1 ADVISORY GUIDE 1/21/14 III-I 1 OVERVIEW Under Chapter of the Hawaii Revised Statutes (HRS), if a taxpayer hasn t paid taxes for which he/she is liable, the Director of Taxation for the State of Hawaii has the power to seize or levy the taxpayer s property. Because your credit union may hold a member s property in the form of a savings or checking account, you may be served a levy. If the State decides to seize funds in a member s account, the Collections Office of the Department of Taxation will mail you a Notice of Levy. The purpose of this document is to notify you that the State claims an interest in some or all of the member s funds on deposit with your credit union. Before sending a levy to you, the State has made attempts to collect these delinquent taxes from your member. The levy applies only to property existing at the time it is served. In other words, on the day a levy is received, that day s account balance is what the credit union would work with. HRS does not cover specific collection procedures. The following information is provided only as a guide. A credit union should have its own internal policies and procedures. Due to severe penalties, if a credit union is not sure how to handle a levy, it should contact its attorney.
2 ADVISORY GUIDE 1/21/14 III-I 2 I. TYPES OF ACCOUNTS Share, share draft and term share accounts are all subject to levy. A. Share Account If a credit union must withdraw all the funds in a share account to satisfy the levy, the member s membership status might be affected. If this is the case, the member should be informed on how to continue membership. The credit union s bylaws would state what s required. Article III, Section 3 of NCUA s Standard Bylaws used to say a member has at least six (6) months to increase the balance to the par value of one share. The revised Standard Bylaws now allow a credit union to determine its own time frame. Funds that are secured for a loan do not have to be remitted. If you have a delinquent loan and your loan agreement contains the right of offset, you would have had to offset any delinquent loan payments BEFORE receipt of the levy. B. Share Draft Account Funds in a share draft account that are subject to a levy cannot be used to cover outstanding share drafts. This means that share drafts might have to be returned. For member service reasons, the credit union should inform its member that this might happen. C. Term Share Account Term share accounts are subject to levy. If term share account funds must be used to satisfy the levy, a credit union may impose early withdrawal penalties.
3 ADVISORY GUIDE 1/21/14 III-I 3 D. Individual Retirement Account (IRA) HRS does not exempt IRA accounts from a levy. However, the levy you receive might specifically exempt any IRA accounts. If the levy you receive does not exempt IRA accounts, then the IRA funds are subject to levy. Due to the nature of IRA accounts and the penalties that could be incurred by the member, a credit union should be careful before remitting any IRA funds. Although you have to comply with the levy, you should inform your member that his/her IRA account will be affected and explain the penalties that might be involved (i.e., early withdrawal penalty if it s a term share account; IRS early distribution penalty if the member is below age 59 1/2, etc.).
4 ADVISORY GUIDE 1/21/14 III-I 4 II. ACCOUNT OWNERSHIP A. Joint Accounts HRS does not exempt joint accounts from a levy. All of the funds in a joint account are subject to a levy. If a joint owner not named in the levy wants to appeal, he/she must contact the Collections Office of the State Department of Taxation. A credit union should follow its own internal policies/procedures when notifying all owners on the account. B. Trust Accounts HRS does not exempt trust accounts from a levy. On a trust account (revocable or irrevocable), the issue is whether the account belongs to the delinquent taxpayer. The Department of Taxation s position is that an account belonging to a taxpayer is subject to levy. An account s owner is usually determined by Name and a Tax Identifying Number (TIN), which may be a Social Security number or an Employer Identification number. The levy will list the name and TIN of the delinquent taxpayer. When the credit union receives the levy and searches its records, accounts belonging to the name/tin on the levy are subject to levy. If the credit union is unsure, it might want to contact the collector named on the levy or its attorney.
5 ADVISORY GUIDE 1/21/14 III-I 5 III. WHEN A LEVY IS RECEIVED When a credit union receives a levy someone should work on it immediately. A. Stamp the date of receipt on the levy. Read the levy carefully and be sure to follow its instructions. It might exempt a certain type of account such as an IRA account. Call the collector named on the levy if the instructions are not clear. B. Verify that the taxpayer named in the levy is really a member. Match the Tax Identification Number (TIN) on the levy with your files. C. If the taxpayer and TIN matches your files, look up all accounts with the same name/tin. This includes share, share draft, term share accounts. D. Hold all funds up to the amount of the levy. E. Call the collector (named on the levy) acknowledging receipt of the levy. Inform the collector that you will be notifying the member and that funds will be sent to the State within seven (7) days. Unlike an IRS levy with its 21 day rule, HRS says property must be surrendered on demand. The league s counsel considers 5-7 days as being reasonable. F. Follow up with a short letter to the collector of what was discussed.
6 ADVISORY GUIDE 1/21/14 III-I 6 G. Inform the member by mail, certified with return receipt requested, and include the following information: 1. That a levy was received. 2. When the funds will be withdrawn and the amount of withdrawal. The amount withdrawn might be less than the levied amount if the funds in the member s account were less than the levy amount. 3. A copy of the levy. Although the State informs the taxpayer when they serve a levy, for member service purposes, the credit union should also inform the member, especially if it involves a share draft account. The credit union would want to inform the member that some share drafts might not be paid because the account funds had to be withdrawn to satisfy the levy. H. Remit the funds as instructed on the levy. If the balance in the member s account is less than the levy amount, remit the lesser amount. If the balance in the account is more than the levy amount, remit only the amount specified in the levy. I. Any issues regarding the levy are between your member and the State. If the member feels the levy is in error, he/she should contact the State. The credit union must comply with the levy unless it receives a Release of Levy form.
7 ADVISORY GUIDE 1/21/14 III-I 7 IV. RELEASE OF LEVY If the member has settled his/her delinquent tax problem with the State, you will receive a Release of Levy. Due to the short time between when you receive and remit levy funds (7 days), you may receive a verbal notification from the collector first informing you that the levy has been released and not to remit any funds. The collector should give his/her name and Identification Number. You should verify this verbal release by calling the number listed on the levy. You should receive the Release of Levy form a few days after receiving the verbal notification. V. LEVY FROM OUT-OF-STATE In order for an out-of-state levy to be valid, it must be approved by a Hawaii court. (HRS , Extraterritorial enforcement of tax laws) However, even though court approval has been granted, the credit union may still want to take the extra step of contacting its legal counsel before complying with the levy. Many times an out-of-state levy is received with no court approval because the levying entity is hoping that the credit union will just release the funds and pay the amount of the levy.