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5.17.4  Suits by the United States (Cont. 1)

5.17.4.8 
Foreclosure of Federal Tax Lien

5.17.4.8.3 
Preparing Recommendation to Institute an Action to Foreclose Tax Liens

5.17.4.8.3.1  (08-01-2010)
Tax Information, Description and Valuation of Property

  1. The complaint filed by the Government in a suit under IRC § 7403 must provide information demonstrating proper assessment and attachment of the federal tax lien, including date of assessment and demand for payment of each tax liability.

  2. In addition to setting forth accurate tax information, the complaint must contain the correct legal description of all real estate and the best available description of personal property subject to the tax lien. The legal description of real property can be obtained from the deed recorded with the local recording office. Personal property must be adequately described to distinguish it from other property. For instance, if the property is an automobile, the description should state the make, style, year and vehicle identification number or VIN.

  3. If the property is an insurance policy, the description should include the name of the insurance company, the contract number, the date issued, the name of insured, the name(s) of beneficiary(ies), and any other pertinent information available.

  4. With respect to all types of property, documents related to the property, such as the title to an automobile or a copy of an insurance policy, can be helpful in describing the property accurately.

    Note:

    Documents related to the property subject to the tax lien can also be helpful in identifying additional parties to be named in the foreclosure suit. For example, in some states the beneficiary of the policy is deemed to have a vested right in the policy and therefore must be named as a party to the suit.

  5. Careful consideration should be given to assessing the value of the property. The valuation is important in ascertaining whether a suit is justified.

5.17.4.8.3.2  (08-01-2010)
Identification of Parties and Competing Liens

  1. The suit recommendation must identify all other persons with liens on or other interests in the property. In a lien foreclosure suit, the court adjudicates all claims against the property. Therefore, the United States must name as defendants to the suit all known persons who have liens on or claim any interest in the property subject to the tax lien. In addition, providing this information enables the attorneys reviewing the case to ascertain prior to commencement of the suit the priority of the Government's tax lien and the amount of collection that can be expected.

    Note:

    Because persons named as parties must be served with process, it is important to furnish their physical addresses, as well as their correct legal names. Post office box addresses are insufficient.

  2. Complete current records checks must be conducted to identify all other persons with liens or other interests in the property.

  3. IF... THEN...
    the party to be named is an individual doing business under another name, both names should be provided, along with the home address of the individual as well as the business address.
    the party is a partnership, the complete name and address of the partnership should be provided together with the individual partners' names and addresses.
    the party is a corporation, the complete name and address of the corporation and its officers, state of incorporation, and statutory agent for service of process should be provided.
  4. The term "company" following the name of a business does not always mean the business has in fact been incorporated. Checking with the office of the Secretary of State in the state in which the business is located will generally confirm whether it is a corporation, local or foreign. If it is not registered, it may be doing business under a fictitious name.

5.17.4.9  (08-01-2010)
Proceeding to Seize a Principal Residence

  1. A court order is required prior to the seizure of certain principal residences. IRC § 6334 exempts certain principal residences from levy unless a judge or magistrate of a federal district court approves the seizure, in writing. IRC § 6334(e)(1).

    Note:

    IRC § 6334(a)(13)(A) exempts from levy any real property used as a residence by any person (except real property which is rented) if the amount of taxes owed does not exceed $5,000.

  2. "Principal residence" refers to the principal residence (as defined by IRC § 121) of the taxpayer, the taxpayer's spouse, former spouse, or minor child.

  3. A proceeding to seize a principal residence (also called a section 6334(e)(1) proceeding) is necessary in order for the Government to pursue administrative collection against a principal residence. Foreclosure of the tax lien on a principal residence is still available under IRC § 7403 and should still be recommended where appropriate. The two options should not be used concurrently. See IRM 5.17.4.8.

  4. A section 6334(e)(1) proceeding is generally commenced in the same manner as suits by the Government to collect taxes. A recommendation is forwarded to Area Counsel, which prepares a suit letter to the Department of Justice. The information required to be provided in a lien foreclosure recommendation (see IRM 5.17.4.8.3) must be provided in a section 6334(e)(1) proceeding recommendation.

    Note:

    If the residence to be seized is the principal residence of the taxpayer's spouse, former spouse or minor child, remember to provide the name and address of that person or persons.

