If you're feeling stressed because you've missed a tax payment deadline, don't panic about the possibility of an IRS levy just yet. Remember, the IRS aims to collaborate with taxpayers to clear their debts before jumping to severe measures like levies or liens. Tax matters can be complex, and it's not uncommon to face challenges.
To effectively deal with potential collection actions such as tax liens or levies, it's crucial to understand what these terms mean and how you can navigate the situation. Remember, these measures don't arise out of nowhere; they result from a structured process that includes ongoing communication from the IRS.
So, please take a moment to relax, and let's demystify the tax process together.
What Does a Tax Levy Entail?
A tax levy is an authoritative step undertaken by the Internal Revenue Service (IRS) to capture a taxpayer's assets or properties in order to clear out an outstanding tax debt. This occurs only after a taxpayer has yet to settle their tax dues or arrange to resolve their overdue taxes.
However, it's important to dismantle a common myth: tax levies don't instantly follow the moment you miss a tax payment. They represent the final phase in a series of procedural steps in the IRS's collection strategy.
An IRS tax levy comes with fair notice.
So, if you're concerned about reaching this stage, know that you will receive ample alerts before such drastic action is taken.
Know more about the IRS From 1120.
Understanding the Pre-Levy Process
The process begins once you've filed your tax returns, which could be on an annual or quarterly basis, depending on your taxpayer status. Here's what unfolds if you're identified as owing taxes:
- Initial Notification: You'll receive your first notice signaling the tax debt, detailing the amount due, which incorporates your reported figures, plus any added interest and penalties.
- Subsequent Notices: Failure to settle the due amount after the initial bill results in further notices. Remember, your debt grows with ongoing interest and penalties until fully paid.
- Escalating Collection Measures: Persistent non-payment post-final notice activates the IRS's more assertive collection steps. These can range from applying your future refunds towards the debt to potentially levying your assets. In some scenarios, a Revenue Officer might directly contact you.
Proactive Measures
- Act promptly upon receiving any bill: Disregarding notices isn't wise. Payment in full is the ideal response, but if that's unfeasible, explore IRS payment plans or communicate directly with the IRS for alternatives.
- Dispute inaccuracies: If you believe the bill is incorrect, challenge it by contacting the IRS or visiting a local office equipped with the necessary documents for your argument. If valid, the IRS will adjust your account and issue an updated bill if necessary.
- Address bankruptcy situations immediately: Inform the IRS about your bankruptcy filing, which might not erase the debt but can pause collection efforts.
Understanding Collection Steps
- Federal Tax Lien: This legal claim against your assets is activated by non-payment post-initial bill and affects all current and future assets.
- Notice of Federal Tax Lien: A public declaration to creditors that the government has a legal right to your assets.
- Levy: The actual confiscation of assets or property rights to settle your tax debt, which could include garnishing wages or seizing bank accounts.
- Pre-Seizure Notifications: You'll receive a final notice alerting you to the imminent levy and your right to a hearing. Ignoring this can lead to asset seizure.
- Summons: A legal directive requiring you or a third party to provide information or documentation to the IRS.
- Passport Restrictions: Significant tax delinquency can result in passport denial, non-renewal, or revocation.
Next, let's delve into the nuances of liens and levies.
Understanding a Tax Lien
A tax lien emerges when you don't pay your tax debt after receiving your tax bills. It represents the government's legal right to your assets due to unpaid taxes.
Essentially, this lien is the government safeguarding its interest in your properties to settle the debt if necessary.
A tax lien covers:
- Real estate and personal property.
- Financial assets.
- Present and future property rights.
- Assets you own are held by others, including wages, retirement accounts, dividends, bank accounts, licenses, rental incomes, accounts receivable, or life insurance's cash value.
Notice of Federal Tax Lien
This notice is a formal declaration to creditors, signaling the government's legal stake in your assets, taking precedence over other creditors. It's typically filed with local or state entities like the county's recorder of deeds or the Secretary of State.
Impact of a Tax Lien
- Assets: The government stakes a claim on your properties, affecting present and future acquisitions until the lien is resolved.
- Credit: The public filing of a tax lien might damage your credit score, making it harder to secure credit lines.
- Professional Life: Potential employers or landlords might access this information, potentially affecting employment or rental opportunities.
- Property Sales: A tax lien can complicate selling your property or refinancing your mortgage due to title search revelations.
- Business Impact: Liens extend to business assets, affecting everything from physical properties to accounts receivable.
- Bankruptcy: Filing for bankruptcy might not eliminate your tax debt or the associated lien.
The progression from lien to levy is the IRS's next course of action if the debt remains unpaid.
Understanding the Levy Process
While a federal tax lien signifies a legal claim over your assets for unpaid taxes, a levy goes a step further by actualizing the seizure of your assets to settle the tax debt.
