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CCH® PENSION AND BENEFITS — 6/27/08

IRS cannot require taxpayer to suspend membership in retirement fund prior to retirement age in order to levy account assets

When the IRS is attempting to levy assets in the retirement fund account of a taxpayer who has not yet reached retirement age, the IRS cannot “elect,” on behalf of the taxpayer, to suspend the taxpayer’s membership in the retirement fund in order to secure the immediate release of the assets in that account, according to IRS Chief Counsel Advice.

A 50-year-old woman had an account with a state retirement fund from her previous employment. She was no longer employed by the state but was not retired. The fund had a provision which allowed her to suspend membership in the fund and receive a distribution of the assets in her account, but she had not elected to do so. The IRS attempted to levy the woman’s retirement fund, but the fund would not release assets in the account unless the woman elected to suspend membership in the retirement fund. The issue was raised as to whether the IRS could “elect,” on behalf of the taxpayer, to suspend the account and secure the immediate release of the taxpayer’s assets in the retirement fund.

Upon the service of a notice of levy, the ruling stated, the IRS “steps in the shoes” of the levied taxpayer and acquires the same property rights as the taxpayer has at the time of the levy. In this case, the ruling continued, the levy reached the taxpayer’s future rights to retirement benefits upon reaching retirement age, since the taxpayer had that right at the time of the levy, but levying on the present right to future payment would not require immediate distribution by the retirement fund; the levy would only have to be honored when benefits became payable to the taxpayer under the terms of the retirement fund. The IRS could not exercise the taxpayer’s right to suspend membership in the retirement fund in order to obtain assets in that fund prior to the taxpayer’s retirement date.