IRS Seizes Social Security Benefits to Pay Tax Debt: Should You Be Worried?

When Motown writer Edward J. Holland, Jr., owed the IRS nearly $20 million, the agency took some extreme steps to collect on the tax debt. It even seized 100% of his social security payments. Find out how the IRS could do that, and whether you need to worry about it happening to you.

IRS Seizes Motown Writer’s Social Security Payments

Edward J. Holland, Jr., was known for his work writing music for some of Motown’s biggest musicians. He was a co-writer for songs like “You Can’t Hurry Love” and “Stop in the Name of Love” by the Supremes, and “Just a Little Bit of You” by Michael Jackson. He also operated a music publishing company, helping artists get their music out to the world.

But while he was making money, Mr. Holland apparently wasn’t paying his taxes. Between 1991 and 2012, Mr. Holland accumulated nearly $20 million in unpaid taxes, penalties, and interest. When you owe the IRS that much money, you can expect the IRS to do something about it. In Mr. Holland’s case, the agency issued a levy on the proceeds of Mr. Holland’s music publishing company, and seized 100% of the 78-year-old’s social security payments.

Needless to say, Mr. Holland objected. He and his company filed separate lawsuits objecting to the IRS’s collection efforts. But in a recent opinion, the U.S. District Court for the Eastern District of Michigan, Southern Division, said the IRS was within its rights under the law.

2 Statutes, 2 Ways for the IRS to Collect of Social Security Benefits

The decision in Holland v United States can seem pretty confusing if you don’t pay attention to the fine print. The issue in the case was whether the IRS was entitled to 100% of Holland’s social security benefits, or simply 15% off the top. It turns out, there are two different sections of the Internal Revenue Code that the IRS can use to collect social security benefits for unpaid tax debt:

• Section 6331(a) applies to one-time levies on present and future “fixed and determinable” obligations to which taxpayers have an existing right.
• Section 6334 applies to continuing levies on recurring future payments like wages and government benefits as they become due.

The question the Michigan District Court had to consider was which category social security falls into. It decided the answer was both. Section 6331(h) specifically references social security benefits, meaning the IRS was entitled to use that section to collect 15% of each social security benefit payment as it came about.

But the court said Section 6331(a) also applied. According to the judge, a person’s social security benefits are fixed and determinable because beneficiaries receive letters telling them how much they are entitled to once they are qualified. All they have to do to collect is survive the month. The court held that nothing in the statute says the IRS can’t use Section 6331(a). Since it found the benefits qualified as a fixed and determinable obligation, the court said the IRS had the choice to apply that statute and collect 100% of Holland’s social security benefits as well.

Do Taxpayers Need to Worry About Their Social Security Benefits?

Just because the IRS has the authority to take a certain action doesn’t mean it is going to in every case. That’s especially true when it comes to Social Security benefits. The IRS is happy to use the 15% rule to collect unpaid taxes from Social Security recipients who fall behind. But in over 30 years of tax law practice, I have only seen two cases where the IRS went after 100% under Section 6331(a).

Generally, the IRS will avoid collections efforts that create an “undue hardship” on the taxpayer. In other words, the government isn’t interested in putting people in such dire financial straits that they end up receiving public welfare to support themselves. So if you are a 65 year old single person whose only income is your monthly social security benefit, you probably don’t have much to worry about.

However, if you owe a lot of money to the IRS like Mr. Holland did, or if Social Security is only one part of your monthly income, the IRS may choose to take more drastic action, including using a 100% levy under Section 6331(a). That can make life uncomfortable, and cause you to fall behind on your financial obligations.

If you are worried about how an IRS levy against your social security benefits could affect your financial future, your best choice is to talk to an experienced tax attorney early, even before the collections efforts start. By negotiating with the IRS now, you and your tax attorney may be able to come to a payment arrangement that satisfies the IRS and protects your social security benefits in the years to come.

Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you have questions regarding Social Security benefits and tax levies, contact Joe Viola to schedule a consultation.