  5. In addition to the information provided in connection with lien foreclosure, the recommendation must show that all the legal and procedural requirements for seizure have been met. For example, it should contain information regarding:

    • the notice given to the taxpayer under IRC § 6331(d)

    • any notices given or hearings conducted as required by IRC § 6320 and IRC § 6330

    • the investigation of the status of the property required by IRC § 6331(j)

    • alternative methods of collection considered

    • necessary approvals

    Note:

    See IRM 5.101.2.18, Securing Managerial Approval of Seizure Actions, and IRM 5.10.2.19, Judicial Approval for Principal Residence Seizures, for more information.

  6. Seizure of a principal residence of the taxpayer, the taxpayer's spouse, former spouse, or minor child (or of any other person) requires the written approval of the Area Director. This written approval must accompany the recommendation.

5.17.4.10  (08-01-2010)
Court Appointed Receiver

  1. A federal district court may, at the request of the United States, appoint a "receiver" when necessary or appropriate for the enforcement of the internal revenue laws. IRC § 7402(a). A receiver is, generally, a disinterested party appointed for the purpose of protection or collection of property subject to competing claims. A receiver can be appointed for the general purpose of collecting a debt due the United States.

  2. IRC § 7403(d) also provides specific authority for a federal district court to appoint a receiver for the purpose of enforcing a federal tax lien against specific property or as a receiver with the powers of a receiver in equity, as further described below.

5.17.4.10.1  (01-08-2016)
Types of Court Appointed Receivers

  1. There are generally two types of court appointed receivers under IRC § 7403(d):

    1. The first of the two types of receivers is appointed after the lien priorities have been determined with respect to property. The Government may request a receiver to negotiate the sale of the property. The receiver is paid from the sale proceeds when approved by the court. An example would be selling securities through negotiation rather than by auction.

    2. The second type is a receiver being requested during proceedings in a collection suit upon certification of the Secretary that such receiver is in the public interest. This authority has been delegated to the Division Counsel (Small Business/Self-Employed) who makes the certification on behalf of the Chief Counsel. This type of receiver has all the powers of a receiver in equity, including, among others, the power to conduct the business of the taxpayer, safeguard the assets of the taxpayer, and liquidate the business to pay creditors.

    3. The taxpayer will no longer be allowed to conduct affairs or business with respect to the property subject to the lien. The receiver has complete control over the assets, subject to the court’s supervision. In some cases, however, the taxpayer continues in an advisory capacity. One of the reasons for requesting that a receiver with all the powers of a receiver in equity be appointed is to have supervision by a court officer in order to prevent waste or fraud by the taxpayer or others and to prevent, if possible, the insolvency of the business.

    Note:

    It is commonly necessary for the Government to recommend a party who is to act as receiver.

5.17.4.10.2  (08-01-2010)
Duties of a Receiver

  1. Some of the duties of a receiver include:

    1. conserving the property;

    2. maintaining the business as a going concern;

    3. liquidating the business to pay creditors;

    4. receiving and disbursing profits or rents; and

    5. returning the property to its owners (once rights of all parties have been satisfied).

  2. Under IRC § 6012(b), a receiver in equity, if operating the taxpayer's business, must make all the business tax returns for the partnership, corporation or individual.

  3. If the taxpayer's property is partly located outside the jurisdiction, the receiver has the authority to take possession of all the property or to bring suit in any district where the property may be located. 28 USC § 754.

5.17.4.10.3  (08-01-2010)
Cost and Expense of Receivership

  1. The cost and expense of a receiver are paid from the assets of the taxpayer. Such expenses are usually substantial. Therefore, it is important to weigh this factor against the need for a receiver before making such a recommendation. It should be kept in mind that, although the receiver may be appointed at the request of the United States, the receiver is not an agent of the United States but rather is acting under the control and authority of the court.

5.17.4.11  (08-01-2010)
Intervention

  1. Listed below are the guidelines for intervention by the United States in pending litigation.

5.17.4.11.1  (08-01-2010)
Definition and Purpose

  1. IRC § 7424 provides that if the United States is not a party, it may intervene in such action or suit to assert any federal tax lien arising on any property that is the subject of such action or suit.

  2. Intervention is allowed to enable the court to settle the entire controversy. A party should be permitted to intervene if it would enable the court to try all claims in one suit.

  3. If intervention is denied, the adjudication has no effect on the federal tax lien.

  4. Failure to intervene could mean that property might be distributed to claimants whose rights are inferior to those of the United States. While the United States might have a right of action against these distributees, as a practical matter the chances of successfully pursuing such a legal course of action may not be good.

