In the course of enacting the Tax Cuts and Jobs Act, Pub. L. 115-97, the Senate added a provision addressing a recurring problem by extending the time to file a wrongful levy action from nine months to two years. It also gave the IRS authority to return money seized or monetary proceeds of property sold following a levy within two years of the date of levy. To put the changes in context, a bit of background is in order.
Congress has given the IRS very potent collection tools; it can impose a lien on a taxpayer’s property, and it can seize property from a taxpayer, all without a court order. I.R.C. §§ 6321; 6331. The IRS can also impose a lien on property held by a third party and then enforce that lien through a levy, where the holder of the property is the taxpayer’s nominee or alter ego. G.M. Leasing Corp. v. United States, 429 U.S. 338, 350-51 (1977). Property is then seized and applied to someone else’s tax liability, all without any judicial determination that the holder actually is a nominee or alter-ego.
Initially, there was no formal remedy available to provide redress to an individual who paid off a nominee or alter-ego tax lien. In light of that gap in federal procedure, in United States v. Williams, 514 U.S. 527, 529 (1995), the Supreme Court authorized a refund claim by the holder of property who paid off a tax lien that secured taxes owed by another person. In 1998, Congress amended the Code to provide remedies to third parties who wish to challenge a lien imposed on their property; consequently, a refund claim is no longer available. See Portsmouth Ambulance, Inc. v. United States, 756 F.3d 494, 499-500 (6th Cir. 2014).
As for levies, the situation was anomalous:
- A taxpayer whose property was seized through a levy could bring a refund claim and would have two years to file suit from the time the claim was rejected. I.R.C. § 6532(a)(1) (2016).
- In contrast, the third party who was subjected to a nominee or alter-ego levy only had nine months to challenge the levy. I.R.C. § 6532(c)(1) (2016).
If that seems unfair on its face, it proved worse in application. Periodically, third parties would act on the assumption that they could sue for a refund, and by the time that they learned they could not, it was too late. See EC Term of Years Trust v. United States, 550 U.S. 429, 434-36 (2007). Even after the Supreme Court decided EC Term of Years Trust, periodically cases would surface in which third parties sought to bring refund actions where they were not available.
The changes are reflected in section 6343(b), which expands the period in which the IRS is authorized to return money from nine months to two years, and in section 6532(c)(1), which provides for a two-year limitations period.
The changes make the system fairer for third parties, and they were overdue.