IRS levied bank account due to alimony not reported

State is PA.  My brother was divorced in 2002 and ordered to pay alimony.  He paid without fail and claimed the alimony accordingly as a tax deduction.  This past April the IRS levied his bank account and pulled a significant amount of money out.  His CPA was able to determine that this was due to his ex-wife not claiming receipt of the alimony thus not paying taxes on it.  They submitted all of the documentation (copies of divorce decree indicating that he was court ordered to pay, cancelled checks showing that he had paid the court ordered amount, etc.).  To date, notification has been rec'd from the IRS that they have rec'd the documentation and that it is under review.  His question is, when they finally do refund the money that they levied (assuming he prevails on this), will he be entitled to collect interest as well?  Also, this levy was for the 2006 tax year.  There are 2 other years where the ex has done the same thing (he knows as he has seen the IRS returns pursuant to CS modification). &n... the chances high that this situation may be repeated when the other 2 yr's tax returns don't match up (hers and his) or will there be some kind of notation in his file regarding the divorce decree and the outcome of this review?  &nb...

OhioCP:

His question is, when they finally do refund the money that they levied (assuming he prevails on this), will he be entitled to collect interest as well?

If he proves his entitlement to the alimony deduction and gets a refund, he will also get interest on that.

OhioCP:

the chances high that this situation may be repeated when the other 2 yr's tax returns don't match up (hers and his) or will there be some kind of notation in his file regarding the divorce decree and the outcome of this review?

First of all, levies don't come completely out of the blue. Before the IRS would assess the extra from denied alimony deductions, it would have sent at least two notices, a notice of proposed assessment and a notice of deficiency. The later notice is required by statute. Then after assessment, he'd have received at least two billing notices, the last one by certified mail warning that after 30 days if he's not paid and not otherwise responded the IRS will seek to collect what is owed by levy. Both of these billing notices are required by statute. Furthermore, the IRS frequently sends as many as three billing notices in betwee those two required notices. Thus, he would have had plenty of time to address this and fix it before the levy ever hit the bank account. My guess is then that he ignored the notices he received, which is never, ever a good idea. Should the IRS seek to assess the tax for denied deductions in the 2 other years, it will use the same process. He wants to ensure that he responds to the notices the IRS sends to him. Notices might have already been sent for 2007 that he's already ignored, for that matter.

Second, the IRS does not maintain some large central audit file on taxpayers. Rather, the information for each tax year is kept separately. As a result, the IRS may not check the 2006 audit file before proceeding to propose assessments for 2007 and 2008. He will want to keep copies of everything involved here, including the IRS determination on the 2006 return, so that he can address the issue more easily the next time around should it be necessary. He may also wish to see his divorce attorney about possible action against the ex for failing to report the alimony and thus causing him tax trouble.

I agree with taxagent, but I will throw out that your brother should make sure that ALL that he is deducting is the alimony.  If there is any child support or property settlement payments included in the money he gives her every month, that part should NOT be deducted as alimony.  People sometimes make that mistake.

"it would have sent at least two notices, a notice of proposed assessment and a notice of deficiency. The later notice is required by statute. Then after assessment, he'd have received at least two billing notices, the last one by certified mail warning that after 30 days if he's not paid and not otherwise responded the IRS will seek to collect what is owed by levy."

No they don't always follow their own statutes.  Those jackals will do anything illegally to collect money if they think they can get away with it and I have personally been their victim and won.  If they think they can levy an account and the person doesn't have the where withall to fight back they will do it.  Send the notice to an old address so that the victim doesn't receive it is in direct violation of the tax codes and they WILL do it. 

This country has sunk to a trillion dollar defecit and the things the IRS is doing to collect on money is down right illegal including dredging up debts not owed, sending notices to old addresses so the tax payor doesn't receive them, and levying without sending bills.  The tax payor would be wise to go straight to hiring legal counsel.  These guys won't stop and will drive him to insanity first.  The ONLY thing that will get them to stop is SKILLLED legal counsel.  It is NOT a DIY legal project.  Once I had skilled lawyers on my side it was AMAZING how quickly the fraud was uncovered and they backed down.

Thanks for the replies.  I knew I could count on getting good answers here!  : )

I questioned my brother as to why he didn't deal with the IRS when he rec'd notices and he repeatedly maintained that he never rec'd them prior to the levy.  It turned out that the IRS had sent the notices to the address on the 2006 returns,  His address has changed since then and the forwarding address was expired.  I'm not exactly sure when he moved, so unfortunately, it may be a similar situation for 07 and would most likely be the same for 05 (which is the other year involved, assuming the IRS would go back this far)..

Ironically, they levied his checking account the same day that his regular taxes for 08 cleared the bank, so at first he thought they had somehow mixed up or there was a system glitch&nbs... that two checks were cashed against his account (although the amounts were a few $1000 dollars apart for what he paid for 08 and what they levied for 06) until he was able to get information from the bank that there was an IRS levy at which point he contacted his CPA.  After a few communications with the IRS, his CPA finally was able to determine that the actual reason was due to his ex not claiming alimony, and my brother and his CPA responded accordingly by sending the approporiate documentation.

