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National Taxpayer Advocate Recommendations for Retirement Fund Tax Treatment

Posted by Paul D. Woodard | Feb 20, 2018

The National Taxpayer Advocate (NTA) is an independent organization within the IRS that was established to ensure fair treatment for taxpayers and help taxpayers understand their rights. The NTA's inaugural edition of the Purple Book contains recommendations for tax law and policy to “strengthen taxpayer rights and improve tax administration.” With respect to retirement plans, the NTA makes two recommendations that could potentially impact taxpayer retirement funds. These recommendations include (1) protecting taxpayers from IRS levies and (2) holding taxpayers harmless after funds levied are returned from a retirement plan or account.

Protecting Taxpayers from IRS Levies

The NTA's legislative recommendation #19 is to, “protect retirement funds from IRS levies in the absence of “flagrant conduct by a taxpayer.” Under current law, the IRS has discretion to exercise its levy authority upon all property, including retirement savings. The NTA's recommendation is to exclude retirement funds from levy authority unless the taxpayer has engaged in “flagrant conduct.”

The IRS currently has a procedure that allows taxpayers to agree to “voluntary” levies on their retirement accounts, which does not require a showing of “flagrant conduct.” However, the NTA is concerned that taxpayers may agree to these “voluntary” levies out of fear, punishing individuals who have not been found to have engaged in flagrant violations.

The logic for the change is to protect taxpayers from levies to their retirement accounts, which could leave them facing significant economic hardship when it comes time to retire. The change would protect the retirement accounts of most taxpayers, with the exception of taxpayers that engage in willful action and knowingly violate tax provisions.

Holding Taxpayers Harmless After Funds Levied Are Returned

Legislative recommendation #22 of the Purple Book is to, “hold taxpayers harmless when the IRS returns funds levied from a retirement plan or account.” In most situations, any distribution from an employer-sponsored retirement plan is treated as taxable income unless that money is rolled over into a qualifying plan within 60 days. Distributions resulting from a federal tax levy are similarly treated as taxable income. However, the only way for a taxpayer to avoid repercussions from a wrongful or premature levy is to self-certify that the distribution is eligible for the 60-day rollover rule. This may leave some taxpayers penalized for levy mistakes made by the IRS.

The NTA has recommended amending the Internal Revenue Code (IRC) for situations where the IRS returns levy proceeds from a retirement account back to the taxpayer, allowing the taxpayer to contribute the amount of money, plus interest, back into the retirement plan as a tax-free rollover contribution before the filing year due date.

If you have any questions about how tax penalties could affect your retirement accounts, the law firm of Butterfield Schechter LLP is here to help. We are San Diego County's largest law firm focusing its law practice on employee retirement benefits and tax law. Contact our office today with any questions.

About the Author

Paul D. Woodard

Paul Woodard practices in the areas of Employee Benefits, Employee Stock Ownership Plans, Pension and Profit Sharing Plans, ERISA, ERISA Litigation, Business Law, Qualified Domestic Relations Orders (QDROs), and Estate Planning.


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