5.17.4.11.2  (08-01-2010)
Procedure to Intervene

  1. A motion is filed with the appropriate court for leave to intervene. If granted, a petition of intervention is filed asking for a determination of the conflicting claims and liens together with an order entered by the court decreeing the sale of the property, if necessary. Intervention must be taken generally under the same conditions as attach to the commencement of an original suit under IRC §§ 7401 and 7403. It must be authorized or sanctioned by the Chief Counsel and directed by the Attorney General. The United States intervenes as a party plaintiff.

  2. In any case in which the United States intervenes, the same procedural rules as provided in 28 USC § 2410 apply as if the United States had been initially joined properly as a party.

5.17.4.12  (08-01-2010)
Action to Enforce a Levy

  1. Listed below are the guidelines for bringing an action to enforce a levy.

5.17.4.12.1  (08-01-2010)
Nature of Proceeding

  1. Under IRC § 6331, the Area Director may collect by levy any tax owed by a person liable to pay such tax who refuses to do so within 10 days after notice and demand and certain other procedural requirements. The levy may be made upon any property belonging to such person or on property on which there is a federal tax lien.

  2. Under IRC § 6332(a), any person in possession of, or otherwise obligated with respect to, property or rights to property subject to levy is required to surrender such property upon levy (except any property subject to prior judicial attachment or execution). Thus, a suit to enforce a levy is generally brought against a third party, not against the taxpayer (e.g., the taxpayer’s employer fails to honor a levy served to reach the taxpayer’s wages).

5.17.4.12.2  (08-01-2010)
Defenses for Failure to Comply

  1. The defendant in a suit for failure to honor a notice of levy has only two defenses:

    1. the defendant is not in possession of the taxpayer’s property; or

    2. the taxpayer’s property is subject to a prior judicial attachment.

    United States v. Sterling National Bank & Trust Co. of N.Y., 494 F.2d 919 (2nd Cir. 1974); In re Dell W. Carlson, 580 F.2d 1365 (10th Cir. 1978). The allegation of lien priority is not a defense. If parties served with levies believe their claim has priority they can bring a suit under IRC § 7426 for wrongful levy. Virgin Islands Bureau of Internal Revenue v. Chase Manhattan Bank, 312 F.3d 131, 139 (3d Cir. 2002).

  2. The defendant in a suit for failure to honor a levy is not permitted to raise defenses ordinarily available in actions directly instituted against the taxpayer for collection of the tax, such as constitutionality, amount, or validity of the assessment, or the statute of limitations. United States v. Bank of Shelby, 68 F.2d 538; (5th Cir. 1934); United States v. Citizens and Southern National Bank, 538 F.2d 1101 (5th Cir. 1976); United States v. Prudential Insurance Co. of America, 461 F.2d 208 (5th Cir. 1972).

  3. IRC § 6332(e) makes clear the legal effect of honoring a levy. A person levied upon who makes payment or delivery to the Area Director pursuant to levy is discharged from any obligation or liability to the taxpayer and any other person with respect to the property or rights to property arising from such payment or delivery. This even includes cases when the Government levies on property under an assessment that is incorrectly determined.

  4. Similarly, when a person incurs personal liability under IRC § 6332(d)(1) for failure to honor a levy and subsequently pays this liability, he is discharged from any obligation or liability to the delinquent taxpayer and any other person. However, IRC § 6332(d) does not relieve from liability any person who surrenders to the United States property or rights to property belonging to a third party where the delinquent taxpayer has no apparent interest in that property.

  5. When property has been wrongfully levied, the owners may secure the administrative relief provided for in IRC § 6343(b) (return of property wrongfully levied upon) or may bring suit to recover their property under IRC § 7426 (wrongful levy suit against the United States).

5.17.4.12.3  (08-01-2010)
Liability for Failure to Comply

  1. IRC § 6332(d)(1) provides that any person who fails or refuses to surrender property subject to levy shall be personally liable in an amount equal to the value of that property (but not exceeding the total amount of the tax liability with respect to which the levy was made). Recovery in a suit to enforce a levy (other than costs) is to be credited against the delinquent tax liability.

  2. IRC § 6332(d)(2) provides for the imposition of a 50-percent penalty by suit in addition to the personal liability described above when a person fails or refuses to surrender property without reasonable cause. The person will be liable for a penalty equal to 50 percent of the amount recoverable in the suit to enforce the levy. No part of this penalty is credited against the tax liability for the collection of which levy was made. The penalty is not applicable if there is a bona fide dispute or reasonable cause for the failure or refusal to surrender the property. When a court determined that a bank could not set off against a taxpayer's checking account after that account had been levied upon, the court declined to impose the 50-percent penalty, but warned that in the future, in like circumstances, no reasonable cause would exist to prevent the assertion of the penalty. United States v. Sterling National Bank, 494 F.2d 919 (2nd Cir. 1974).

