What’s the difference between an IRS tax lien and a tax levy?

Posted on January 11, 2010
Filed Under IRS Levies, IRS Seizures, Tax liens | Leave a Comment

The IRS has two ways to collect back taxes:  a Federal tax lien and tax levy.  A tax lien is different from an IRS levy – the lien does not result in the IRS taking your property from you.  That is done by levy.

You have rights to defend the filing of a lien, and prevent the issuance of a levy.  To be able to assert your rights and protect your property, it is important to  understand and recognize the tools the IRS uses.

Here is what you need to know about the IRS tax lien and IRS tax levy:

IRS TAX LIEN

An IRS tax lien protects and secures the IRS’s rights to your property.  The lien attaches to property you own when it is filed, and property you purchase later.  A Federal tax lien most commonly impacts real estate.

If you own a house, and the IRS files a tax lien against you, the lien would give the IRS an interest your home similar to that of your mortgage company.

Example:  Your house is worth $100,000, and you have a mortgage of $75,000 on it.   There is $25,000 of equity in your house.  Before the IRS filed its tax lien, that equity would be yours.  Now that the lien has been filed, the equity belongs to the IRS.   If you want to sell your house, the IRS gets your equity at closing, not you.

The IRS usually files its Federal tax lien with county recorder or clerk of courts in the county where you residethe property is located.   For the tax lien to affect real estate, it must be filed in the county where the property is located.  It would then encumber all of your real estate in that county.  A federal tax lien does not name the property it attaches to – it automatically encumbers all your real estate in the county it is filed and all of your other personal property.

If the IRS files a lien against you, you have a 30 day window to file an adminsitrative appeal to request reconsideration of the filing.  This is called a collection due process appeal.

The lien expires when the IRS statute of limitations on collection expires – in most cases, 10 years.

IRS TAX LEVY

The purpose of an IRS levy is to take your property.  An IRS levy is the same as a seizure, or garnishment.  The IRS can levy on your wages, bank accounts, subcontractor pay, accounts receivable, even retirement accounts.  The IRS can seize your house, car or your business equipment (although those are rare).   For most people, it is the levy, not the lien, that hurts.

There are only a few things the IRS cannot levy  – these “exemptions” are listed in Internal Revenue Code 6334.   The exemptions you can claim include the right to keep unemployment benefits, workers compensation, most household goods and some tools of your trade from the IRS.

Before the IRS can levy on your property, they must first send you a Final Notice of Intent to Levy.  This is your notice of that the IRS intends to start enforcement against you.  After you receive the Final Notice of Intent to Levy, you have 30 days to file an appeal of the proposed IRS collection action. If you file the appeal, the IRS is prevented from taking action until your hearing is completed.  The purpose of the hearing is to reach a resoluton to levy action before it occurs – offer in compromise, installment agreement, uncollectible, for example.

The IRS does not need to file a Federal tax lien as a prerequisite to levying your wages, bank accounts, etc. - just the Final Notice of Intent to Levy.

In the rare cases of seizure of a house, the IRS must get court approval first.  To do this, the Department of Justice will usually file a lawsuit against you in Federal District Court seeking approval to foreclose and take your house.  Again, this is not a preference of the government.

The Federal tax lien and tax levy gives the IRS different rights against you – the lien as to security in your property, the levy to take it.  Together or apart, the lien and levy are powerful tools for the IRS.

Will the IRS take my house? Seize my car?

Posted on January 7, 2010
Filed Under IRS Levies, IRS Seizures, Property Exempt from Collection | Leave a Comment

One of the most common concerns about owing the IRS back taxes is that they will show up one day and take your house or car from you.

No matter what the IRS may tell you or what you may have heard, it is very unlikely the IRS will levy on your house, car or furniture.  The assets you may be most concerned about the IRS taking are the one’s the IRS is least likely to take from you.  This is important to know in negotiating with the IRS.

Last year, the IRS made only 600 seizures of houses, cars and other personal property.  In case you are wondering, 600 seizures across the country is a very low number (compare to the 2 million levies the IRS sends on bank accounts and wages – now that is a concern worthy of attention).

The reason?  If you do not have any “equity” in your property the IRS will not levy it.

Internal Revenue Manual 5.10.1.2 states that seizures are prohibited  “where the taxpayer has insufficient equity in the property.”  Internal Revenue Code 6331(f) prevents the IRS from making an “uneconomical levy” – meaning there must be an economic recovery to the IRS to do it.

