Take-Away: Unlike ‘normal’ creditors who must first obtain a judgment before the debtor’s assets can be levied upon, the IRS possesses a statutory right to levy a taxpayer’s assets without first having to go to court.

Background: A recent Michigan federal court decision provides a helpful reminder that the IRS is a unique ‘creditor’ which is not to be toyed with when it comes to collecting back taxes. In U.S. v. Estate of Albert Chicorel, , 2018 WL 5289703 (E.D. Mich, October 25, 2018) the District Court Judge observed:

[A] levy is one of the most powerful and coercive methods of tax collection open to the government. The government levies “without first going to court.” Internal Revenue Manual (“IRM”) To levy, IRS officers seize property- with armed escort if necessary- and sell it to satisfy the tax obligation. See id.; 26 U.S.C. Section 6331(b). The Internal Revenue Manual instructs officers to consider bringing, among other things, bolt cutters, hammers, and chains, when conducting a levy. See IRM Should the taxpayer or a third-party refuse to surrender property and the officer is unable to otherwise seize it, that person is automatically liable for a sum equal in value to the not-surrendered property. 26 U.S.C. Section 6332(d)(1).

Levy: The IRS has 10 years after a tax assessment in which to proceed with its collection efforts, either in court to collect the unpaid taxes, or to levy on the taxpayer’s assets. [ 26 U.S.C. 6502(a).]

Facts: In Chicorel, the IRS assessed the decedent, Mr. Chicorel, in 2005 for $140,903 in income taxes for the 2002 tax year. Mr. Chicorel died in 2006 without having satisfied that income tax assessment. In 2007 the Personal Representative of Mr. Chicorel’s estate published a Notice to (Unknown) Creditors as part of the probate estate’s administration to start the statute of limitations running on creditors to pursue their unpaid claims from the probate estate. The Personal Representative did not, however, send a written Notice to Creditors directly to the IRS. In 2016 the IRS finally levied Mr. Chicorel’s estate assets.

Known Creditor: Under Michigan law the IRS was a known creditor of Mr. Chicorel’s estate. [MCL 700.3801] That is because the IRS and its claim could have been reasonably ascertained by the Personal Representative of Mr. Chicorel’s estate based upon an investigation of the decedent’s available records that related to 2 years immediately preceding Mr. Chicorel’s death, or his mail after his death. Known creditors must receive actual notice of the decedent’s death and to whom claims need to be filed in order to be paid. Actual notice delivered then triggers a relatively short statute of limitations in which the known creditor must move forward in an effort to collect on their outstanding claim.

Outcome: Because the Personal Representative failed to provide actual notice to the IRS, a known creditor, the IRS had a much longer period in which to file its proof of claim against Mr. Chicorel’s estate. As a result, when the IRS did file its Proof of Claim against Mr. Chicorel’s estate within two years of his death, that proof of claim was found by the court to be timely. Because the Personal Representative did not then formally disallow the IRS’s Proof of Claim, the IRS did not have to do anything further to extend the period of time it had in which to levy on Mr. Chicorel’s estate assets. The IRS’s timely filed, and unchallenged, Proof of Claim in effect tolled the statute of limitations that IRS had in which to collect on its assessment. [MCL 700.3802(3).] Since the IRS’s Proof of Claim was filed within 10 years of its initial assessment, the IRS’s levy was considered to be timely. The IRS did not receive actual Notice as a known creditor of Mr. Chicorel. Consequently,  its ability to pursue its remedy of levy was extended  a decade after Mr. Chicorel’s death.

Conclusion: The IRS’s collection remedies are, as the judge noted, both powerful and coercive. Something to keep in mind when a Notice of Assessment comes in the mail.