Tuesday, April 29, 2003
IRS taxes man on money they took from his retirement account
Okay, Tax Court's decision here is correct, but I still shared this with my wife as an example of the cruelty of the system.
Nick Allen Palmerino owed unpaid taxes for 1996. In may of 1998, the IRS imposed a levy on his 401(k) account, and took what was owed. This case is about taxes the IRS says he owes for 1998. Why? Because he did not include the money the IRS took from him as income. Tax Court ruled for the IRS. Everything in the account was tax-deferred, and the distribution benefited Palmerino by relieving him of debt. This analysis is correct, but still the effect seems monumentally unfair: The IRS can tax you for money they take from your retirement.
Of course, the IRS would like to be even more cruel, but Tax Court is holding them back. A footnote points out that the IRS has acquiesced to a prior Tax Court decision striking down the 10 percent early withdrawal penalty under similar circumstances. However, the footnote also states that this acquiescence only applies to levies on retirement accounts prior to the 21st century. So watch out. If your client owes taxes and has a retirement account, the IRS can take the retirement, charge a tax on it, and possibly impose a penalty as well.