What Is a Tenant's Duty to Pay Rent to the IRS After a Tax Levy?

Residential tenants often have little to no control over who they rent property from. But when a landlord runs into trouble with the IRS, it can be the tenant who is stuck paying. What is a tenant’s duty to pay rent to the IRS after a tax levy on a rented property? And what are the penalties if they fail to do so? A recent decision in United States v Gora explains.

IRS Can Issue Tax Levies Against Rented Properties

If the IRS assesses taxes and penalties against a taxpayer, it has a wide range of tools at its disposal to collect the debt. This includes the ability to issue a tax levy against any property belonging to the taxpayer but in the possession of third parties. That levy allows the IRS to seize any payments due to the taxpayer related to the property, such as rental income.

In US v Gora, the IRS issued tax assessments, interest, and penalties for tax years 2010 through 2019 against Curtis and Kathleen Olson totaling $263,747.45. When they failed to promptly pay the amount, on September 23, 2020, the IRS issued a Notice of Levy against the residential property the Olsons had rented to Joanie Gora. The Notice of Levy was sent to Ms. Gora, informing her of her duty to pay rent to the IRS after the tax levy, and the risk of penalties if she failed to do so.

Penalties for Failure to Pay Rent to the IRS After a Tax Levy

Under federal tax law, if a third party receives a Notice of Levy and fails to pay the amount subject to that levy without reasonable cause, that third party is subject to a 50% penalty, on top of the surrender of the levied amount. “Reasonable cause” may include a “bona fide dispute concerning the legal effectiveness of the levy.” However, if there is no reasonable cause, the 50% penalty is mandatory, unless:

• The third party did not possess the taxpayer’s property or rights to it at the time the levy was issued
• The property was “subject to a prior judicial attachment or execution.”

At trial, Ms. Gora argued that the first of these exceptions applied. She asserted that she did not have a written lease with the Olsons when the levy was issued, and that even when she did, it was a month-to-month lease, which she argued limited the IRS’s right to collect payments. However, the IRS officer spoke to Ms. Gora on multiple occasions, as early as October 2020, and she never raised this issue with the IRS.

The United States District Court for the District of Minnesota found that Ms. Gora knew of her duty as a tenant to pay rent to the IRS based on its tax levy against the Olsons by October 2020. That meant that if she did not have reasonable cause not to pay, she would be liable not only to pay the rent for the property to the IRS, but for an additional 50% penalty for her failure to do so.

Can the IRS Issue a Levy Against a Month-to-Month Rental Agreement?

But what about her defenses? Can the IRS issue a levy against a month-to-month rental agreement, or an oral rental agreement? Ms. Gora took possession of the Olson’s property in January 2019. At the time, the Olsons were still making improvements to the property, so her rental payments increased in time. Ms. Gora said there was no written agreement until November 2020. However, the IRS presented a month-to-month lease agreement dated February 1, 2019, and signed by the parties on February 11, 2019. It required Ms. Gora to pay $1,150 per month rent and a security deposit of $1,100. While her payment history was less than that at first, by September 2020, when the levy was issued. She moved out of the rental property around July 9, 2022.

The District Court considered Ms. Gora’s defenses:

• That the IRS could not impose a levy without a written rental agreement
• That a month-to-month lease limited the IRS to only one month’s rent

Neither were persuasive. The Court applied Minnesota law saying that a month-to-month lease created a “tenancy at will” allowing the tenant to hold possession of the landlord’s property “without a fixed ending date.” Because she was in actual possession of the property from the date of the Notice of Levy until July 9, 2022 when she moved out. The Court also found that a month-to-month lease – either written or oral – created a fixed and determinable obligation that the levy could attach to. Since it was clear that Ms. Gora had a fixed rental obligation of $1,150 per month, she had a duty to pay that amount to the IRS upon receiving the Notice of Levy. Ultimately, the District Court found that Ms. Gora was liable for $24,150 in monthly rents, plus interest, and an additional $12,075 in penalties for failure to comply with the tax levy.

Ms. Gora’s case is a cautionary tale for tenants. In addition to everything discussed in this blog, the opinion in US v Gora is full of credibility findings demonstrating that Ms. Gora had tried to mislead the Olsons, the IRS, and the Court, providing falsified bank statements and photos of checks that had never been received by the IRS. If she had spoken with a tax attorney when she received the Notice of Levy, she would have better understood the tenant’s duty to pay rent to the IRS after a tax levy, and avoided the penalty owed for failing to pay.

Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 35 years experience. If you have questions about tax levies, contact Joe Viola to schedule a free consultation.