Tax Liens and Workers’ Compensation Benefits: Who Gets the Money?
Every employer has been there before. You hire a new employee and everything is going smoothly, until one day you receive a letter from the North Carolina Department of Revenue compelling you to withhold an amount from your new employee’s paychecks to satisfy an outstanding tax obligation the employee owes. In the boilerplate of that garnishment letter is language stating the employer will be held responsible for the employee’s tax obligation in the event the employer fails to withhold and pay the garnishment amount. Knowing that you never want to ignore a letter from the state or federal department of revenue, you comply with the letter and begin withholding the tax lien amount. But what happens in cases where the employee with the tax obligation was injured at work and is receiving ongoing temporary total disability benefits instead of a normal salary check? Must the defendants withhold a weekly amount from each TTD/TPD check or from a settlement to satisfy the outstanding tax lien?
Though the North Carolina Industrial Commission and Appellate Courts have not directly ruled on this issue, some plaintiffs’ counsel have argued that, based on state and federal statutes, the Department of Revenue cannot recover a tax lien from weekly TTD/TPD checks or from a lump sum settlement.
N.C. Gen. Stat. § 97-21 provides in relevant part “[n]o claim for compensation under this Article shall be assignable, and all compensation and claims therefor shall be exempt from all claims of creditors and from taxes.”
The Federal Tax Code also includes a provision that seems to exempt workers’ compensation benefits from tax liens. § 6331(a) of the U.S. Tax Code provides the government authority to garnish the wages of employees who have failed to pay their taxes; however, it carves out a few exemptions from that general rule. § 6331(a) states as follows:
“If any person liable to pay any tax neglects or refuses to pay the same within 10 days after notice and demand, it shall be lawful for the Secretary to collect such tax (and such further sum as shall be sufficient to cover the expenses of the levy) by levy upon all property and rights to property (except such property as is exempt under section 6334) belonging to such person or on which there is a lien provided in this chapter for the payment of such tax.”
Section 6334(a)(7), which sets out specific exemptions from the wage garnishment rule cited above, specifically states that workers’ compensation benefits cannot be garnished to satisfy outstanding tax obligations. Therefore, the U.S. Tax Code seems to suggest that the government is prohibited from asserting tax liens against workers’ compensation benefits.
While the statutes above seem to support that neither the N.C. nor U.S. Department of Revenue can assert a tax lien against workers’ compensation benefits, there are a few Appellate cases in North Carolina that have allowed parties that would seem to qualify as “creditors” under § 97-21 to, nevertheless, assert liens against workers’ compensation benefits. In State of North Carolina v. Miller, the Court of Appeals held that N.C. Child Support enforcement was not barred by N.C. Gen. Stat. § 97-21 from recovering child support payments out of a plaintiff’s weekly workers’ compensation benefits. See State v. Miller, 77 N.C. App. 436, 438 (1985) (holding Child Support Enforcement was not barred by § 97-21 because “the obligation to support one’s children is not a ‘debt’ in the legal sense of the word.”) Similarly, in Sara Lee Corp. v. Carter, the North Carolina Supreme Court allowed a Trial Court Order to stand which declared that the plaintiff’s weekly workers’ compensation benefits were to be held in constructive trust for the benefit of Sara Lee Corporation, since the Trial Court found the plaintiff had defrauded Sara Lee and breached the fiduciary duties he owed Sarah Lee, entitling Sarah Lee to damages from plaintiff worth $322,729.20. See Sara Lee Corp. v. Carter, 351 N.C. 27 (1999).
Because the aforementioned cases allowed parties to recover what seemed like “debts” from workers’ compensation benefits, it is unclear how North Carolina or federal courts would treat a case addressing whether the N.C. or U.S. Department of Revenue could assert a tax lien against a plaintiff’s workers’ compensation benefits.
Practice Tip: In situations where the Department of Revenue sends defendants a letter asking defendants to garnish a plaintiff’s wages, the best approach is to see if the plaintiff will consent to the wage garnishment. Because the plaintiff will accrue interest on any outstanding tax obligation the longer he/she fails to pay it, there is a significant benefit to the plaintiff in having the tax debt paid off. However, if the plaintiff will not consent to wage garnishment to satisfy the tax lien, defendants may need to seek guidance from the Commission on how to proceed. Where disputed tax lien or garnishment issues arise, employers and insurance carriers should consult with defense counsel to determine defendants’ obligations. Please reach out to our Workers’ Compensation team should you need guidance in this area.