Examples:

Your car? If your car is worth $7,500, and you owe $7,500 on it, you are protected.

Your house? Take the value, subtract your mortgage, and reduce it further by the costs of sale.  There has to be a fairly substantial amount left afterwards for the IRS to be interested under the equity rules.

Even if there is equity, a seizure is still generally something the IRS does not desire to do.  You will need to force them – meaning a lack of cooperation after repeated attempts by the IRS to work it out.  Most seizures need managerial approval before being sent to an IRS property liquidation specialist.  Some, like a personal residence, require outside court approval (See IRC 6334(e((1)).

In most cases, the IRS is prohibited by tax law and their own internal guidelines from making a seizure when there is no recovery.  Because of that, the IRS focuses the most on levying wages and bank accounts.  Knowing the difference allows you to put your energy into protecting what really matters to the IRS.

IRS installment agreement vs. Chapter 13 bankruptcy: Which repayment plan saves you the most?

Posted on January 2, 2010
Filed Under Bankruptcy - Chapter 13, Bankruptcy and the IRS, Installment agreements, Interest and penalties | 2 Comments

Trying to repay the IRS in an installment agreement can be difficult.  The interest and penalties the IRS charges doubles the original amount of tax you owe every five years.

Your installment agreement may keep the IRS at bay, but your tax liability does not get paid off.

The tax code and the IRS offers no real way of stopping interest and penalty accruals.  That is frustrating, but there are solutions.

The solution for many is in the bankruptcy code.  An IRS repayment plan made through a Chapter 13 bankruptcy can stop IRS interest and eliminate penalties. Chapter 13 can even reduce the amount of tax you pay.  This often results in a shortening the time it will take you to repay the IRS.

No one really wants to file bankruptcy, but making your installment payments by bankruptcy law, not tax law, can result in substantial benefits to you.

A Chapter 13 bankruptcy repayment plan can help you with the IRS.  Here’s how:

(1)     Interest stops.  Chapter 13 stops the IRS from charging you interest while you make your payments.  The interest you already owe the IRS can also be reduced by bankruptcy law.

(2)     Penalties can be reduced.  Chapter 13 can stop the accrual of IRS penalties.  Bankruptcy law can also force the IRS to accept a reduction in the penalties already charged.

(3)     Repay a percentage of what you owe to the IRS.   The amount of tax, interest and penalties repaid to the IRS can be as little as 1% by Chapter 13 bankruptcy law (vs. 100% in IRS installment agreements).  This is accomplished by use of the Chapter 13 bankruptcy “cramdown” rules.  You pay back olny what you can afford on older income tax debts in a Chapter 13.  Anything you cannot afford to repay on the older taxes is eliminated.

(4)     IRS collections stop.  Once you file a Chapter 13, the IRS is prevented from levying your property.  Bankruptcy creates a “stay” on the IRS.  You keep everything in a Chapter 13 tax bankruptcy.

(5)     Your budget.  If the IRS will not allow some of your expenses in an installment agreement, bankruptcy law could.  A Chapter 13 tax bankruptcy means you pay the IRS what your reasonable budget permits under bankruptcy law standards.  You eliminate much of the use of IRS “living expense standards.”

In most cases, the Chapter 13 bankruptcy results in you paying back much less than what you would in an IRS installment agreement.  What you pay does not double by tax law, but can be reduced by bankruptcy law.  Comparison of a Chapter 13 repayment plan vs. IRS installment agreement can save you time and money.

Can the IRS take my property without telling me first?

Posted on December 28, 2009
Filed Under Appeals - collection actions, IRS Collection Letters, IRS Levies, IRS Seizures | Leave a Comment

In most every case, the IRS cannot take your property until they send you a letter stating their intentions.  This letter – called a “Final Notice of Intent to Levy” - is the government’s last attempt to reach you before they start levying your wages, bank accounts or other property.

The Final Notice of Intent to Levy gives you very important rights to stop the levy and resolve your case.

Here is what you need to know:

(1)     If the IRS has not sent the Final Notice of Intent to Levy to you, you are protected.  If you are unsure if you have received it, the IRS can be contacted to determine if it has been sent and what action needs to be taken.  Here is what the IRS final notice looks like.

(2)     If the IRS has sent you the final notice, they have to wait 30 days after the letter is sent to start collection.  During this 30 day window, you have the right to file a request for an administrative meeting with an IRS appeals officer.  The purpose of the meeting is to discuss alternatives with the IRS to property seizure.  This is known as a collection due process appeal.

(3)     The IRS is legally prohibited from taking your property until your appeal is completed. Typically, it takes the IRS about four to six months to have your case assigned to appeals officer and for your conference.

(4)     IRS appeals officers tend to be best equipped to resolve your case in a manner that is fair to you. You will have one person assigned to your case and can have a face-to-face meeting if you request.  This is impossible if you go through the IRS automated collection 1-800 systems for resolution.  Meeting with an IRS appeals officer usually gives you the best chance at reaching a fair resolution – that is their job.

(5)     Solutions you can request from appeals include an installment agreement, hardship “uncollectible status,” offer in compromise or innocent spouse claim.

(6)     If you cannot agree with IRS appeals over how to resolve your case, you have the right to have an independent Tax Court judge review your case. If you have a strong case and can show that the IRS is being unreasonable, the hold on collection will continue while your Tax Court case is pending and decided.

If it has been more than 30 days since the IRS sent you the Final Notice of Intent to Levy, you still have options. IRS administrative policy (see Internal Revenue Manual 5.1.9.3.2.3) is to process a late-filed collection due process appeal if it is filed within one year after the final notice is sent.  Filing your appeal late gives you the same administrative rights as filing timely – a hold on collection and meeting with an appeals officer.  You lose the right to go to Tax Court by filing late.

Exercising your rights to a collection due process hearing allows you to achieve a solution with an IRS appeals officer without the threat of collection.  This levels the playing field during negotiations – no IRS  levy or seizure – and puts you in the best place for resolution.

Offer in compromise: Avoiding an unseen IRS settlement cost

Posted on December 22, 2009
Filed Under Offer in compromise | Leave a Comment

In today’s difficult economic times, every dollar counts.  An offer in compromise may help, but for many there is a hidden cost – lost tax refunds.  

Tax refunds increase the amount you pay to the IRS in an offer in compromise.   

Here’s why:  The terms of an offer in compromise requires the IRS to keep your tax refund for the year in which the offer is accepted.  This means if your offer is accepted in 2010, the IRS will keep your refund from your 2010 tax return. 

It may get worse.  The IRS will also keep your refund in any year in which the offer is under investigation.  So if you submit your offer in late 2008 but it is accepted in early 2010, you will lose the refunds on your 2008, 2009 and 2010 tax returns.

The solution is simple:  Always check how much your tax withholdings are before submitting an offer in compromise.  If a refund is on the horizon, request that your employer reduce the IRS withholdings so no refund is available.  The cash will be in your pocket, not the governments.         

Your tax refunds can easily double the amount the IRS accepts in an IRS offer in compromise.  Planning ahead of time will ensure that the amount you pay is equal to the amount the IRS accepts.

Does bankruptcy stop IRS audits?

Posted on December 19, 2009
Filed Under Audits, Bankruptcy - Chapter 13, Bankruptcy - Chapter 7, Bankruptcy and the IRS | Leave a Comment

Bankruptcy is a powerful tool in solving IRS problems – but can it stop the IRS from auditing you?

A centerpiece of bankruptcy law is the concept of an “automatic stay.”    The automatic stay stops creditors from calling and writing to enforce or collect a debt from you.  The “stay” on your creditors – including the IRS – starts the minute you file bankruptcy. 

The automatic stay is why the IRS will immediately release a levy if you file for bankruptcy protection. 

But can bankruptcy stop the IRS from conducting an audit?

Bad news first:  Although bankruptcy can be pretty absolute on the IRS, it falls short of being able to slow down an IRS audit.  The bankruptcy stay does not apply to IRS audits and will not stop them (Bankruptcy Code section 362(b)(9)). 

Here’s the good news:  Bankruptcy can, however, eliminate any taxes, interest and penalties you might end up owing after an audit is completed.  The timing of the filing of the bankruptcy is important – among other conditions, you have to wait 240 days after the audit is final to be able to bankrupt an audit result.  

IRS audits are often painstaking, but there can be light at the end of the tunnel.  You may not be able to stop the machine, but bankruptcy can clean up the damage.

Self-employed? All IRS levies are not created equal

Posted on December 9, 2009
Filed Under IRS Levies, IRS Seizures | Leave a Comment

IRS levies on those who are self-employed are serious, but it may not always be as bad as it seems. 