  3. In view of the severity of the 50-percent penalty, the recommendation for its assertion should generally be made only when the failure or refusal to surrender the property levied upon is arbitrary or capricious, or when the alleged dispute over the amount owing or the legal effectiveness of the levy is frivolously raised. Questions concerning the appropriateness of assertion of the penalty should be referred to Area Counsel.

5.17.4.12.4  (08-01-2010)
Initiation of Suit

  1. The Internal Revenue Manual sets forth the general procedures to be followed in recommending a suit under IRC § 6332. Jurisdiction is in the United States district courts. 28 USC 1345. A suit for failure to honor a levy should not be recommended if use of an administrative process to collect the tax would prove adequate.

  2. As a general rule, resort to suit under IRC § 6332 is made when the party in possession of the taxpayer's property disposes of it subsequent to the levy. If the party in possession retains possession of the taxpayer's property, then consideration should be given to a suit to enforce the Government's lien against the property under IRC § 7403. Questions relative to the type of suit to recommend in doubtful cases should be referred to Area Counsel.

    Note:

    Where a person served with a notice of levy retains the property under a good faith belief that he or parties other than the taxpayer may have a claim against the property superior to the federal tax lien, a suit under IRC § 7403 is generally more appropriate than a suit under IRC § 6332 for failure to honor a levy. In a lien foreclosure action, the court determines the interests of all parties in the property.

  3. If the notice of levy was duly and timely served prior to the expiration of any collection period running against the taxpayer as provided in IRC § 6502(a), then the personal liability arising from a dishonor of that notice of levy may in any appropriate case be enforced at any time without limitation, notwithstanding any subsequent expiration of the normal or extended period of limitations on collection against the taxpayer. United States v. Weintraub, 613 F.2d 612, 619 (6th Cir. 1979).

5.17.4.13  (08-01-2010)
Writs of Entry

  1. The Supreme Court held in G.M. Leasing v. United States, 429 U.S. 338 (1977) that an entry without a warrant onto the private areas of personal or business premises of a taxpayer for the purpose of seizing property to satisfy a tax liability is in violation of the Fourth Amendment to the Constitution of the United States.

  2. The purpose of the revenue officer's entry is to seize property in satisfaction of unpaid taxes, not rummage everywhere in search of seizable items once lawfully on the premises. United States v. Condo, 782 F.2d 1502 (9th Cir. 1986).

  3. Revenue officers must either secure written consent to enter private premises or a court order permitting the entry. The revenue officer should obtain a consent to enter from an adult occupant of the premises. Generally, the revenue officer should attempt to obtain consent unless the officer believes that advance notice will jeopardize his safety, or attempts to contact the taxpayer or occupant of the premises have failed.

  4. A writ of entry obtained from the court authorizes the revenue officer to enter the premises identified in the officer's affidavit or declaration. The affidavit or declaration presented to the court will identify the property or types of property the officer intends to seize, and thus the affidavit or declaration and the writ order limit the scope of the seizure.

  5. Private portions of premises can be entered without a writ of entry if the revenue officer observes situations that indicate exigent circumstances, such as the taxpayer removing property beyond the reach of the Service under circumstances that are not in the ordinary course of business. G.M. Leasing v. United States, supra.

    Note:

    Area Counsel must be consulted before entering without a writ of entry.

  6. See also IRM 5.10.3.5, Writ Procedures.

5.17.4.14  (01-08-2016)
Suits to Recover Erroneous Refunds

  1. IRC § 7405 authorizes the Service to bring a civil suit to recover any money erroneously refunded to a taxpayer or a third party.

  2. Interest on erroneous refunds is provided for at the underpayment rate under IRC § 6602.

  3. The suit may be brought even if the erroneous refund was issued as a result of the Service’s error with no wrongdoing on the part of the taxpayer.

  4. No assessment is necessary to bring an erroneous refund suit.

  5. Filing an erroneous refund suit is not the only way the Service may recover an erroneous refund. Refer to IRM 5.1.8.7.1.3, Unassessable Erroneous Refunds Recovery Procedures.

    1. The type of erroneous refund determines the applicable statutes of limitations and the means by which the Service can recover the erroneous refund.

    2. Assessable erroneous refunds may be assessed and collected administratively within the applicable period of limitations on assessment and collection. Refer to IRM 5.1.8.7.1.1.1, Assessable Erroneous Refunds.