I will definately recommend strongly that he keep all documentation and to contact the IRS to double check that they have his correct address on file for 05 and 07, just in case.  I'll also recommend based on your explanation that the IRS deals with year yr. separately that he proactively send them the same documentation (proof of alimony payments and copy of divorce decree ordering him to pay) to try to head off any issues with 05 and 07.  My fingers are crossed anyway that this will work. 

If there are any residual problems coming from this (like the IRS continuing to deny this deduction), I'm sure the next step would be for him to pursue thru his divorce attorney.  For right now, however, he doesn't have any real concrete losses other than not earning interest on the funds that were levied as the bank reversed his overdraft fees that resulted from this levy once he explained the situation (and of course, transferred the money to cover the overdrafts from another account, which luckily he had available), so I'm not really sure what the divorce court would do except reprimand the ex.  I'm assuming that the IRS will pursue her independently of him doing anything in divorce court.  If this is a false assumption, please correct me.  My brother said his ex is looking at about 110k in non-reported income spanning the 3 yrs, so they could hit her pretty hard.

My brother owns a small business, thus his business taxes are paid thru his personal filings (and which is why he has a CPA prepare everything and why he writes fairly substantial checks to the IRS each April based on the business earnings).  He knows very well that child support and other such expenses are not deductible and I'm assuming that the CPA would have informed him even if he had mistakenly tried to claim this.  No worries on this one!  : ) 

Alimony was stopped in mid 07 when his ex remarried, so that would be the last year for this issue to occur, thank goodness.  &...

Again,  thanks for your service to the lawyers.com community!  It is very much appreciated!  : )

OhioCP:

It turned out that the IRS had sent the notices to the address on the 2006 returns, His address has changed since then and the forwarding address was expired. I'm not exactly sure when he moved, so unfortunately, it may be a similar situation for 07 and would most likely be the same for 05 (which is the other year involved, assuming the IRS would go back this far)..

The IRS uses the address for these notices from the last return filed with it. It has a central computer system that maintains the address information, and agents use that information for the notices. The computer wiill be updated with newer address information if  the taxpayer has, since the last return was filed, provided the IRS change of address information or the post office informs the IRS of the change of address when mail is forwarded. Unfortunately, forwarding orders expire, so taxpayers can't count on the post office providing that information to the IRS. Thus, when you move, in addition to providing changes of address to friends, relatives, magazines, credit cards, etc., you need to provide changes of address to the IRS, state, and local tax agencies. Not suprisingly, the IRS has a form for this, Form 8822. Otherwise, if you move and the IRS doesn't have your latest address, you may miss key notices and end up in a bad spot like your brother did.

OhioCP:

I'll also recommend based on your explanation that the IRS deals with year yr. separately that he proactively send them the same documentation (proof of alimony payments and copy of divorce decree ordering him to pay) to try to head off any issues with 05 and 07. My fingers are crossed anyway that this will work.

No, he shouldn't do that. The IRS will not have any file for the 2005 or 2007 returns with which to associate that information until such time that the IRS decides to open up an audit for it. Thus, it would be useless to do it now, as it won't help. It won't get looked at by the agent if an audit is opened later because it won't get sent with the information the agent receives. All it might do is prompt the IRS to open an audit which it might not otherwise have done. He should instead hold the documentation until he receives a notice from the IRS asking about it. By the way, if he filed his 2005 return on time, and assuming no fraud and no events extending the statute of limitation (e.g. bankruptcy, being outside the U.S., failure to report at 25% of his income, etc.), it is now too late for the IRS to audit that one. The general rule is that it has 3 years from the due date of the return or the date the return was filed, whichever is later, to make the assessment for that return. A timely 2005 return (with extensions) would be filed at the latest 10/15/2006, meaning the IRS would have had to assess that by 10/15/2009, and that date has now passed.

OhioCP:

I'm assuming that the IRS will pursue her independently of him doing anything in divorce court. If this is a false assumption, please correct me.

That's the usual course of these things—pursue them both until they provide information sufficient for the IRS to determine what the real deal is, whether it is alimony or not. If the IRS determines it is alimony, then it will focus on her and adjust his liability accordingly. Note that "alimony" as defined for federal tax purposes may not match what state divorce law calls "alimony", so the label in the decree calling it "alimony" is not conclusive on the issue.

Once again a very helpful response.  I'll pass the word along to my brother and tell him to keep all of his documentation handy in case it comes up again.  Sounds like 2005 won't be an issue for him (although, if they determine that his ex did commit "fraud" by claiming alimony in 2006, this might prompt them to look at 05, so it might be an issue for her).  I'll also do a bit more research on how IRS defines alimony in comparison to his state's divorce laws.  Thanks for the heads up on this!

"The IRS uses the address for these notices from the last return filed with it."  This doesn't appear to have happened in his case as his 2007 and 2008 returns would have had his correct address as he moved sometime in 07 (since 07 return was filed in April 08 and 08 return filed in April 09).  I just don't know if he moved before or after April.  Regardless, he should have filed a change of address with the IRS when he did move.  Lesson learned! 

Thanks again and have a wonderful day!