If you’ve ever found yourself in a bit of a tax pickle – perhaps you missed the deadline for settling your taxes – don’t let anxiety about a potential IRS levy take the wheel just yet. As the IRS themselves say, their primary goal is “to work with you to resolve your debt” well before they resort to collection actions. After all, tax filing can be quite intricate, and it’s not unusual to find yourself in a bind.
When it comes to navigating collection actions like a tax lien or levy, the key is understanding what these actions entail and how to steer your way through them effectively. Most importantly, you must always remember that there are ways to manage potential tax levies – they don’t just pop out of thin air. Typically, they’re part of a longer process that involves regular communication from the IRS. So, take a breath, and let’s unravel the tax tangle together.
A tax levy is a legal action that the Internal Revenue Service (IRS) takes to seize a taxpayer’s property or assets to satisfy a tax debt. This is done when a taxpayer has failed to pay their taxes or make suitable arrangements to settle their delinquent tax debts.
But contrary to popular perception, tax levies don’t happen as soon as you default on your taxes. Rather, they are the culmination of the collection process, which entails quite a few steps. By that, we mean that it is hard to be surprised by an IRS levy. So you can rest assured that you will have prior warning if things go that far.
Let’s start from the point where returns are filed, which happens annually or quarterly depending on the type of taxpayer you are. Once your return is filed, here’s how the process works:
- If the IRS finds that you owe taxes, you’ll receive an initial bill, which is your first notice of the tax debt. The total tax amount owed is calculated based on the information in your return, along with any applicable interest and penalties.
- If you do not clear your tax dues even after receiving the initial bill, you’ll receive at least one more bill. However, you must remember that interest and penalties continue to accumulate until the full outstanding amount is settled.
- If you still don’t make the required payment even after receiving the final bill, the IRS will initiate collection actions. These could range from offsetting your future tax refunds against the outstanding amount (until it’s paid in full) to a levy, i.e., seizing your assets and property. In some cases, a Revenue Officer may visit your home/business unannounced.
Once you get a bill (or bills), ignoring it is not an option - not a good option anyway. You have a couple of options to keep this process from escalating:
- The first and most obvious one is to pay the outstanding amount in full before the due date. If you are, for whatever reason, unable to do that, you can opt for one of the IRS’s payment plans. If even that is not an option, you can call the IRS to explain your situation and reach a solution together.
- But let’s say you disagree with the notice. In such a case, you can call the number on it or visit your local IRS office. In this process, you must ensure that you have all the relevant information in place - a copy of the bill and any tax returns, canceled checks, or other records that will help your case. If all goes well, the IRS will adjust your account and send you a revised bill, if needed.
- In the event you are in bankruptcy, you must notify the IRS of that ASAP. While it may not work to completely eliminate your tax dues, it could get the IRS to temporarily suspend collection actions.
Now let’s say you are unable or do not, for whatever reason, clear your tax dues. What next? This is a quick snapshot of what the collection process typically looks like:
- Federal tax lien: This is a legal claim on all your present and future assets. It automatically comes into effect if you don’t pay what you owe after receiving your initial bill.
- Notice of federal tax lien: This is a public notice to creditors informing them that there is a federal tax lien attached to all your current and future property and rights to property.
- Levy: This is a legal action where property or rights to property are seized to cover a tax debt. If wages or bank accounts are seized, the money will be used to pay off your tax debt.
- Notice of intent to levy and notice of your right to a hearing: Typically, before property is seized, you will be sent this notice. If you don’t pay your overdue taxes, make alternative arrangements to settle the tax debt, or request a hearing within 30 days of receiving this notice, your property may be seized.
- Summons: A summons is a legal order that compels you or a third party to meet with the IRS and provide information, documents, or testimony.
- Passport actions: If the IRS certifies an individual as having a seriously delinquent tax debt, the Department of State will not issue or renew their passport and may revoke a previously issued passport.
