A Guide to Avoiding, Stopping, Fighting, or Settling Tax Levies

screenshot of the webpage about tax levies on irs.gov

Do you owe the IRS back taxes? If so, and you’re unable to pay the debt, you could be in danger of a tax levy. This means losing much more than money.

The government has the power to claim whatever’s needed when settling tax debt. This means utilizing a tax levy to reconcile unpaid taxes. Any property you own can be levied, starting with a hold called a tax lien. Money, property, and many other things can be taken by the government, and it can get serious. It can also become hard to settle the debt and clear a tax levy.

 

What is a Tax Levy?

Basically, a tax levy is used to collect a tax debt by seizing your property or the contents of your bank account by utilizing a lien. A tax levy and lien are two different things. While a lien only secures the property as an option for collection, the levy takes the property to satisfy the money that’s owed to the IRS. It’s a completed process that’s easier to avoid than fix.

 

Requirements of the IRS before a Tax Levy

There are 4 requirements that usually must be met by the Internal Revenue Service before a levy can go into effect. These requirements ensure the taxpayer has a fair chance at paying off the debt without further consequences. After all, everyone deserves an early warning that they’re in debt territory. Here’s what the IRS must do before implementing a tax levy.

  1. A tax bill is sent to the taxpayer. This bill includes a notice and demand for payment of the debt.
  2. After the bill is received, the individual or organization has a choice: Either pay the debt or refuse/neglect the payment request, basically avoiding the responsibility in many causes.
  3. When the payment is refused in any way, this triggers the next step or requirement of the IRS. The Internal Revenue Service sends a Final Notice of Intent to Levy and a Notice to Your Rights to a Hearing. This notice gives you 30 days to decide or amends before the levy starts. There are several ways you may receive this final notice. It may come by registered or certified mail to your last known location address. It can also be delivered to your job or handed to you personally. This depends on the circumstances. However, the IRS may levy your tax refund regardless, and you can request a hearing after the tax levy on this refund.
  4. The IRS contacts a third party concerning the collection of a debt. You will receive notice of this third-party contact from the beginning. This is used to help the government determine your tax liability.

 

How a Tax Levy Affects You

If you’re, unfortunately, hit with a tax levy, you can expect serious consequences that can affect you and your loved ones. Once things pass a threshold, you’ll start losing possessions that are worth more than just money. This can include your home and automobile.

The first hard hit comes from wage garnishment. If you’ve never gone through this process before, you’re in for a big surprise. And it will not be a pleasant one either. While many people do experience wage garnishments, they’re usually not tax garnishments. Many times, old student loan debts or child support debts are garnished from wages and have a limit as to how much they can pull.

With the government, this limit is completely different. If your wages are garnished for back taxes, you can lose more than half your paycheck to satisfy the government.

The IRS can also contact your bank and place a 21-day hold (lien) on your money, all of it. If this happens, they can levy the money from your bank to retain the tax debt that’s owed to them. This could mean all the money in your bank. There is no threshold in this case. However, they won’t take what’s in your bank account if you work out a better plan with the government.

As a last resort, the government can seize your property, including your home and automobile. Although they do not like doing this, it may be necessary to fix the situation. Other property or payments can also be taken by the IRS to settle a debt.

 

Tax Levy Immunities

But some payments are generally immune from this seizure. Although the IRS can sometimes seem harsh, they are lenient when it comes to economic support funds. The following payments are immune:

  • any unemployment benefits
  • annuities
  • disability payments
  • household items, mainly large furniture items
  • personal valuable small items like jewelry
  • child support payments
  • assistance payments from the public
  • pension benefits
  • work or school items necessary to function properly

 

How to Avoid a Tax Levy

One of the easiest ways to avoid a tax levy is to make sure enough money is being withheld from your paycheck. Not doing this properly can cause you to get behind on your taxes. Creating a tax debt is how it starts, so making sure everything is up to date avoids ever getting involved with a tax levying situation.

 

How to Stop a Tax Levy

As soon as you realize you’re in danger of a tax levy, it’s smart to try and remedy the situation before it gets worse, and it can get quite bad. Taking care of this problem early lowers the chances of losing even more money or property. There are steps to stopping a tax levy, and you should take advantage of these options.

First, try your best to pay your back taxes when you’re facing a lien on your assets. The IRS is willing to communicate with you to solve this issue quickly. If they ask for any information, be ready to provide everything they need. Most importantly, cooperation with the IRS shows they can trust you to remedy the debt through collection actions.

 

Working with the IRS to Settle a Tax Levy

There is a way to possibly get the lien taken off your record. If you’re willing to use an IRS payment plan, you must make 3 successive payments from your bank account. This is called a direct debit installment agreement. You can set up this installment plan on the IRS website since there is no need for any professional help. But there is usually a fee of up to $225 associated with the installment plan depending on how much you make in wages and the amount you owe.

There’s always a possibility that you can compromise with the IRS via an Offer in Compromise and the government may be willing to take a lesser amount than what you owe. Unfortunately, the government usually only approves less than half of these applications for reduced debt. You will not be considered if you’re filing bankruptcy or if you’re being audited. To be considered, make sure all your tax returns are filed and current taxes paid.

