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The Texas Tax Code has an oft-overlooked provision that imposes harsh penalties against financial institutions that fail to strictly comply with a notice of freeze or levy issued by the Office of the Texas Comptroller against their customers' accounts.
Section 111.021 of the Texas Tax Code — which governs compliance with notices of freeze and levy issued by the Texas Comptroller — is not a new provision or requirement for financial institutions operating in the State of Texas. However, it's a section that, particularly if overlooked, can lead to harsh monetary penalties against financial institutions not accustomed to processing such notices. Specifically, a financial institution that fails to comply is liable for customer funds transferred from targeted accounts up to the total amount owed, as well as an additional amount equal to 50% of the funds sought to be frozen or levied.
Notices Effective Upon Delivery
Notices of freeze and levy issued by the Texas Comptroller are effective upon delivery. This provision is especially exacting upon financial institutions as it facially provides virtually no time for the bank to analyze or process the notice.
To illustrate, suppose the Texas Comptroller issues a notice of freeze to Bank X at 11 a.m. on November 16th, targeting the accounts of customer Jane Doe, who owes the State of Texas $100,000 in delinquent taxes. However, at 7 p.m. that same day, Bank X inadvertently allows $80,000 to be transferred from the targeted accounts. Under this scenario, Bank X would be liable to the Comptroller for the $80,000 transferred and $50,000 — half of the amount sought to be frozen. In such circumstances, the Bank's total liability would actually exceed the antecedent liability of the taxpayer.
By comparison, financial institutions are afforded up to two business days to process a writ of garnishment issued against their customers (See 31 CFR § 212.4).
Notices Can Be Served to "Any Branch Office"
Unlike other claims against a financial institution's customer, notices of freeze or levy issued by the Texas Comptroller do not have to strictly comply with the service requirements under Section 59.008 of the Texas Finance Code, which provides that service of notice must be effectuated at the address designated as the registered agent of the financial institution.
Instead, the Tax Code allows the Texas Comptroller to bypass section 59.008 of the Texas Finance Code and serve notices of freeze or levy upon financial institutions in person or by mail – "[T]o the principal or any branch office of the bank or other financial institution including any office of the bank or other financial institution at which the deposit is carried. (Tex. Tax Code § 111.021(e)) ..."
This exception to section 59.008 can present significant challenges for financial institutions in timely reacting to a notice of freeze because it is a significant departure from usual protocols relating to claims against customers' accounts. As a result, financial institutions may find it difficult to comply with these notices, increasing the likelihood of incurring liability.
Best Practices for Financial Institutions
Each financial institution operating in Texas should develop comprehensive standard operating procedures for processing notices of freeze and levy issued by the Texas Comptroller, which includes education and training of all financial center personnel.
Failure to develop and maintain a robust compliance program for processing the Texas Comptroller's notices of freeze and levy could expose financial institutions to significant losses.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
