Remember the last time you received a tax refund from the IRS for over $75,000, even though your income was barely $20,000? I don’t either. This situation, however, happened to one lucky gentleman in 2009, when James Waterman received a $75,169 tax refund from an adjusted gross income from the prior year of just $21,594. The Internal Revenue Service discovered the error and placed an officer on the case to recover the money from Mr. Waterman.

In fact, Mr. Waterman actually owed $92,779. The IRS visited Mr. Waterman at his house, notified him of the outstanding balance, and demand payment. Mr. Waterman refused. The IRS informed him that it intended to levy his bank accounts. Just two hours after notifying Mr. Waterman, the IRS served a jeopardy levy on Mr. Waterman’s bank, JPMorgan Chase Bank, by delivering the notice to Mr. Waterman’s local bank. A levy permits the IRS to freeze a person’s assets.

Shortly thereafter, Chase faxed the levy to its processing department. In between the period when Chase received the levy notice and when Chase actually froze Mr. Waterman’s assets, however, Mr. Waterman was able to withdraw from $40,000 from his accounts. Chase did not freeze Mr. Waterman’s accounts until two days after it received the levy. By that time, however, Mr. Waterman only had about $7,600 in his Chase accounts.

IRS files lawsuit against Chase for its failure to timely freeze bank accounts

The IRS instituted proceedings against Chase in the United States District Court in California to recover damages for Chase’s failure to timely freeze Mr. Waterman’s bank accounts. On 15 August 2014, the court issued an opinion finding that Chase is liable to the IRS for failing to properly freeze Mr. Waterman’s accounts.

Interestingly, the court noted that the agent’s “decision to make a further statement regarding the levy was not required and, in hindsight, was ill advised” because it “may have spurred Waterman to withdraw money from those accounts before Chase had the opportunity to freeze them.” Chase argued that it was required to freeze the accounts within a reasonable period and it was denied a reasonable opportunity to freeze the accounts because of the IRS’s actions.

Initially, the court stated that Chase could not be blamed for the IRS improperly tipping off Mr. Waterman. The court, however, later reversed its stance and held:

 “The fact of the matter, though, is that the IRS was required to tip Waterman off no matter what. Even when jeopardy assessments are made, the IRS must provide notice of demand for immediate payment before any levy may be imposed.”

The court also noted that the statute does not contain any reasonableness element that would delay the placement of a temporary hold on property after a levy is served.

The court further stated that, “Once the levy was served, Chase was the only party who could have precluded the dissipation of assets.” A violation may carry liability for 100% of the value of the levied property, even if one acts reasonably, or liability for 150% of the value of the levied property if a party acts unreasonably.

Contact our attorneys about tax liens or tax debt

Even though Chase was held liable for its failure to freeze Mr. Waterman’s bank accounts, Mr. Waterman is not off the hook. Undoubtedly, Chase will go after Mr. Waterman for any amount that it will be required to pay to the IRS.  As we’ve written before, tax liens are serious–both for you and any third-parties involved in the matter, such as banks or other parties holding assets belonging to a debtor. If you have any questions regarding tax debt or tax liens, our experienced California tax attorneys can answer your questions. Contact one of our offices today for help.

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