Analysis of and reflections on recent cases and rulings.

• Author: Beavers, James A.
• Position: TAX TRENDS

The IRS can apply levy proceeds to liabilities for any tax year covered by the levy; a taxpayer can prove, through extrinsic evidence, the mailing date of a Tax Court petition that has no postmark on the mailing envelope.

Procedure & Administration

Bounced check is not a payment

The IRS could apply a payment resulting from a levy on an account to the liabilities for any of the years covered by the levy, notwithstanding the fact that a taxpayer had earlier delivered a check to the IRS written on the account, which bounced because the funds in the account had been transferred to satisfy the levy.

Background

David and Audrey Melasky filed joint tax returns for tax years 1995, 1996, 1999-2004, 2006, 2008, and 2009, but they did not pay their tax liabilities for these years. As of April 2009, the IRS had sent the couple multiple notices of intent to levy for each pre-2006 liability. Between 1997 and 2006, the Melaskys and the IRS negotiated offers in compromise and partial-payment installment agreements, but the Melaskys failed to meet the terms of the agreements.

As of January 2011, the Melaskys had not satisfied any of their pre-2006 tax liabilities and owed approximately $345,000 to the IRS for that period. They also owed tax liabilities of approximately $724 for 2006, $334 for 2008, and $18,000 for 2009.

On Jan. 27, 2011, the Melaskys delivered an $18,000 personal check to an IRS office in Houston. They designated this check to be applied toward their 2009 liability. Although the IRS Houston office made an entry on that date in their account for 2009 showing the payment, it did not immediately present the check for payment.

On Jan. 31, 2011, before the IRS Houston office presented the Melaskys' check for payment, the IRS office in Philadelphia issued their bank a notice of levy with respect to their 1995, 1996, and 1999-2004 liabilities (the Jan. 31 levy). As a result, the bank froze the couple's account.

Thereafter, the IRS presented the $18,000 check to the bank for payment, but it bounced because the bank had already turned over the account's balance in response to the Jan. 31 levy. The IRS reversed the previously applied credit it had given the Melaskys for 2009 and assessed a $360 penalty for issuing a bad check.

The Melaskys filed suit in Tax Court, arguing, among other things, that the IRS was required to apply $18,000 of the amount taken from their bank account due to the Jan. 31 levy to the outstanding liability for 2009.

The...