Let’s now examine liens and levies in detail.
When you neglect or fail to clear your unpaid taxes after receiving your tax bills, the government gets a legal claim to your property. This is referred to as a tax lien - that is, the legal claim that attaches to your property when you fail to pay the first tax bill that comes your way. This lien is intended to protect the government’s interest in your property so it can realize the unpaid debt through your property if it comes to that. This lien exists in:
- Property, including real estate
- Financial assets
- Current or future rights to any property
- Property that is yours but held by someone else (like your wages, retirement accounts, dividends, bank accounts, licenses, rental income, accounts receivable, the cash loan value of your life insurance, or commissions)
A notice of federal tax lien serves as a public notification to creditors about the existence of a lien. The IRS submits this notice to assert their claim’s priority over those of other creditors. This document is filed with local or state authorities, such as the county recorder of deeds or Secretary of State offices.
A lien can affect the following aspects:
- Assets: This means the government has a legal claim against your property. This lien will also include any future assets that you acquire while the lien is still operative.
- Creditworthiness: When a notice of federal tax lien is issued, it might be disclosed by consumer credit reporting agencies. This could have the adverse effect of potentially lowering your credit score and impeding your ability to obtain credit, such as a loan or credit card.
- Employment: Employers, landlords, and other parties may also take this information into consideration and may not view it positively.
- Selling your home: Tax liens may be revealed during title investigations, thereby putting your home sale or refinancing at risk.
- Business: The lien also applies to all business assets and any entitlements to those assets, including outstanding receivables.
- Bankruptcy: Even if you do end up filing for bankruptcy, your tax debt and lien may persist even after the bankruptcy process.
The next step the IRS will take is the actual levy.
Although a federal tax lien is a legal claim to your property, a levy is a legal action that involves actually seizing your property to fulfill your tax obligation.
The IRS draws its authority to levy from the Internal Revenue Code (IRC), specifically outlined in IRC 6331. Essentially, any property or entitlement belonging to the taxpayer, or on which there is a federal tax lien, can be subjected to a levy, unless the IRC provides an exemption for that property.
Once a lien is ignored, the IRS will initiate the levy process. However, they will inform you of their intent to levy. Typically, here’s what happens before a levy:
- The IRS assesses the tax the taxpayer owes and sends them a notice and demand for payment (a tax bill).
- The taxpayer fails or refuses to make the payment.
- The IRS then sends them a final notice of intent to levy and notice of your right to a hearing (levy notice) at least 30 days prior to the levy.
- This notice may be delivered in person, left at their residence or place of business, or sent to their last known address.
- It’s important to note that if the IRS levies a state tax refund, the taxpayer may receive a notice of levy on your state tax refund, along with a notice of your right to a hearing after the levy.
- The IRS provides the taxpayer with prior notification that it may initiate communication with third parties (such as employers, banks, or neighbors) to gather details regarding the taxpayer’s tax obligation.
In some circumstances, the IRS will not offer you a hearing at least 30 days before seizing your property. These include the following situations:
The collection of the tax is in jeopardy.
A levy is served to collect tax from a state tax refund.
A levy is served to collect the tax debt of a federal contractor.
A Disqualified Employment Tax Levy (DETL) is served. A DETL is the seizure of unpaid employment taxes* and can be served when a taxpayer previously requested a Collection Due Process appeal on employment taxes for other periods within the past 2 years.
*Employment taxes are the amount an employer is required to withhold from their employees for their income tax and Social Security/Medicare tax (trust fund taxes) plus the amount of Social Security/Medicare tax they pay for each employee.
If the IRS serves a levy under one of these exceptions, they send you a letter explaining the seizure and your appeal rights after the levy is issued.
The most obvious approach to stopping a levy is paying your outstanding tax dues. Here are your other options:
Apply for one of the IRS’s payment plans: An IRS Installment Agreement entails the option to make smaller, regular payments over an extended period if you’re unable to pay the entire amount in one go. Please note that agreements spanning over 120 days may incur a setup fee.