    3. Recovery by suit should be considered only if administrative recovery is barred by the statute of limitations or the erroneous refund is unassessable, and the criteria for filing a suit in IRM 25.3.2.3(5) , Criteria for Bringing Suit, is met. Refer also to IRM 5.1.8.7.1, Recovery of Unassessable Erroneous Refunds, and IRM 25.3.2, Suits by the United States.

5.17.4.14.1  (08-01-2010)
Burden of Proof

  1. The Government has a burden of proof with respect to all the elements of the erroneous refund suit. The Service must show that the refund was erroneous, the amount of the refund, and that the taxpayer received or benefited from the erroneous refund. Soltermann v. United States, 272 F.2d 387 (9th Cir. 1959).

5.17.4.14.2  (08-01-2010)
Statute of Limitations for Commencing Suit

  1. IRC § 6532(b) provides:

    "Suits by United States for Recovery of Erroneous Refunds. — Recovery of an erroneous refund by suit under section 7405 shall be allowed only if such suit is begun within 2 years after the making of such refund, except that such suit may be brought at any time within 5 years from the making of a refund if it appears that any part of the making of the refund was induced by fraud or misrepresentation of a material fact."

  2. The Service generally has two years from the date the taxpayer receives the erroneous refund to bring the erroneous refund suit. O'Gilvie v. United States, 519 U.S. 79 (1996).

  3. The Service has five years to bring the erroneous refund suit if any part of the erroneous refund was "induced by fraud or misrepresentation of a material fact." Lane v. United States, 286 F.3d 723 (4th Cir. 2002).

    1. Fraud is defined as "an intentional misrepresentation, concealment or nondisclosure for the purpose of inducing another [Government] ... to part with some valuable thing [e.g., money]."

    2. Misrepresentation is defined as "an untrue, incorrect, or misleading representation." Webster's Third New International Dictionary (Third Edition 1986). The representation can be in a form of a statement, assertion, or a failure to disclose relevant information. It need not be intentional, but it must be regarding a fact (not law) that is material or essential to the Service's decision to issue the erroneous refund. See United States v. Indianapolis Athletic Club, Inc., 785 F. Supp. 1336 (S.D. Ind. 1991).

5.17.4.14.3  (08-01-2010)
Initiating Suit for Recovery of Erroneous Refund

  1. Recommendations for suits of this nature are forwarded to Area Counsel as are other recommendations for commencement of legal proceedings. See IRM 25.3.2,Litigation and Judgments, Suits by the United States, and IRM 5.1.8.7.1.3.4, Recommend a Civil Suit.

5.17.4.15  (08-01-2010)
Action to Quiet Title

  1. The Government may acquire title to property through the enforcement of a tax lien. This may occur, for example, when the property is sold at a distraint sale, the minimum price is not met by the highest bidder, and the Government bids in the property. This may also occur when there is a non-judicial foreclosure sale, and the Government exercises its right to redeem pursuant to IRC § 7425(d).

  2. In order to increase the amount that property will bring at a sale by the Government, express authority has been given to the Government under IRC § 7402(e) to bring an action to quiet title to property it has acquired through the enforcement of a tax lien. An action to quiet title is brought to clarify, with finality, who holds title to real property. Jurisdiction in cases of this type is in the federal district courts.

    Note:

    An order quieting title can also be sought in conjunction with a lien foreclosure action if there are clouds on the title to the property.

5.17.4.16  (08-01-2010)
Assertion of Liability against Fiduciaries

  1. The following provides procedures for collection from fiduciaries.

  2. The definition of fiduciary, duties and responsibilities and available remedies are discussed below.

5.17.4.16.1  (08-01-2010)
Definition of a Fiduciary

  1. The definition of a fiduciary provided in IRC § 7701(a)(6) includes: a guardian, trustee, executor, administrator, receiver, conservator, or any person acting in any fiduciary capacity for any person.

5.17.4.16.2  (08-01-2010)
Duties and Responsibilities of a Fiduciary

  1. The duties of a fiduciary depend on the type of fiduciary capacity in which the fiduciary acts (e.g., trustee, executor of decedent’s estate). They generally include:

    1. prompt collection and marshaling of assets;

    2. custody, preservation and management of assets; and

    3. payment of debts.

  2. Treas. Reg. § 301.6903-1(a) requires that every person acting for another person in a fiduciary capacity shall give notice thereof to the Area Director in writing. Written notice is also required to advise the Area Director when the fiduciary relationship has terminated. Treas. Reg. § 301.6903-1(b).

