There are several actions the IRS can take when it comes to collections activity. Here are three of the more common situations with our brief responses.
When tax matters get serious, the IRS will file a tax lien or tax levy against a taxpayer to protect the government’s interest.
A tax lien is a document filed in public records by the IRS declaring their right and intention to collect on taxes they believe are owed. The IRS and state tax departments use tax liens to secure unsecured debt, namely delinquent taxes.
Typically, a tax lien is issued when a taxpayer fails to pay taxes after the IRS or a state has made a demand for payment. A tax lien can be filed against individuals, trusts, estates, partnerships, associations, companies, corporations, or any other organization that has a tax liability due. Once filed, a lien stays in place until the subject tax liability is satisfied or becomes unenforceable (usually due to expiration of the statute of limitations). The lien protects the IRS or state and provides priority over certain third-party creditors.
Every Notice of Federal Tax Lien declares the lien is “in favor of the United States on all property belonging to this taxpayer for the amount of these taxes, and additional penalties, interest, and costs that may accrue.” This means that the IRS has the legal ability to collect what they believe is due in whatever manner they believe will be most effective. This includes agreeable options like formalized installment arrangements, as well as more aggressive means, like a levy.
After stating their intent, the IRS uses a tax levy to start collection proceedings on the taxes they believe are owed.
A levy allows the IRS to legally seize assets to satisfy a liability.
The types of levies include:
The IRS must provide taxpayers with written notice before they act on collecting the debt. The most common ways the IRS does this, beyond filing liens, is to mail notices, letters, statements, and other correspondence. You may also be assigned and contacted by a revenue officer if your business owes back taxes or if you owe over $1,000,000 as an individual.
The IRS does not tell a taxpayer when they are going to levy a bank account or when they will seize the account or other assets. Instead, they send various letters and notices, such as Notice LT39, Notice CP90, or Notice CP504, indicating their intention to collect after a specified period of time. The notice period for a levy may only be sent out one time. Once the notice period has passed, the IRS controls timing.
The best way to deal with a tax levy is to prevent it from happening in the first place by promptly responding to IRS notices. While it may be tempting to put off dealing with a tax liability, the IRS generally does not stop or delay their collection process.
If you receive a tax levy, it’s important to know your rights as a taxpayer, including:
A wage garnishment is a means to collect a debt owed. It usually requires a court order that is served upon an employer and requires the employer to deduct a portion of an employee’s compensation and pay that portion to a creditor. Once the IRS garnishment is in place, it stays in effect until released according to the court order or terminated through legal action.
However, the IRS and student loan creditors can garnish your wage compensation without seeking a judgment and resulting court order, which makes those creditors more likely to use a wage garnishment in the collection of amounts owed.
The IRS can require your employer take what is termed the non-exempt amount, which they determine using a complex formula based on things such as your tax filing status, the number of people that could qualify as dependents, the current standard deduction amount, and information contained in your last tax return.
IRS wage garnishments continue every pay period until the tax debt is satisfied, unless other arrangements are made to pay the overdue taxes, or the levy is released.
For taxpayers with limited income, there are options available, including:
Generally, the IRS can levy 15% of your Social Security or use other retirement plans, too. Plus, all tax filings and payments must be timely when trying to use these options.
Once a levy is issued and the bank receives a Form 668-B, the bank is required to freeze the funds in the levied accounts, up to the amount of the tax debt stated in the levy, for 21 days. If the bank does not comply with the IRS freeze, the IRS can hold them responsible for the tax debt and add penalties equal to 50% of the tax liability.
The 21-day freeze period allows the taxpayer time to appeal and claim that the levy should be lifted. If the taxpayer (or the representative who has power of attorney for the taxpayer) does not contact the IRS within the allotted time, the levy instructs the bank to send the levied funds to the IRS to apply against the tax debt due. This will usually mean paying any penalty and interest first, leaving the payment of actual tax debt last.
Anyone with a tax debt problem should be aware that the IRS can issue a levy at any time once the taxpayer has been properly notified. The levy of a bank account takes more internal IRS discussion and approval than most IRS collection activities. Therefore, they are not done just by chance; they are direct and used to get the full attention of someone who has a tax debt that they aren’t paying, particularly where a business operation is involved.
When working with the IRS, consider the following:
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