maxes out" at 25% of liability, so why not do their best to cut down on late payment penalties for 2011 first?

You have confused the cap on falure to file penalties (25%) and failure
to pay penalties (no cap.... it's 1/2 % per month until paid in full).

[remove ps]

Alan wrote:

> You have confused the cap on falure to file penalties (25%) and
> failure to pay penalties (no cap.... it's 1/2 % per month until paid
> in full).

Isn't the failure to pay limited to 25% or 22.5%? There is no cap on
the interest, which changes each quarter but is currently 3% a year on
individuals (more on corporations).

[Alan]

On 4/23/2013 6:36 PM, remove ps wrote:
> Alan wrote:
>
>> You have confused the cap on falure to file penalties (25%) and
>> failure to pay penalties (no cap.... it's 1/2 % per month until paid
>> in full).
>
> Isn't the failure to pay limited to 25% or 22.5%? There is no cap on
> the interest, which changes each quarter but is currently 3% a year on
> individuals (more on corporations).
>

Sorry.. thinking about state. Federal cap is 25% for failure to file and
25% for failure to pay. If at same time, the failure to pay (1/2%)
reduces the failure to file (5%). So... the failure to file would be
22.5% if failure to pay coexists for five months.

[Phil Marti]

On Tuesday, April 23, 2013 5:32:57 PM UTC-4, caj11 wrote:

> 1. Does the IRS levy independent contractor/1099 income and if so, how much are they allowed to levy? The client's income is very erratic, like most real estate agents.

They can levy. The exempt amount is the taxpayer's standard deduction plus personal exemptions divided by the number of pay periods in a year. Child support payments are also exempt. Everything above that is subject to levy. See IRC 6334(d).

>
> 2. The client does want to start making monthly payments even before an Installment Agreement goes into effect, just to cut down on interest and late payment penalties (late-filing penalties are moot, since they did file). Does it make any sense to specify for payment to go toward 2011 liabilities first, since 2009 is closer to the maximum 25% on late payment penalties anyway? i.e., they may still be paying 2011 taxes when the 2009 late payment penalty "maxes out" at 25% of liability, so why not do their best to cut down on late payment penalties for 2011 first?

Yes, that makes sense since partial payments are first applied to tax when calculating P&I. The 2009 FTP penalty has probably already maxed out since a notice of intent to levy was probably sent on that one back in 2010, and the penalty goes to 1% per month after that notice is issued (IRC 6335(d)).

You didn't mention 2012. Was it filed with full payment of any balance due? If not that's where I'd put the first money available after 2013 ES payments. It shows that perhaps the taxpayer has changed his ways. Might impress the R/O, might not.

Phil Marti
Erstwhile R/O
Clarksburg, MD

[caj11]

Thanks to everyone for the advice. Just a couple responses/questions to Phil:

On Wednesday, April 24, 2013 6:29:17 AM UTC-4, Phil Marti wrote:
> On Tuesday, April 23, 2013 5:32:57 PM UTC-4, caj11 wrote:
>
>
>
> > 1. Does the IRS levy independent contractor/1099 income and if so, how much are they allowed to levy? The client's income is very erratic, like most real estate agents.
>
>
>
> They can levy. The exempt amount is the taxpayer's standard deduction plus personal exemptions divided by the number of pay periods in a year. Child support payments are also exempt. Everything above that is subject to levy. See IRC 6334(d).

Okay, I get that they are legally entitled to levy, but what happens in reality when the real estate agency is sending out commissions to them at unspecified times of the year (sometimes a few times a month, sometimes absolutely nothing in a month), and nobody knows how much commission is going to be paid until the real estate deal is final?

While we clearly know the standard deduction and number of exemptions here, there is no set number of pay periods to divide by. I guess what I'm getting is - will the IRS contact the real estate agency and say, "send ALL or part of her commission checks to us until further notice?" How would they determine how much, if it is just part?

> >
>
> > 2. The client does want to start making monthly payments even before an Installment Agreement goes into effect, just to cut down on interest and late payment penalties (late-filing penalties are moot, since they did file). Does it make any sense to specify for payment to go toward 2011 liabilities first, since 2009 is closer to the maximum 25% on late payment penalties anyway? i.e., they may still be paying 2011 taxes when the 2009 late payment penalty "maxes out" at 25% of liability, so why not do their best to cut down on late payment penalties for 2011 first?
>
>
>
> Yes, that makes sense since partial payments are first applied to tax when calculating P&I. The 2009 FTP penalty has probably already maxed out since a notice of intent to levy was probably sent on that one back in 2010, and the penalty goes to 1% per month after that notice is issued (IRC 6335(d)).
>
>
>
> You didn't mention 2012. Was it filed with full payment of any balance due? If not that's where I'd put the first money available after 2013 ES payments. It shows that perhaps the taxpayer has changed his ways. Might impress the R/O, might not.

The taxpayer paid in full for 2012, and the RO did check on that. Whether it impressed them I don't know yet. Thanks Phil.

[Phil Marti]

On Wednesday, April 24, 2013 11:43:28 AM UTC-4, caj11 wrote:

> Okay, I get that they are legally entitled to levy, but what happens in reality when the real estate agency is sending out commissions to them at unspecified times of the year (sometimes a few times a month, sometimes absolutely nothing in a month), and nobody knows how much commission is going to be paid until the real estate deal is final?
>
> While we clearly know the standard deduction and number of exemptions here, there is no set number of pay periods to divide by. I guess what I'm getting is - will the IRS contact the real estate agency and say, "send ALL or part of her commission checks to us until further notice?" How would they determine how much, if it is just part?

Well, if the "pay period" isn't standard it seems to me you'd use a factor of 1/365 times the number of days since the broker last got a check in determining the exempt amount.

A note about the ongoing aspect of the levy. The Code says that a levy on salary and wages is continuous until released. Moving on to the exempt amount, it applies to wages, salary AND OTHER INCOME. So, are payments to an independent contractor salary/wages or other income?

I did a lot of research on this since a lot can change in the 16 years I'm retired. The Manual is ambiguous but seems to be leaning in the continuous levy direction. The law hasn't changed, except there's very clear language now that says a levy on Federal payments of other income is continuous.

The bottom line is I don't know how this all works nowadays in real life. There can be a huge time lag between operational developments and the issuance of procedures in the Manual. The good news is that you're working with a revenue officer. The better news (to me) is that he addressed 2012. Hopefully you can work out something that the taxpayer can comply with and the levy business will be moot.

Phil Marti
Erstwhile Revenue Officer
Clarksburg, MD

[paultry]

On 4/25/2013 05:43, Phil Marti wrote:


> Well, if the "pay period" isn't standard it seems to me you'd use a factor of 1/365 times the number of days since the broker last got a check in determining the exempt amount.
>

http://www.law.cornell.edu/cfr/text/26/301.6334-3

> A note about the ongoing aspect of the levy. The Code says that a levy on salary and wages is continuous until released. Moving on to the exempt amount, it applies to wages, salary AND OTHER INCOME. So, are payments to an independent contractor salary/wages or other income?

Treasury Reg 301.6331-1 says, in part, "(b) Continuing
levies and successive seizures—(1) Continuing effect of levy
on salary and wages. A levy on salary or wages has
continuous effect from the time the levy originally is made
until the levy is released pursuant to section 6343. For
this purpose, the term salary or wages includes compensation
for services paid in the form of fees, commissions, bonuses,
and similar items."

http://www.taxalmanac.org/index.php/Treasury_Regulations,_Subchapter_F,_Sec._301.6331-1