If you are self-employed, and if your right to a payment is dependent on the performance of future services – meaning the “job” has not yet been completed – an IRS levy reaches nothing. Your right to the money is contingent upon completing performance. The IRS would need to serve the levy after the job is completed for it to be effective. 

This result is because a levy on self-employment income reaches only what you have a fixed and determinable right to. In other words, the IRS stands in your shoes.  Whatever you have a right to at the time of levy, so does the IRS.  You have no right to money for uncompleted services.  See Treasury Regulation 301.6331-1(a)(1) and Internal Revenue Manual 5.17.3.4.2. and Internal Revenue Manual 5.11.5.3.

On the other hand, if performance has been completed, then there is a receivable owed to you – it is fixed and determinable, even though payment might be made later.

Here is a real example: I had a client who was self-employed playing piano at his church on Sundays. After services concluded, he was paid for his performance that same day. Before the performance – earlier that week – the church received an IRS levy.  The levy resulted in no funds to the IRS because no funds were due to my client at the time of the levy.  The IRS would have to serve the levy on the church on Sunday right after the performance to receive payment.  That was when my client’s right to the money was fixed and determinable.

One of the most feared powers of the IRS is their ability to take your property.  Wages, bank accounts, self-employment income and receivables are some of their favorites. But how much power the IRS has depends on the type of property they are seeking to take.  All IRS levies are not created equal.

Even if no money is due, if the IRS taking these steps, proper negotiation needs to be put in place to stop the aggression and achieve account resolution.

Tips for dealing with Automated Collection Service

Posted on December 1, 2009
Filed Under Automated Collection Service | Leave a Comment

ACS can be intimidating – big, impersonal and far away on a 1-800 number.

Most IRS collection letters are sent from an Automated Collection Service Center (ACS).  ACS handles the incoming calls from the collection notices. It is responsible for levy releases, lien determinations and setting up installment agreements.

Here are some tips for successfully navigating ACS:

Closing the gap between you and ACS can be simple if you are courteous, educated, and organized with the information that ACS is looking for.

Ads for IRS problems: Be informed, get the facts

Posted on November 23, 2009
Filed Under Offer in compromise | Leave a Comment

Pennies on the dollar!  Act now before its too late! The laws may change!

During first consultations, my clients often have questions about advertisements they have seen on television or heard on the radio about the IRS offer in compromise process.  Here is my response:

The IRS offer in compromise rejection rate is 75%. The IRS accepted only 11,000 offers last year (out of the 44,000 that were submitted).

An offer in compromise is not for everyone.  Your finances have to match up with the IRS settlement guidelines.  Pennies on the dollar is possible, and is certainly a worthwhile goal.  But a detailed understanding of the what the IRS looks for in a financial statement is key to success.

Some ads also have a call to action – “act now as the laws might change.”

The insinuation that the laws might be changing for the worst is incorrect.  There are no changes in law pending in Congress that would hurt the offer in compromise program or disfavor taxpayers.

The irony is that there is a bill pending in the House Ways and Means Committee – The Tax Compromise Improvement Act - that would help taxpayers by removing the current 20% nonrefundable offer deposit requirement.  This would make entry into the compromise process more affordable.

Bottom line is to be careful.   Ask questions, be informed and get the facts.  As my readers know, as an alternative to the 75% compromise rejection rate, I am a strong advocate of bankruptcy to elminate IRS taxes.

IRS collections in troubled times

Posted on November 16, 2009
Filed Under IRS Collection Problems, Installment agreements, Offer in compromise | Leave a Comment

Everyday, I see how the IRS is responding to people hurt by the economy. The Journal of Tax Practice and Procedure asked me to write an article about it  - ”IRS Collections in Troubled Times.”

Current IRS enforcement is centered on recovering government money that was spent to stabilize the economy.  As a result, the IRS is increasing its collection enforcement activities, with lien and levy filings hitting levels not seen since the mid-1990s.

The IRS has sought to soften the impact with public statements that it will attempt to be compassionate to taxpayers.  To their credit, the IRS is trying to be sensitive to those who have had job losses and income reductions.  But much of what the IRS is offering – like flexibility for missed installment payments – were available even in better times.

The reality is that fairness often comes down to individual situations and the IRS employee on the other end of the phone.  I have seen compassion and indifference.  There is some flexibility from the top; the essential question is how it is exercised.

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