Offer in compromise: If you’re unable to pay the full amount you owe, or if installment payments are not feasible, you might qualify for an offer in compromise. This means you’re seeking to resolve your outstanding tax debt for a sum less than the total owed. The IRS could approve an offer in compromise if:
- They acknowledge that your tax debt might not be correct.
- Your assets and income are insufficient to cover the owed amount.
- Paying the full amount due would result in financial strain due to your unique circumstances, or would be deemed unfair.
However, this option has its limitations. Prior to your proposal, you must:
Complete all the necessary tax filings as mandated by law
Pay the required estimated tax payments for the present year
Meet all the federal tax deposit requirements for the ongoing quarter
Further, this is not an option if you are undergoing bankruptcy proceedings or are currently subject to an audit.
Requesting postponement: If making any payments would hinder your ability to cover essential living costs, you can ask for a postponement in the collection process until you are financially capable of paying. But before granting your request, the IRS might require you to fill out a Collection Information Statement and back up your claim about your financial situation. However, even if your request is approved, penalties and interest will continue to accrue until the full amount is paid, and the IRS may file a notice of federal tax lien. They could also request updated financial details during this temporary delay to assess your ability to make payments.
Appeal: You have the right to appeal most collection actions to the IRS Office of Appeals. You can seek a collection due process hearing within 30 days from the receipt of your notice of intent to levy and notice of your right to a hearing. To initiate this, you need to submit your request (check Form 12153, Request for a Collection Due Process or Equivalent Hearing) to the address specified in your notice.
In cases where collection due process rights do not apply, there may be alternative avenues of appeal, such as the Collection Appeals Program, which you can use if you disagree with an IRS employee’s decision regarding any levy, seizure, or Notice of federal tax lien filing and want to appeal it by requesting a conference with that employee’s manager.
In some instances like the following, levies may be released by the IRS:
- The amount owed has been paid in full.
- The collection period ended before the levy was issued.
- Doing so will help the taxpayer meet their obligations.
- The taxpayer has entered into an installment agreement, and the terms of the agreement do not allow for the levy to continue.
- The levy creates an economic hardship, meaning it prevents the taxpayer from meeting basic, reasonable living expenses.
- The value of the property is greater than the amount owed, and releasing the levy will not hinder the IRS's ability to collect the owed amount.
The IRS may return the seized property under the following circumstances:
- The seizure occurred prematurely.
- The seizure violated legal regulations.
- Returning the confiscated property will aid in collecting the debt.
- There is a payment plan in place to settle the liability for which the levy was initiated, except when the agreement doesn’t permit the return of previously seized property.
- IRS protocols were violated.
- This reversal would benefit the taxpayer and the government.
A lien differs from a levy. A lien serves to safeguard the government’s stake in your property if you fail to settle your tax debt. On the other hand, a levy involves physically/actually seizing property to cover the tax debt.
- A tax levy is an IRS action to seize a taxpayer’s assets to satisfy unpaid tax debt.
- It’s a culmination of a process involving the IRS sending you bills, reminders, and, finally, initiating collection actions.
- Options to prevent escalation include paying the amount in full, using IRS payment plans, disputing the bill, or notifying the IRS if you are in bankruptcy.
- A tax lien is the government’s legal claim on various assets, affecting credit, employment, and property transactions, to collect unpaid tax dues.
- Ways to stop a levy include paying, using payment plans, requesting an offer in compromise, requesting postponement, or appealing the collection actions initiated.
- A levy reversal is possible under certain conditions.
Facing a tax levy can be daunting, but it’s not the end of the road. Whether it’s paying in full, setting up a payment plan, or seeking professional advice, there are steps you can take. Don’t hesitate to take action today and regain control of your financial situation. Reach out to a tax professional or contact the IRS for guidance tailored to your specific circumstances.
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