If the Tax Man Cometh - after Customers

Several Internal Revenue Service procedures have been modified in the wake of the enactment of the Taxpayer Bill of Rights as part of the Technical and Miscellaneous Revenue Act of 1988. One such change involves IRS levies on customer A year after the effective date of the change, bankers still have numerous questions. Background. Formerly, a bank in receipt of an IRS Notice of Levy Form 668-A) immediately forwarded the funds to the government. There were two exceptions: (1) Banks did not have to remit funds in response to levies when the account to be seized contained less than 100-so-called kiddie accounts. (2) Banks froze accounts involving co-holders for 21 days until the matter was resolved. The Taxpayer Bill of Rights changed this effective July 1, 1989. Under this law, a 21-calendar-day holding period goes into effect for all customer accounts subject to a levy, regardless of size and title of ownership. Now, when an IRS levy is served, the bank must turn over the money in the customer's account, with interest, only when 21 days have passed since the bank received the levy notice and no IRS release has been received. IRS will notify customers and the bank ma- notify customers to allow them time to contact the agency and resolve any questions before the bank sends the money. If the amount of the levy is larger than the amount in the account, the bank pays IRS the interest the customer would ordinarily have earned on the frozen funds during the 21-day holding period. The date that the bank normally credits interest to the depositors' accounts is not relevant to its obligation to pay interest on the levy proceeds. However, in no instance should the bank (1) pay over to IRS more than the amount levied, regardless of interest accrued, or (2) pay interest on funds levied from a noninterest-bearing account. Also, IRS is only entitled to the funds that the customer would have received if the customer closed out the account that day. Any conditions on the account, such as early withdrawal penalties, apply to the frozen funds. The interest paid is considered earned by the customer and therefore should be reported on the same Form 1099-INT provided for other interest. No separate Form 1099-INT is required. Date Levy Is Received On the day the levy arrives, the bank must freeze all funds sufficient to satisfy the levy immediately. IRS maintains that once a levy notice is received by an office of a bank (main office or branch), the levy is effective for all bank offices as of the time and date of service. (It doesn't matter whether notification comes in the form of a visit by an IRS official or receipt of an IRS letter.) The initial avenue for the customer to IRS is by the phone number listed on the letter. Q. Are any customer funds considered nonattachable by IRS? A. Yes. Negotiable certificates of deposit, safety deposit boxes, and individual retirement accounts (except in rare situations) are examples of funds to which the levy will not attach. Direct deposits of funds from income can be attached if the monies are in the account at the time of the levy 9. Must the frozen funds be removed to a separate account? A. No. So long as the customer cannot access the funds, they can stay put. If the bank's practice is to separate the funds and place them in a noninterestbearing account until the matter is resolved, the bank must calculate the interest that those funds would have earned had they remained in the interest-bearing account. The bank must include that sum when it remits the frozen funds to IRS, assuming the account principal is insufficient to satisfy the levy. Q. How must interest be paid? A. The interest accrues according to the account contract-not according to the rate referenced in the Internal Revenue Code. The fact that the bank does not post interest until the periodic statement is issued is irrelevant if the bank would have paid the interest to the customer if the customer had closed the account on the day the frozen funds are sent to IRS. …