Do You Owe Back Taxes and Have a TSP Account? Be Forewarned

318,462 federal employees owed back taxes to the federal government as of September 20, 2013. Under a proposed rule, money in the TSP accounts of these individuals could be used to pay a tax levy.

Are you a federal employee who owes money to the Internal Revenue Service (IRS)? If so, a proposed new rule in the Federal Register may be of interest. At first glance, this would not appear to be a significant event. And, for most federal employees, it is not significant as they pay their taxes as required.

But not all federal employees do pay their taxes. Federal employees owe a total of $3.3 billion in back taxes to the federal government, according to Internal Revenue Service data. 318,462 federal employees owed back taxes as of September 20, 2013. That is an increase of 2.6% from the previous year according to USA Today. That puts the average tax bill at $10,391, according to IRS data obtained by USA TODAY under the Freedom of Information Act. Agencies with the highest rates of tax delinquency are small federal agencies dealing with civil rights and the disabled: The National Council on Disability (11.54%), the Committee for Purchase from People Who Are Blind (10%) and the Civil Rights Commission (9.52%).

The Federal Retirement Thrift Investment Board (FRTIB) has issued a proposal to amend its regulations for responding to tax levies and criminal restitution orders that comply with statutory requirements. Currently, the TSP’s governing statute includes a provision that protects funds from execution, levy, attachment, garnishment, or other legal process, except for certain enumerated exceptions. The exceptions do not currently include federal tax levies. But, apparently, there are now enough federal employees owing enough money to the IRS that the IRS has been taking steps to receive the several billion dollars owed by federal employees.

In effect, the proposed rule would allow the FRTIB to take money out of a TSP investor’s account if the investor is required by federal court to pay criminal restitution. Under the proposed rule, when the FRTIB receives a tax levy or criminal restitution order, it would place a freeze on the investor’s account until the payment is made.

As of now, the IRS cannot issue levies on current or former federal employee TSP accounts. The new rule has just been proposed and is currently in the comment period. It will not become final until the comment period has expired. The proposed rule would also require the FRTIB to notify a TSP investor that the TSP agency has received a levy and that it will be withdrawing funds from the account to pay off the debt.

Comments on the proposed rule must be received on or before August 26, 2014. You may submit comments using one of the following methods:

  • Federal Rulemaking Portal: Follow the instructions for submitting comments.
  • Mail: Office of General Counsel, Attn: James Petrick, Federal Retirement Thrift Investment Board, 77 K Street NE., Suite 1000, Washington, DC 20002.
  • Hand Delivery/Courier: The address for sending comments by hand delivery or courier is the same as that for submitting comments by mail.
  • By fax sent to (202) 942-1676.

In enacting the amendment, Congress placed IRS levies in a small company of exceptions which include child support obligations, alimony obligations, and restitution pursuant to the Mandatory Victims Restitution Act. Congress has deemed these instances as the only permissible reasons for funds to be diverted from a TSP participant’s account. And, under the proposed rule, all funds in the TSP could be subject to the tax levy. As noted in the Federal Register, “the balance in the account of the employee or Member (or former employee or Member)” would be subject to the tax levy.

About the Author

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters on federal human resources. Follow Ralph on Twitter: @RalphSmith47