 

How to Fight an IRS Tax Levy

You can always ask for an appeal and due process hearing from the IRS if you think there’s been a mistake. If you disagree with government employees on a decision for a tax levy, you can speak with the IRS employee’s manager. The office of appeals can review your case if you still don’t agree with the manager’s decision. Although it’s not that common, you can win the case with proof that the debt was indeed paid.

While it’s almost always the last resort, you can file bankruptcy to try and settle your tax debts. I say try because this doesn’t always work, and it takes quite a bit of time and paperwork to complete. Also, a lawyer usually takes care of bankruptcy proceedings, and this costs even more money.

 

How to Request a Tax Levy Release

Once a tax levy has begun, it may be worse than you thought. You may wonder if a tax levy release is possible. The good news is, there is a possibility that you can get the levy released. 

One way to request a tax levy release is to prove that the levy is causing you an economic hardship. 

Here are other ways you could possibly have the tax levy released:

  • Your property may be worth much more than the amount requested by the government.
  • You agreed to a government installment plan that doesn’t include the tax levy
  • You’ve paid the owed amount
  • It would be easier to pay taxes with the levy released
  • When the levy was issued, the collection period already ended

Even with the levy released, if you still owe taxes, you’re required to continue paying what you owe to the government. If you continue to communicate with the IRS and properly pay on your installment plan, this will keep the government from putting a lien back on your property or bank account.

Once money leaves your bank account, going to the IRS for tax payments, it’s extremely hard to retrieve those funds. This is true even if an installment plan was the agreement.

 

Your Best Options

Obviously, it’s best to avoid a tax levy. But should you find yourself engrossed in this process, a tax expert at Innovative Tax Relief can guide you with the next steps you should take. Just request a free tax consultation from us.

In the future, always make sure your taxes are paid to the government because the IRS will eventually come knocking if you don’t.

 

Understanding Tax Liens

IRS tax lien

If you owe back taxes, tax liens (and their siblings, tax levies) can affect you seriously if you don’t take proper action. In this guide, we give you all the details you need to know about tax liens, as well as ways to remove them if you get caught in their net. 

 

What Is a Tax Lien?

In simple terms, a tax lien is a claim the government makes on your financial assets (usually your real estate – see a house or another property) when you have not paid your income taxes on time. A tax lien is the first red flag you will get for failing to take care of your income tax obligations. At this point, you don’t risk having your assets seized. However, if you decide to sell the asset, you can expect the government to claim some of the proceeds (or all of them, depending on the sum you owe). However, do bear in mind that a tax lien may appear on your credit report and could:

  • Affect your ability to get a loan or keep a security clearance. 
  • Stick with you even if you file for bankruptcy.
  • Be a blockage for you when on a job hunt. 
  • Cause your creditworthiness to take a nosedive (the IRS will notify creditors of your financial situation by filing a public notice of the tax lien).
  • Prevent you from refinancing or selling your home (during title searches, things like tax liens do surface). 
  • Cost you a lot of time if you need to go through the IRS automated collection system (ACS) or a revenue officer that requires you to pay them a visit in person. 

A tax levy comes right after a tax lien and has the power to seize your property and bank accounts or even garnish your wages so that the government can eventually get its owed taxes from you. Note that you may receive a lien immediately after the IRS has assessed the tax. Nevertheless, it may take up to several months before the IRS figures out that you have not paid your taxes.

 

What Is a Federal Tax Lien?

Just like a tax lien, a federal tax lien is a federally-authorized lien placed against your assets (or any of them) for back taxes that have not been paid. It gives the US government the right to take or keep your personal property until you pay your due federal taxes. The steps involved from the moment the IRS realizes that you owe money to the government to the point they finally collect their money, are as follows. The IRS will:

  1. Assess the liability.
  2. Notify you with a Notice and Demand for Payment. 
  3. After that comes a public Notice of Federal Tax Lien that all creditors will be able to see. 
  4. Secure your property to secure payment if you continue to have your taxes unpaid, be it an estate, gift, self-employment, income tax, or another.  

Remember that when served a federal tax lien, any assets you may acquire during the lien may also be placed on a tax lien. Overall, a federal tax lien will most likely downgrade your credit score substantially, given that the IRS notifies creditors and individual states that you owe back taxes and that they are the first in line to receive payment for these unpaid taxes. In many instances, you may even be required to pay your due taxes in full so that you can regain your ability to receive any kind of financing. 

 

What Is a State Tax Lien?

This is slightly different from a federal tax lien as it is imposed by the state government. However, it still gives the government authority to secure the owed tax by exercising a legal right over your property, be it personal or real estate. Before any action is taken, the state issues a Notice of State Tax Lien after your tax liabilities are assessed, and a Final Bill for Taxes Due (or a Bill for Taxes Due) is then sent to you. The waiting period between the Bill for Taxes Due and the Notice of State Tax Lien is 35 days. Within that time, you need to reach some sort of appropriate resolution (if you cannot settle your tax debt). Until you do, though, the lien will remain on the property in question. 

