Recent Case Demonstrates Banks and Other Businesses Must Act Immediately When a Levy Is Received
Sept. 11, 2014
A recent tax case heard in the U.S. District Court for the Central District of California highlights the need for businesses that receive a notice of levy on the assets of a customer to immediately comply with the levy. The IRS was successful in holding JPMorgan liable for money withdrawn by a taxpayer from his account held at the bank after a notice of levy was submitted to the bank by the IRS but before the bank froze the taxpayer’s accounts.
In United States v. JPMorgan Chase Bank NA, the IRS argued that JPMorgan received a notice of levy against the assets of a taxpayer, a depositor at its bank. Two hours after the levy was received, and prior to the execution of the levy by the bank, the taxpayer removed $40,000 from his account. The bank did not fully process the levy for two days. The IRS sought to hold the bank liable because it did not act to freeze the account of the taxpayer in a reasonable time, which would have prevented the taxpayer from removing money owed to the government. The IRS relied on the rule of Section 6332(d)(1) of the Internal Revenue Code, which states that any person (in this case the bank) who fails to surrender any property subject to levy shall be liable in his own person to the United States. The IRS argued that the bank should have frozen the taxpayer’s assets sooner than the two days it took to do so.
In its decision, the court noted that there were only two statutory defenses for the bank under Section 6332: 1) the defendant did not possess any property or rights to property of the taxpayer, and 2) the property was subject to a prior attachment or execution. Because neither defense applied to the facts of the case, the bank argued that it acted with reasonable speed to comply with the levy as the statute does not specifically state the speed with which banks must freeze bank accounts. However, the court found that no reasonableness exception or standard exists under IRC Section 6632.
The court ultimately held that the bank was required to act immediately upon receipt of the levy. In addition, the court stated that a bright-line test was necessary to prevent the tax collection process from becoming bogged down with the “granular inquiries of the levy process.” This further supported the IRS’ position that those that receive levies must act on them immediately.
Although many banks and other businesses currently have processes and systems in place to respond to levies, this case suggests that the speed with which banks and other businesses do so might need to be re-evaluated.
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