  3. IRC § 6012(b) requires the filing of income tax returns by fiduciaries who have full control and custody of the property of a taxpayer.

5.17.4.16.3  (08-01-2010)
Liability of Fiduciaries under 31 USC § 3713

  1. 31 USC § 3713 makes a fiduciary of an insolvent estate (such as an insolvent decedent’s estate) personally liable for debts due to the United States if the fiduciary pays any debt owed by the estate without first paying priority debts of the United States of which the fiduciary is aware. A fiduciary must first pay known debts to the United States or risk personal liability if he or she fails to do so.

  2. IRM 5.17.13, Insolvencies and Decedents' Estates, explains the United States’ priority and the liability of the fiduciary under 31 USC § 3713 in detail. This section deals generally with the duties of the fiduciary and the assessment and collection of the liability imposed by 31 USC § 3713.

  3. The liability of a fiduciary is not dependent upon any benefit the fiduciary may or may not receive from the estate. The amount of liability is to the extent of the payments the fiduciary made of debts over which the United States was entitled to priority under 31 USC § 3713 or to the amount which may remain due and owing the United States on its claim, whichever is the lesser.

5.17.4.16.4  (08-01-2010)
Establishing a Fiduciary's Liability

  1. A fiduciary's liability may be established through administrative procedures or through suit.

  2. Liability may be established administratively through the notice and assessment procedures under IRC § 6901.

  3. IRC § 6901 provides that the liability of a fiduciary may be assessed as any other tax, and notice and demand may be issued and collection may be effected by levy if necessary. However, the liability of the fiduciary must be assessed within one year after the fiduciary liability arises or within the 10-year period for collection of the tax in respect of which such fiduciary's liability arises, whichever is later. The fiduciary may execute a waiver to extend the period of limitations for assessment. Where income, estate and gift taxes are involved, the fiduciary is entitled to a notice of fiduciary liability and an opportunity to file a petition with the Tax Court for a redetermination of the liability asserted against the fiduciary.

  4. A suit may also be filed in court against the fiduciary under IRC § 7402(a) to collect the amount of the fiduciary's liability.

5.17.4.17  (08-01-2010)
Civil Injunctions under IRC § 7402(a) to Restrain Pyramiding

  1. An injunction is a court order that requires a party either to refrain from certain actions or to perform certain actions. Federal district courts have jurisdiction to issue injunctions under IRC § 7402(a). Injunctions can be obtained to restrain the future conduct of any person when necessary or appropriate to enforce the internal revenue laws. United States v. Ernst & Whinney, 735 F.2d 1296, 1300–1301 (11th Cir. 1984), cert. den., 470 U.S. 1050 (1985); United States v. Hart, 701 F.2d 749 (8th Cir. 1983); and United States v. Ekblad, 732 F.2d 562 (7th Cir. 1984). Suits for injunctions may be appropriate against employers and their responsible officers who have a history of pyramiding federal trust fund taxes and who continue to do so.

5.17.4.17.1  (01-08-2016)
Standards for Injunctive Relief under IRC § 7402(a)

  1. A plaintiff must be able to show "irreparable harm" and that it has no adequate remedy at law to obtain an injunction. The Service has presented proof on "irreparable harm" satisfying these standards in trust fund cases referred for injunction. In addition the Service's practice has been to limit injunction suits against trust fund pyramiding to cases where the amount of tax due is significant, and the Service has first exhausted all administrative means to collect the taxes. Before seeking an injunction the Service should:

    1. Exhaust all administrative remedies,

    2. Consult with Counsel where the taxpayer has previously abandoned other business ventures, leaving unpaid and uncollectible tax liabilities, and

    3. Refer to IRM 5.7.2, Trust Fund Compliance, Letter 903 Process and IRM 25.1.8.2, Trust Fund Violations.

  2. The court will focus on two critical factors: first, the defendant's persistent failure to comply with employment tax laws after repeated administrative efforts to effect voluntary compliance, and second, the reasonable likelihood that the defendant will continue to pyramid trust fund liabilities. United States v. Buttorff, 761 F.2d 1056, 1062 (5th Cir. 1985) and United States v. Kaun, 827 F.2d 1144, 1149–50 (7th Cir. 1987). Accordingly, requests for injunctions against a trust fund violator should show:

    1. the violation is not an isolated occurrence, but part of a pattern of past violations including, where applicable, evidence of prior assessments and penalties;

      Reminder:

      While past violations are what a court will focus on, it is important to remember that monitoring of the taxpayer's compliance is an on-going task both during and after any court decision. Compliance monitoring includes during the recommendation preparation and submission, court action, and after the court has issued its order.