IRS Authority for Levy
The IRS's power to enact a levy is granted by the Internal Revenue Code (IRC), particularly under IRC 6331. This statute allows the IRS to seize any property/rights to property of the taxpayer or property on which there is a federal tax lien unless explicitly exempted by the IRC.
The transition from a lien to a levy involves these steps:
- The IRS evaluates the tax amount due and issues a bill to the taxpayer.
- Suppose the taxpayer neglects or refuses to pay. In that case, the IRS forwards a final notice of intent to levy & a notice regarding the right to a hearing (levy notice), dispatched at least 30 days before the enforcement.
- Delivery methods for this notice include in-person, at the taxpayer's residence or business, or mailed to their last known address.
- In case of a state tax refund levy, you might receive the levy notice on the state refund and the hearing notice post-levy.
- The IRS also alerts the taxpayer about its intent to contact third parties to ascertain the taxpayer's financial situation.
Exceptions to the 30-Day Notice
Specific scenarios don't necessitate a 30-day advance hearing notice before property seizure:
- Immediate levy actions when tax collection is deemed at risk.
- Levies on state tax refunds.
- Levies aimed at federal contractors to collect tax debts.
- Disqualified Employment Tax Levies (DETLs) target unpaid employment taxes if the taxpayer had a Collection Due Process appeal for employment taxes in the last two years regarding different tax periods.
Preventing and Addressing an IRS Levy
To halt an IRS levy, the most straightforward method is to clear your outstanding tax balance. However, if immediate full payment isn't feasible, explore these alternatives:
- IRS Installment Agreement: This plan allows you to pay your tax due in smaller, more manageable amounts over time. Be aware that setting up agreements exceeding 120 days might include additional fees.
- Offer in Compromise: This option is suitable if you cannot fulfill the total debt or installment plans aren't viable. You propose to settle your tax debt for less than the amount owed if:
- The IRS might reassess the accuracy of the tax liability.
- Your financial situation needs to demonstrate an inability to pay the full amount.
- Full payment would cause financial hardship or be considered inequitable.
Before applying, ensure you comply with all required tax filings and payments. This option is unavailable during bankruptcy or active audits.
Requesting Deferral: If paying now threatens your basic living expenses, you might request a temporary halt in collection efforts. The IRS will require a detailed Collection Information Statement and may continue to assess interest and penalties, potentially issue a tax lien, and periodically review your finances.
Appeal: You're entitled to contest IRS collection actions via the Office of Appeals. You need to file a request for a collection due process hearing within 30 days of receiving a levy notice using Form 12153.
There are also alternative appeal options like the Collection Appeals Program for disagreements with IRS decisions on levies or liens.
Can a Levy Be Reversed?
Under certain conditions, the IRS may lift a levy:
- The tax debt is fully paid.
- The statute of limitations on collection expires before the levy's issuance.
- Releasing the levy enables you to pay your tax debt.
- You've arranged an installment plan that is incompatible with continued levying.
- The levy inflicts significant economic hardship, jeopardizing your essential living standards.
- If the property's value surpasses the debt, its release won't affect IRS debt collection.
Property Return Post-Seizure
The IRS might return property if:
- The levy was premature or violated legal guidelines.
- Returning it facilitates debt collection.
- A repayment plan is set (not applicable if the plan excludes property return).
- It was incorrectly seized, or IRS procedures were breached.
- Reinstatement serves both taxpayer and government interests.
Addressing a levy with informed strategies can provide critical relief and potential reversal avenues, helping you navigate financial strain while complying with tax obligations.
Distinguishing Between Lien and Levy
A lien and a levy, though related, serve different purposes concerning tax debt. A lien acts as a legal claim or security for the government over your assets when you don't pay your tax debt, essentially marking the government's territory.
In contrast, a levy is the following more aggressive step where the actual taking or seizing of your property occurs to settle the tax debt.
Essential Distinctions
- Tax Levy: This is the action where the IRS seizes assets to clear the tax debt, following a structured process that includes notices and the opportunity for resolution.
- Preventive Measures: You can avert a levy by settling the debt, adhering to payment arrangements, contesting the tax assessment, or declaring bankruptcy, where relevant.
- Tax Lien: It represents the government's legal right over your assets and can impact various aspects of your financial life, from credit scores to business operations.
- Halting a Levy: Tactics to prevent a levy include immediate payment, entering into installment agreements, proposing an offer in compromise, requesting a deferral, or appealing the action.
Reversal Possibilities
- A levy can be reversed under specific conditions, offering a reprieve if certain criteria are met.
Conclusion
Encountering a tax levy is a serious matter but not insurmountable. You can navigate the situation effectively by understanding your options, whether through direct payment, negotiation, or legal avenues.
It's crucial to address tax issues promptly to avoid escalation to levies or liens, maintaining control over your financial health.
Say hi to us on LinkedIn.
