Federal Payment Levy Program: The New IRS Automated Levies on Military Retirement Payments May Be Harming Veterans Experiencing Economic Hardship

August 23, 2017

Over the years, I and my staff have written and advocated extensively about our concerns with the IRS’s implementation of the Federal Payment Levy Program (FPLP). My concerns are amplified by a recent IRS change in policy regarding adding military retirement payments as a payment stream to FPLP. In this blog post, I will provide relevant background on the issue. In the second part of the blog, I will discuss the data points upon which the IRS relies in justifying FPLP levies on military retirement payments, why those figures are inaccurate and misleading, and why I believe military retirement payments should be run through the Low Income Filter (LIF) to mitigate the risk of economic harm to these retirees.

The FPLP is an automated system the IRS uses to match its records against those of the government’s Bureau of the Fiscal Service to identify taxpayers with unpaid tax liabilities who receive certain payments from the federal government. Internal Revenue Code (IRC) § 6331 allows the IRS to issue continuous levies for up to 15 percent of federal payments due to these taxpayers who have unpaid federal liabilities. Because federal payments, such as Social Security, constitute a significant portion of many taxpayers’ monthly income, TAS published a “Consumer Tax Tips” brochure, What You Need to Know: the Federal Payment Levy Program, to assist folks in understanding their rights under the FPLP program. Starting in May 2017, the IRS added military retirement payments paid out by the Defense Finance and Accounting Service to the FPLP. Military disability payments and payments to Medal of Honor recipients are exempt from FPLP.

The IRS generally applies a low income filter to the FPLP to screen out taxpayers whose incomes are below 250 percent of the federal poverty level. The purpose of this filter is to protect low income taxpayers from economic hardship due to a levy on their Social Security old age or disability benefits, or Railroad Retirement Board (RRB) benefits. The LIF has a long history in the IRS. I first advocated for it in 2001 when the IRS began implementation of the FPLP. Commissioner Rossotti placed a moratorium on FPLP implementation until the IRS developed a low income filter. After the Government Accountability Office critiqued the efficacy of the filter, the IRS removed it. Following the publication of an important TAS research study in the 2008 National Taxpayer Advocate Annual Report to Congress, the IRS created the 250 percent Low Income Filter. Later, the IRS also agreed to exclude recipients of the Social Security Disability from the program. The filter ensures the IRS does not issue levies that the law would require it to release because of the taxpayer’s economic hardship.

However, it is likely that some retired service members will not be subject to the FPLP’s low income filter. (See National Taxpayer Advocate 2014 Annual Report to Congress, Federal Payment Levy Program: Despite Some Planned Improvements, Taxpayers Experiencing Economic Hardship Continue to Be Harmed by the Federal Payment Levy Program). As I discussed in the annual report, the current LIF exclusion criteria still fail to protect many low income taxpayers. For instance, when the IRS records indicate the taxpayer has an unfiled delinquent tax return (or returns) indicator on his or her account (also called a tax delinquency investigation indicator), the account will bypass the LIF and leave the taxpayer subject to the FPLP.

The IRS policy change has not been widely publicized. All taxpayers – especially those who are veterans -- deserve person-to-person interaction, or at least a good faith effort of personal contact, before the IRS levies their retirement payments. (See National Taxpayer Advocate 2015 Annual Report to Congress, Taxpayer Service: The IRS Has Developed a Comprehensive “Future State” Plan That Aims to Transform the Way It Interacts With Taxpayers, But Its Plan May Leave Critical Taxpayer Needs and Preferences Unmet, for an in-depth discussion of how the IRS’s reduction in face-to-face interaction with taxpayers is directly correlated to an erosion of confidence in the fairness of the tax system.)

I am deeply concerned that the IRS has decided to target retired service members, not long after recent military engagements in Iraq and Afghanistan have decreased in intensity. Serving in the United States Armed Forces requires years of tremendous sacrifice, challenging and dangerous assignments, frequent moves across the country, long separations from family, and fairly meager pay. Whether viewed as the sole means of income or a reward from the U.S government for serving 20 years in the Armed Forces, a service member’s retirement pay should not be considered another automatic FPLP funding stream.

The IRS based its decision to include military retirement payments as an additional payment stream in the FPLP on figures contained in a 2015 Treasury Inspector General for Tax Administration (TIGTA) audit report (Most Federal Employee/Retiree Delinquency Initiative Cases Are Resolved With the Collection of Revenue; However, Some Program Improvements Can Be Made – hereinafter “TIGTA report”). TIGTA recommended that the IRS expand the use of the FPLP to other federal payments, including military retirement payments. TIGTA reported that the IRS planned to exclude all military retiree disability payments and utilize the LIF to exclude military retirees with income below the 250 percent of the federal poverty guidelines, similar to taxpayers receiving Social Security or RRB benefit payments. Subsequently, the IRS, however, decided not to implement the LIF for all military retirees.

In my next blog, I will discuss in more detail my concerns about adding military retirement payments as an additional payment stream under the FPLP, and explain why the IRS’s data provided as a justification for adding these payments to the FPLP are inaccurate and misleading.

Additional blogs from the National Taxpayer Advocate can be found at www.taxpayeradvocate.irs.gov/blog.

The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate is appointed by the Secretary of the Treasury and reports to the Commissioner of Internal Revenue. However, the National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget.