You may not realize it, but most every effort the IRS will make to collect a tax debt from you will be done without suing you.
For example, no court filings or lawsuits are necessary for the IRS to levy your wages or bank account wages.
And the IRS can place a lien on your house or business on their own, no judge, jury, lawsuit or outside court review necessary.
How about the authority of high-level IRS collection agents, like Revenue Officers? Do they need to sue you to take your car, retirement account, or business equipment?
IRS Revenue Officers have far-reaching powers of enforcement, including making an unannounced visit your house or sending a letter for you to appear at an IRS office for an interview, all without the need for any court approval. They can take your car, wages, retirement account or business equipment without the need to sue you first.
This is different most other creditors (like credit cards companies or banks) who need to sue you with a lawsuit and secure a court judgment before they can come after you. The IRS just needs to send you some collection letters from their computer before they can have at it, rarely needing the approval of a judge or court.
But just because IRS collections does not need to sue you in court with a lawsuit does not mean they can’t, or that they won’t.
They can, and in the right situation, they will.
If you have an unpaid tax debt, the IRS can file a lawsuit against you in court if (1) they want to sell your house or (2) they want to get more time to collect the taxes from you.
Here’s what you need to know about each possible IRS court action to sue you:
1. The IRS wants to seize and sell your house.
Unlike taking your wage or bank accounts, the IRS cannot sell your house to pay a tax debt without suing you first, and getting a judge to grant a court order permitting the sale. And that’s a good thing – Congress has decided that houses are just too important for the IRS to take without an intervening court process first.
The good news is that not every taxpayer who owes the IRS is money is at risk to have their house seized and sold by IRS foreclosure. To begin with, there must be equity in your house.
For example, if your house is worth $150,000 and you owe $150,000 on it to your bank, an IRS seizure and sale would only result in your bank getting paid. Tax laws prevent the IRS from taking a house (or any property, for that matter) when there is no recovery or benefit to them. The IRS should not sue you to take your home when the equity will not result in recovery to them.
2. The IRS wants more time to collect the taxes from you.
The IRS collection of most every tax debt will eventually come to an end. That’s because the IRS is limited by law in how long they can pursue you.
The IRS time frame to collect a tax debt is 10 years, starting the day the IRS puts your balance on their books. This is called the IRS statute of limitations on collection.
For example, IRS collection of a 2004 tax debt stemming from a tax return filed on April 15, 2005 would end in April, 2015 – 10 years after the IRS received the return and put the balance on its books. After the 10 years is up, the IRS gives you a credit for the amount that they did not collect, and clears your account balance to zero. You are done with the IRS when the 10 years ends.
But the IRS can get more time to pursue you past 10 years. To do so, tax laws permit the government to file a lawsuit against you in U.S. District Court and request that the court grant them an additional 20 years to collect.
That’s right, 20 more years if the IRS decides to sue you.
Like the IRS seizing and selling your house, lawsuits to extend the statute of limitations on collection are somewhat rare. The IRS does not do this on every tax case it has in its collection inventory – it is somewhat picky in that regard.
The IRS usually looks for a combination of factors that would benefit it from getting more time. Those factors include a taxpayer having an asset that the IRS cannot collect from now but could later (within an additional 20 years). This could include an inheritance or retirement account.
Also, the IRS is usually looking for a significant balance owed before filing a collection lawsuit. Owe the IRS $50,000? You are likely not under any significant risk to be a defendant in an IRS lawsuit. If you owe the IRS $500,000, the risk increases.
Just because the IRS does not usually sue taxpayers to collect a tax debt does not mean they cannot. It just means they usually choose not to. And that, of course, is because the IRS has sufficient administrative power to act on their in most every collection enforcement case. But when negotiating with the IRS, it is important to know all the tools the IRS has at its disposal and how to respond, including lawsuits to collect.