Here is a rule the IRS sometimes forgets. It cannot keep a levy that the law requires it to release. Vinatieri v. Commissioner is the Tax Court decision that turned that common sense into a holding, and it is one of the most useful cases a low-income taxpayer can have in a Collection Due Process hearing.
The Facts
Kathleen Vinatieri lived in Tennessee in an apartment she rented for $600 a month. On September 13, 2007, the IRS sent her a Final Notice of Intent to Levy for unpaid tax she had reported on her 2002 return. She found out about the collection when her employer told her about the proposed wage levy. She timely requested a CDP hearing.
She told the settlement officer that she had pulmonary fibrosis and could work only part time. At the officer's request, she submitted a Form 433-A showing monthly income of $800, monthly expenses of $800, $14 in cash, and a 1996 Toyota Corolla with 243,000 miles worth $300. She owned nothing else. The officer's verification was consistent with what she reported.
The settlement officer's log stated that she met the criteria for currently not collectible hardship status under the Internal Revenue Manual. But the officer also found no record of returns for 2005 and 2007. Vinatieri explained that the payroll company that should have issued her 2005 W-2 had gone out of business and the IRS had no income information for her either. Because she was not in filing compliance, Appeals said no collection alternative could be considered. On June 2, 2008 it issued a notice of determination sustaining the levy. The determination did not address the hardship the officer had recorded.
Vinatieri, without a lawyer, petitioned the Tax Court. The IRS moved for summary judgment.
The Issue
Does Appeals abuse its discretion by sustaining a levy that would create economic hardship, on the ground that the taxpayer has not filed all required returns?
The Holding
Yes. In an opinion by Judge Dawson, the Tax Court held that § 6343(a)(1)(D) and the regulations require release of a levy that creates economic hardship whether or not the taxpayer has filed all required returns. It explained that "if the taxpayer has provided information that establishes the proposed levy will create an economic hardship, the settlement officer cannot go forward with the levy and must consider an alternative." The Court found a levy on her wages or car would leave her unable to pay basic living expenses, concluded the determination "was wrong as a matter of law and, therefore, was an abuse of discretion," and denied the IRS's motion for summary judgment.
The Reasoning
The release statute
IRC § 6343(a)(1)(D) says the IRS shall release a levy if it "has determined that such levy is creating an economic hardship due to the financial condition of the taxpayer." The regulation, Treas. Reg. § 301.6343-1(b)(4), says a levy creates economic hardship and must be released "if satisfaction of the levy in whole or in part will cause an individual taxpayer to be unable to pay his or her reasonable basic living expenses." The regulation directs the IRS to consider factors such as age, employment, dependents, necessary expenses for food, clothing, housing, medical care and transportation, local cost of living, and extraordinary circumstances like a medical catastrophe.
A levy that must be released cannot be sustained
Here is the core of the opinion: "When a taxpayer establishes in a pre-levy collection hearing under section 6330 that the proposed levy would create an economic hardship, it is unreasonable for the settlement officer to determine to proceed with the levy which section 6343(a)(1)(D) would require the IRS to immediately release. Rather than proceed with the levy, the settlement officer should consider alternatives to the levy."
Filing compliance is not a condition of hardship release
The IRS relied on prior memorandum opinions upholding its policy of requiring taxpayers to be current with returns before granting collection alternatives. The Court said that policy was generally reasonable, but in those cases the taxpayers had enough income to meet basic living expenses. Neither § 6343 nor the regulations condition a hardship release on filing compliance. The Court quoted the legislative history of the CDP statute, which describes its purpose as giving taxpayers "a meaningful hearing before the IRS deprives them of their property." A decision to proceed with a levy that must immediately be released "is unreasonable and undermines public confidence that tax laws are being administered fairly."
The standard of review
Because the underlying liability was not at issue, the Court reviewed Appeals' decision for abuse of discretion, meaning whether Appeals acted arbitrarily, capriciously or without sound basis in fact or law. A determination that is wrong as a matter of law meets that test.
What It Means for Taxpayers Today
Hardship is a defense to the levy itself
If you truly cannot pay your basic living expenses, a levy should not go forward in a CDP case, even if you have unfiled returns. That does not make the debt go away. It means Appeals must consider an alternative, such as currently not collectible status, instead of approving a levy the IRS would have to release. Our article on currently not collectible status explains what that status does and does not do.
Prove it with a complete financial statement
Vinatieri won because her financial information was complete, current and verified. The opinion notes that a taxpayer claiming hardship must submit complete and current financial data. A vague claim that you are broke will not do it. A Form 433-A or 433-F with supporting documents, consistent with what the IRS can verify, will.
Still file the returns
Do not read Vinatieri as permission to ignore unfiled returns. The IRS will generally not grant an installment agreement or accept an offer in compromise while returns are missing, and the case did not change that. It held only that the filing requirement cannot justify a levy that hardship law requires the IRS to release. File what you can, and document why you cannot file the rest, as Vinatieri did with her missing W-2.
Individuals, not businesses
The regulation's hardship language refers to an individual taxpayer unable to pay reasonable basic living expenses. A business that cannot pay its bills is in a different position. Do not assume Vinatieri protects a corporation or partnership.
Use the CDP hearing
The hardship argument is strongest when you raise it in a timely CDP hearing, where an independent officer must weigh whether the levy is "no more intrusive than necessary" under § 6330(c)(3)(C) and the Tax Court can review the result. If you missed the hearing deadline, you can still ask the IRS to release a levy for hardship under § 6343, but you lose the Tax Court review. See Boechler v. Commissioner on late petitions.
The Bottom Line
The Tax Court did not let the IRS hide behind a compliance checklist. Kathleen Vinatieri had $14 and a car with 243,000 miles on it. Taking either would have left her unable to live or work, and the law already said the IRS would have to give it back. Vinatieri stands for a simple proposition: the IRS cannot use a CDP hearing to approve what the Code forbids it to keep.