Thursday, January 16, 2014

IRS Tax Levy Garnishment Exemptions

IRS tax levy garnishment exemptions are refreshingly simple. 26 U.S.C. § 6334 - Property Exempt From Levy, provides in part,

"(a) Enumeration
"There shall be exempt from levy —
"(1) . . .
"(2) . . .
"(3) . . .
"(4) Unemployment benefits . . .
"(5) . . .
"(6) Certain annuity and pension payments . . . payments under the Railroad Retirement Act, . . . the Railroad Unemployment Insurance Act, special pension payments received by a person . . .[on the military] Medal of Honor roll . . ., and annuities . . . [for retired military].
"(7) Workmen’s compensation Any amount payable to an individual as workmen’s compensation . . .
"(8) Judgments for support of minor children .
"If the taxpayer is required by judgment of a court of competent jurisdiction, entered prior to the date of levy, to contribute to the support of his minor children, so much of his salary, wages, or other income as is necessary to comply with such judgment.
"(9) [See note below]
"(10) Certain service-connected disability payments . . .
"(11) Certain public assistance payments
"Any amount payable to an individual as a recipient of public assistance under—
"(A) [SSI for the aged, blind, and disabled], or
"(B) State . . . public welfare programs for which eligibility is determined by a needs or income test.
("12) Assistance under Job Training Partnership Act . . . . "

Note:  26 U.S.C. § 6334(a)(9) must be read in conjunction with 26 U.S.C. § 6334(d) the amount exempt from an I.R.S. wage garnishment is the sum of one standard deduction plus each allowed personal exemption, with that annualized amount being pro-rated to the applicable wage pay period. Also,  26 U.S.C. § 6334(d)(2)(B) provides that a verified written statement must be submitted to establish the number of personal exemptions. Otherwise, in the absence of such a verified written statement, the exemption "shall be applied as if the taxpayer were a married individual filing a separate return with only 1 personal exemption."

26 U.S.C. §§ 6334(a)(8) & (9) are the only parts of this section that would apply to a debtor's wages. The payments set out as exempt in paragraphs (4), (6), (7), (10), (11) and (12) clearly cannot be garnished by the I.R.S. directly, but the funds may become vulnerable to a bank garnishment once the benefits have been deposited into an account.

Matthews v. Lewis, Ky., 617 S.W.2d 43 (1981) may provide some traction for a debtor arguing the statutory exemption follows the funds, at least to the extent that they can be traced and identified.  In Matthews workers’ compensation benefits deposited into a checking account had been garnisheed. The Kentucky Supreme Court was asked to decide whether a Kentucky exemption statute (KRS 342.180) precluded the garnishment. The Court ruled that statutory language specifically identifying worker's compensation payments as exempt from execution was intended to preclude garnishment. The opinion observed that:
"Our society's contemporary social programs exhibit a philosophy of relief for the distressed, the impoverished, and the victims of personal and financial catastrophes among us. The Workers' Compensation Act is simply one aspect of those social programs. Kentucky's exemption statutes are simply another necessary instrument in the overall scheme of social welfare programs. They are the teeth in the protection given certain deserving victims from their creditors . . . We hold that unless they provide clearly to the contrary, Kentucky's exemption statutes, including but not limited to KRS 342.180, extend protection to deposits in bank checking accounts so long as those deposits can be identified as or traced to payments of exempt funds."