Can the IRS Levy against a Creditor Entitled to Receive Bankruptcy Plan Distributions?

Sometimes the IRS takes aggressive action to collect unpaid taxes. The “levy” is a common tool used by the IRS to force a third-party to help collect unpaid taxes. The levy is tendered to the third-party holding money or property of the taxpayer and demands that the third-party tender the money or property to the IRS.

In the case of In re Elrod, 523 B.R. 790 (Bank. W.D. TN 2015), the IRS sent a levy to the Chapter 13 trustee demanding that money designated by the plan to be sent to a creditor-taxpayer instead be sent to the IRS. To be clear, the IRS was attempting to collect a tax from a creditor who was otherwise eligible to receive plan distributions. The IRS was attempting to intercept the trustee’s payments and force the trustee to tender to the IRS that creditor-taxpayer’s share.

The Chapter 13 trustee objected claiming it was a violation of the automatic stay, 11 U.S.C. §362(a). The court agreed with the trustee and found that the IRS had violated the automatic stay because the property held by the trustee was “property of the bankruptcy estate” as defined by 11 U.S.C. §541(a)(1) and §1306(a). The levy was quashed.

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