    2. the defendant is clearly a "responsible person" with respect to the pyramided taxes;

    3. the defendant's activities place him in a position where continued violations can be anticipated, and

    4. the anticipated violations jeopardize the effective enforcement of the employment tax laws.

5.17.4.17.2  (08-01-2010)
Types of Injunctive Relief against Trust Fund Pyramiding

  1. In past trust fund pyramiding cases, the Government has first sought a preliminary injunction against in-business taxpayers preventing them from:

    1. failing to timely pay their future corporate income tax, FUTA tax, and withholding and FICA tax liabilities;

    2. transferring any money or property to any other entity to have that entity pay the salaries or wages of the defendants' employees; and

    3. assigning any property or making any payments after the preliminary injunction is issued until the trust fund liabilities, accruing after the preliminary injunction, are first paid to the Service.

  2. The individual defendants and other persons authorized to disperse company funds have been required monthly to sign and deliver to the Service statements that they have read the court's preliminary injunction order and will obey it.

  3. The Justice Department has also asked district courts to issue preliminary injunctions authorizing the Service to enter defendants' premises and seize and sell corporate property if the defendants violate the injunction. Such violations may result in further court proceedings against the violator for civil or criminal contempt, including the possibility of imprisonment. If a district court judge is initially unwilling to imprison the principals of a failing business for violating a preliminary injunction, the court may be willing to order the failing company (through its principals) to file a bankruptcy petition for immediate liquidation and appointment of a trustee.

  4. It may be appropriate for the Government to seek an injunction against certain corporate principals who have a pattern of creating new companies after the Service (or other creditors) seek to collect overdue accounts from an existing corporation. SeeUnited States v. Wolf, 93 AFTR2d 2004-2417 (W.D. Okla. 2004) (Professional employer organization enjoined where it underpaid client’s trust fund liability, diverted funds to related corporations, and left only a shell). Under these circumstances, the Government may seek an injunction requiring the principals to, among other things, notify the Service if they acquire, manage, or work for another company in the next five years (or other appropriate time period). Id. SeeUnited States v. Campbell, 897 F.2d 1317, 1323–1324 (5th Cir. 1990), for an injunction case sustaining affirmative duties of this nature under IRC § 7408.

5.17.4.17.3  (01-08-2016)
Injunction Monitoring

  1. Injunctions are generally issued for a period of time (e.g., five years), during which the taxpayer must be monitored for violations of the injunction.

  2. The injunction may provide that certain violations, if cured within a specified period of time and limited to a specific number of violations, will not default the judgment. Where violations are not cured or surpass the number allowed, the injunction will be in default.

  3. Compliance monitoring would include items such as found in IRM 5.17.4.17.2(1). See also IRM 25.3.2.6.2.

Exhibit 5.17.4-1 
IRM 5.17.4 Legal Revenue Officer Guide — Suits by U.S. -- Limitation Upon Assessment

