If you currently face an IRS (Internal Revenue Service) tax levy, you may be going through sleepless nights and stressful days. You may have received a certified mail that notifies you that if you don’t pay the back taxes you owe immediately, your property can be subject to a tax levy. This could be one of a series of emails that you will receive before the process is actually put into action.
Tax evasion, neglect, or failure to pay taxes in the US amounts to nearly $1 trillion annually. However, this is not because the IRS is unable to deploy the necessary instruments to collect the taxes. The agency has plenty of tools to ensure tax collection and levies are just one of them that are most commonly known.
A tax levy can affect you in many ways:
- It can cut into your paycheck
- Your employer may be instructed to route payments from your salary directly to the IRS
- Your bank account can be frozen
- Your property including your home can be seized
- The IRS can also levy rights to Social Security benefits, pensions, investments, future wages, insurance receivables and personal assets
It’s important that you get all the information you need about this administrative enforcement. This aids in getting the right advice and assistance if you face a tax levy. This is a serious and drastic step taken by the tax authorities and you may need the services and assistance of a reputed and experienced tax professional to help you negotiate this slippery slope.
What Is A Tax Levy?
The United States Internal Revenue Code gives authority to levies to collect tax dues that are owed to the Federal government. This authority is given without the need to go to court in the case of tax liabilities. No court permission is needed to execute them.
- It is a legal seizure of property to fulfill a tax debt
- It refers to unpaid state taxes
- Levy is different from a tax lien
- There are different types of tax levy: Wage Garnishment (direct transfer from your wages), Bank Levy, Levy on current (not future) 1099 payments, reduced tax refunds, property seizure, other asset seizure and passport seizure
- A well-defined procedure is followed before actual seizure can take place
- The IRS must first assess the actual tax amount owed and then send a demand notice or tax bill
- If no response is given, the IRS sends more notices and a Final Notice of Intent to Levy
- You are also given a Notice of Right To Hearing 30 days before the levy
- Property that’s intangible or belongs to someone else (such as retirement funds, dividends on shares, rental income, licenses, commissions, etc) can also be levied
- This can include cash in the bank, property, boats, or cars
How To Deal With Tax Levies
The safest and most effective way is prevention. Ensure that you pay your taxes within the prescribed time limit and as soon as they become due. In case you are unable to pay the full amount immediately, it’s important to open a channel of communication with the IRS and request an extension.
The biggest mistake that people make is to ignore notices from the IRS. Don’t imagine that they will simply run out of steam. Tax liability is a punishable offense that could even result in prison time.
As soon as you receive the notice, or feel that you may receive one, it’s crucial that you contact the IRS for advice and guidance. Simultaneously you must also get in touch with a professional, well-reputed, and experienced CPA, Enrolled Agent, or a tax attorney who has dealt with such issues successfully. You may be able to set up a convenient installment plan under their advice in tandem with the IRS. In some cases, you may be able to work out a compromise.
In case the levy has already been initiated, you have the right to appeal the decision. This will prevent the process from being taken forward. Financial hardship can be one of the grounds on which an appeal is entertained. Another situation would be if you were an innocent spouse of a tax defaulter.
The legal notice is usually given well ahead of the actual levy. This is to enable the defaulter to arrange the funds and hopefully reverse the levy. However, reversal is not an easy task and it’s wiser to avoid this situation altogether by paying your taxes on time.
Reversals are possible only if the levy was imposed before the notice period was over, or if it can be proven that the IRS didn’t follow correct procedures. In case the property that was seized is essential for the defaulter to earn an income and thus pay off the liability, reversal may be possible. You can also try for a reversal if you enter into an installment payment arrangement with the IRS.
This offer to compromise must be accompanied by the correct documents, including all the necessary paperwork, correctly filled in, with up-to-date and honest information. If there are mistakes in the document, the IRS can return the paperwork and deem it “unprocessable.” The levy procedure will then continue.
Strategies suggested by professional tax experts to avoid or deal with levies include:
IRS payment plan: Remember that the tax liability amount accrues interests and penalties the longer you delay. That’s why it’s important to communicate with the IRS and get into a payment plan with their guidance. You could enable a Direct Debit Installment Agreement where a certain number of payments are directly debited from your bank account. Plans are available on the IRS website.
Compromise Offer: Though the IRS accepts less than 50% of compromise offers in a year, you can request a compromise for less than the full amount that you owe. The acceptance is based on your estimated/expected payments for the current year, but not if you’ve filed for bankruptcy or if you’re being audited.
Filing An Appeal or Filing For Bankruptcy: if you have points of disagreement with the original assessment, you can discuss with superiors in the officer’s department and finally request the Office of Appeals for a review. Filing for bankruptcy is the last resort and may not always work.
The levy is finally released when:
- You pay your dues in full
- Collection period ended prior to issue of levy
- Levy release helps you make payments
- Value of the property being attached is more than the amount owed
However, the release doesn’t mean that your dues are waived. If you don’t make arrangements with the IRS, a new levy may be imposed.