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socrateaser, Attorney
Category: Bankruptcy Law
Satisfied Customers: 38879
Experience:  Attorney and Real Estate Broker -- Retired (mostly)
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IN Chapter 13 to payback IRS. Filed after they filed garnishment

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IN Chapter 13 to payback IRS. Filed after they filed garnishment back in 2010. Laid off last August so took out retirement so we could keep was making Chapter 13 payments. If the retirement money was used to pay an IRS Levy then the penalties are reduced. Does the amount that IRS was paid through the trustee during that time count as an IRS Levy?

IRC Section 72(t)(2)(A)(vii) provides that the 10% penalty does not apply to a levy under IRC Section 6331. However, a levy is an involuntary seizure of property by the IRS. Whereas your payments are voluntary.

In In re Beam, 192 F. 3d 941 (1999), the IRS served a notice of levy on a Chapter 13 bankruptcy trustee. The U.S. 9th Circuit Court of Appeals held that the IRS levy was valid against the trustee, once the debtor's case was dismissed and the bankruptcy stay lifted.

The point here is that the only way that the 10% penalty would be avoided, is if the IRS were actually levying your account or the bankruptcy trustee's account. Because the trustee is not being levied, the penalty is assessable against you.

Frankly, it would have been better had you permitted the IRS to levy your IRA directly, rather than to pay via the Chapter 13 plan. You would have to modify your plan to create this outcome, and the legal fees may not be worth the savings.

Hope this helps.
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Customer: replied 4 years ago.

Thank you. I didn't think it applied, but was hoping.

You're welcome and good luck.