Limitation Upon Assessment
Tax Circumstances Involved Code Section Time Limit
Income, estate, gift, employment, and miscellaneous excise. (a) General rule 6501(a) 3 years after return is filed. See notes below regarding filing dates of early returns and quarterly employment taxes.
  (b) Request for prompt assessment of any tax for which a return is required (other than the estate tax) by a decedent, or by his/her estate; or by a corporation undergoing dissolution. 6501(d) 18 months after request, but request cannot be made before return is filed. Limited to 3 years after return is filed.
  (c) Omission of 25 percent of gross amount. 6501(e) 6 years after return is filed.
  (d) False or fraudulent return with intent to evade tax. 6501(c)(1) No limitation.
  (e) Willful attempt to evade tax (other than income, estate or gift tax). 6501(c)(2) No limitation.
  (f) Failure to file return. 6501(c)(3) No limitation.
  (g) Agreement in writing executed before expiration of period prescribed for assessment between Commissioner and taxpayer to extend period. 6501(c)(4) Assessment may be made at any time prior to expiration of the agreed time.
  (h) Assessment of liability of initial transferee. 6901(c)(1) 1 year after expiration of period of limitation against the transferor.
  (i) Assessment of a transferee of a transferee. 6901(c)(2) 1 year after expiration of period against preceding transferee, but not more than 3 years after expiration of period for assessment against the initial transferor; or, if applicable, one year after the return of execution in a collection court proceeding against a prior transferor.
  (j) Assessment of liability of fiduciary. 6901(c)(3) 1 year after the liability arises, or before the expiration of the period for collection of the tax, whichever is later.
  (k) Where Commissioner and transferee or fiduciary agree to extend period of assessment prior to expiration of period for assessment. 6901(d)(1) At any time during agreed period.
  (l) Where taxpayer deceased or corporation dissolved. 6901(e) Same period as if death or dissolution has not occurred.
Trust Fund Recovery Penalty General rule 6672(b)(3) 6501(a) Same as IRC 6501(a) limit for underlying business returns reflecting withheld or collected tax, but not before the later of--(a) the date 90 days after the date on which timely penalty notice was given, or (b) if there is a timely protest of the proposed assessment, the date 30 days after final administrative determination.
Notes:1. The period of limitations for assessment is suspended on the date that a statutory notice of deficiency is mailed to the taxpayer under IRC § 6213(a). If no petition is filed with the Tax Court, the suspension continues for 150 days (210 days if the taxpayer lives outside of the United States). See IRC § 6213(a) and IRC § 6503(a). If a petition is filed, the suspension continues until sixty days after the decision of the Tax Court becomes final. IRC § 6503(a)(1) (income, estate and gift tax); IRC § 6901(f) (fiduciaries and transferees).
2. Returns, other than employment tax returns, filed before the due date will be considered as filed on the last date provided by law. IRC § 6501(b)(1).
3. For purposes of IRC § 6501, a return filed before the due date is considered filed on the due date. IRC § 6501(b)(1).
4. For purposes of IRC § 6501, employment tax returns for any period of a calendar year, filed before April 15 of the succeeding year, will be considered as filed on April 15 of such succeeding year. IRC § 6501(b)(2).
5. See IRM 25.6.1.9, Statute of Limitations, Assessments, for more information regarding the statute of limitations on assessment.

Exhibit 5.17.4-2 
IRM 5.17.4 Legal Revenue Officer Guide — Suits by U.S. -- Limitation Upon Collection

Limitation Upon Collection
Tax Circumstances Involved Code Section Time Limit
Income, estate, gift, employment and miscellaneous excise. (a) Where assessment timely made, tax may be collected by levy or by a proceeding in court. 6502(a) Within 10 years after assessment. Note: The authority to extend the collection period by waiver was curtailed by RRA 98. See IRM 5.17.4.5, above.
  (b) Judgment rendered against the taxpayer arising out of assessed tax liability. 6502(a) Period for collection by levy is extended and does not expire until the liability for the tax (or a judgment against the taxpayer arising from such liability) is satisfied or becomes unenforceable. NOTE: The period for collecting on a federal judgmentlien generally is 20 years from the date that the judgment lien arises. 28 USC 3201(c)(1). With the court's approval, however, the judgment lien may be renewed once for an additional 20 years. 28 USC 3201(c)(2).
  (c) Assets of taxpayer in control or custody of court. 6503(b) Suspended for period assets of taxpayer (including the assets of the estate of a decedent or of an incompetent) are in the control or custody of the court in any proceeding before any court of the United States or any state and for 6 months thereafter.
  (d) Taxpayer outside the United States for a continuous period of at least 6 months. 6503(c) Suspended during the period of taxpayer's absence from the country if such period is for a continuous period of at least 6 months. If at time of taxpayer's return, period for collection would expire before expiration of 6 months from date of return, period is not to expire until 6 months after the date of his return. Accord Treas. Reg. § 301.6503(c)-1. See IRM 5.1.19.3.7, Taxpayer Living Outside the U.S., for more information.
  (e) Property of third party wrongfully seized or received by the Government. 6503(f) Suspended during period from date of wrongful seizure or receipt to date property administratively returned to taxpayer pursuant to IRC 6343(b) or date on which a final judgment to the effect that levy was wrongful is secured pursuant to IRC 7426(a)(1) and for 30 days thereafter. The suspension is only as to that part of the assessment equal to the amount of money or value of specific property returned.
  (f) Taxpayer files bankruptcy. 6503(h) Suspended for the period during which the IRS is prohibited from collecting by reason of the bankruptcy case and for 6 months thereafter.
Note: This exhibit lists some of the more common suspensions under IRC § 6503. Other paragraphs of IRC § 6503 and other IRC sections result in suspensions of the collection statute, including, but not limited to, IRC §§ 6503(j), 6015(e)(2), 6330(e)(1), 6331(i)(5), 6331(k)(3)(B), 6672(c)(4), 7508, and 7508A. See IRM 5.1.19, Collection Statute Expiration, for additional information.

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