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Key Takeaways
- A tax lien is a legal claim by the IRS declaring intention to collect on taxes they believe you owe, while a tax levy is the actual seizure of your property to satisfy the debt.
- There are several options available for taxpayers with limited income to repay debts over an extended period.
- When it comes to IRS collection activities, it’s advisable to hire tax professionals who have experience representing clients with levies and who have been successful in getting levies released.
There are several actions the IRS can take when it comes to collections activity. Navigating these processes can be complicated and confusing — but you don’t have to do it alone. A knowledgeable professional can work with the IRS on your behalf to address back taxes owed, create installment agreements, and negotiate settlements of your outstanding tax debt.
Here are some of the most common questions we receive regarding IRS collections, along, with guidance from our IRS Dispute Resolution & Collections team.
What is the Difference between a Tax Lien and a Tax Levy?
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:
- Garnishment of wage and income
- Seizing funds from a bank or other financial account
- Seizing state tax refunds
- Accounts receivable levies (the IRS requests creditors send payments directly to the IRS, instead of to the business)
- Seizure and sale of real estate, property, and equipment
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:
- The right to retain representation
- The right to appeal an IRS decision in an independent forum
- The right to appeal a federal tax lien through either the collection due process or the collection appeals program
You may need professional assistance in dealing with a tax levy, and there is a limited window of time for any type of appeal. It is advisable to find qualified tax controversy professionals to represent and assist you.
The IRS Is Garnishing My Wages — What Can I Do?
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.
How Much of My Salary Can the IRS Take?
The IRS can require your employer to 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.
There are options available for taxpayers with limited income, including:
- Installment Agreement (IA): An IA allows a taxpayer to make a specific monthly payment until the debt is paid in full. This is a common option.
- Partial Pay Installment Agreement (PPIA): The IRS does this when a taxpayer does not have the ability to repay what is owed within the 10-year statute of limitations Instead, they create a payment agreement that allows the taxpayer to pay off part of the liability during that time. The IRS will periodically re-evaluate the taxpayer’s financial situation to determine if they still qualify for a PPIA. If the PPIA becomes too great of a financial burden, there are other solutions.
- Currently Not Collectable (CNC): This provision is for taxpayers who are unable to pay their tax debt because of financial hardship. If granted, the IRS will review your financial situation periodically. If your income increases, the IRS may ask you to start paying on the tax debt. If your income remains the same, you will remain in CNC. Once your debt reaches the 10-year statute of limitations date, the IRS will cease their collections efforts.
- Offer In Compromise (OIC): If the IRS determines a taxpayer does not have the ability to pay off their tax debt before the statute of limitations runs out based on current financial capability, they may qualify for an OIC. But an OIC is not automatic. The IRS takes time in reviewing OIC requests. Generally an OIC involves a taxpayer offering to pay a portion of their outstanding tax debt.
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.
The IRS Froze My Bank Account — What Can I Do?
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.
How to Deal with IRS Garnishment, Frozen Bank Accounts, and More
When working with the IRS, consider the following:
- Hire Experienced Representation
When it comes to IRS collection activities, it’s advisable to hire tax professionals who have experience representing clients with levies and who have been successful in getting levies released.
- Contact the IRS on Your Own
Some taxpayers have great success reaching out to the IRS and negotiating an installment agreement or other resolution on their own. Remember, a wage garnishment or other form of levy is not the IRS’ first course of action. By the time your wages are affected, they’ve spent months trying to reach you and make arrangements.
- Do Nothing
If you owe a relatively small amount of tax and the levy is not creating a financial hardship, you have the option to allow the levy to remain until the tax debt is satisfied and the levy is released. However, make sure you consider how a garnishment might influence or cause difficulties in the future before taking this approach.
When the IRS comes calling, don’t let fear, frustration, or worry prevent you from acting. Eide Bailly’s IRS Dispute Resolution & Collections professionals can help you face the IRS with confidence and trusted advice on your tax situation.
