Served an IRS Levy? Be "Super-Expeditious!"

The IRS is allowed to issue a bank levy when it feels the collection of tax is in jeopardy. A recent decision out of the U.S. District Court, Central District of California, reminds bankers that they promptly need to freeze accounts upon receipt of a levy from the IRS.

Just the Facts ...

The facts of the case are interesting. The IRS mistakenly sent a refund of more than $78,000 to a taxpayer. Within a month or so, the error surfaced at the IRS and it began collection action against the taxpayer who refused to pay up. An IRS collection officer tried to collect the money in person and warned the taxpayer the IRS intended to levy his bank accounts.

Upon leaving the taxpayer's home, the IRS official drove directly to the local branch of the taxpayer's bank and served the levy. At that time, the taxpayer had about $47,000 in two accounts at the bank.

Meanwhile, the taxpayer, tipped-off to the prospective levy by the IRS collection officer, withdrew $40,000 from his accounts less than two hours after the levy was served on a bank employee. It took the bank two days to freeze the taxpayer's accounts, and it properly remitted the balance in the accounts to the IRS, which at that time, was minus the $40,000 the taxpayer was allowed to withdraw.

The IRS filed against the bank for the $40,000 withdrawn by the taxpayer while the levy was waiting to be recorded. And, the IRS won.

Who Is at Fault Here?

The IRS erred in sending the refund to the taxpayer. The taxpayer owed the money back to the IRS. The IRS told the taxpayer the accounts were to be levied. However, because the bank allowed the taxpayer to withdraw funds from his accounts subsequent to the service of the levy, the bank was held liable for the $40,000 withdrawn.

The bank argued that it followed its normal procedures in freezing accounts and acted with reasonable speed. The judge, unimpressed, thought otherwise. He noted the bank only had two defenses in this case.

1. If it didn't possess any rights to the taxpayer's property, or

2. If the property was subject to a prior attachment.