Notes:

  • It may take up to three years for the IRS to assess liabilities on federal income taxes (from the date you are required to file or file a tax return). This legal time frame is called a Statute of Limitations, during which the IRS can bring legal action against you. 
  • A statute of limitations can be extended to six years if you underestimate your gross income by over 25%.
  • A statute of limitations can have no time limit if you fail to file a return (fraudulent or not). 
  • Some states follow the 3-year statute of limitations rule (see Ohio, Wisconsin, Michigan, Kentucky, Colorado, California, and Arizona) while others follow the 3-year plan for income taxes owed to the state (i.e., Tennessee, Oregon, New Mexico, Louisiana, and Kansas). 

If you find yourself dealing with a state lien, it is advised to consult with a tax professional to have all your questions about things like the statute of limitations in your state answered. 

A tax professional is undeniably your best line of defense when you want to protect yourself against liens and levies placed on your wages, assets, property, and bank accounts (and get out of the troubles brought by a state or federal tax lien). It is critical that you reach a settlement with the IRS (or appeal a lien) before they place a levy on your property or bank account, to prevent your assets from being seized. 

 

How to Find Out If You Have a Tax Lien

As already mentioned above, the IRS will most likely notify you if a federal tax lien has been filed by sending you a Notice of Federal Tax Lien. In general, a federal lien is effective almost immediately after the IRS issues a written demand for payment of due taxes (within the next 10 days or so). 

Nevertheless, you could find out whether you have a federal lien tax on your own. Given that tax liens are placed with local authorities, we suggest you visit your state’s Secretary of State website. There should be an option that reads UCC Search or Lien Filing. In either case, you will be called to enter some personal details, such as your filing name and other ID information, so you can retrieve the data you seek. 

Other than that, another great resource to figure out if you have a lien is legal databases, which usually offer access to up-to-date information on tax liens for a fee. Now, since your state may also place a lien on your property if you fail to pay the local taxes on time, you may want to check with the county in which your financial asset (the one that a lien may have been placed on) is located. The process varies among states. However, you will need the assistance of your state government offices to help lift your lien and pay your back taxes. In New York, for example, this procedure entails you call (518) 457-5434 or use your online services account to pay your tax bill. Other states offer a wide range of payment options – even provide you with the chance to set up a payment plan for a small fee (see California). 

Note: As soon as you pay your tax debt, remember to request a copy of your credit report so that you can check that the lien has indeed been lifted. If it has not been removed, do contact the relevant credit bureaus to sort this issue out with them. 

 

Can You Sell a House With a Tax Lien?

Yes, it is possible to still be able to sell your home if you have a lien on it. Of course, some conditions need to be met. For instance, you should ensure that you pay your tax lien first and then refinance or sell your home. 

You have two options here (1) pay the lien before you close the deal (you add the lien amount to your expenses) or (2) clear the lien by paying the taxes on your own before selling your house. If the latter is not doable (though, it is the best course of action since a property lien is listed on the title report, which may trouble or worry potential buyers), you could consider the following:

  • File For Chapter 13 Bankruptcy – This is a handy solution that will give you a greater negotiating power. But, that’s all there is to it. Although it will NOT clear your debt, it may open the road for a payment plan that serves you so you can repay your due taxes over a period of time. 
  • Dispute The Lien – Pursue this option if you believe that a lien has been wrongly placed on your property. In this case, the creditor may be willing to lift the lien. In any other case, you can bring your case to the court. If you win, your lien will be released. If you lose, you may be able to work something out with the creditor (some sort of settlement) to reduce the due amount. 
  • Apply For a Subordination – The IRS may discharge the sum of your back taxes so that you can sell or refinance your property or restructure your mortgage.  This means that the IRS will sell (subordinate) your debt to other creditors, who will wait for the closing of the deal to get paid. So, basically, your debt goes from the IRS to another creditor. That way, the title of your home is clear (and is passed on to the buyer clear) while you will still be called to pay the back taxes to the 3rd-party creditor. To apply for a subordination, you could use the services of creditors with liens (i.e., a mortgage company) or apply for a program like the Direct Debit Installment Agreement to have your lien withdrawn after making the needed payments. 
  • Increase The Selling Price – If nothing of the above works, you could add the amount you owe to the IRS to the selling price of your home to cover the property tax lien. Just ensure that the real estate market supports the asked price (the current market value should be around the price at which you are selling your house so that it is attractive to potential buyers). Also, don’t forget to pay your lien before you transfer the ownership of the house. That way, your buyer will get a clear title. 

 

How to Remove a Tax Lien

If you cannot afford to pay your back taxes, which is the single most effective way to stop a tax lien, you could come to some sort of agreement with the IRS. We suggest exploring options like an Offer in Compromise, which may help you settle your back taxes for less than what you really owe. In this case, though, take note that being accepted is quite a long shot. You will also need to fulfill certain conditions:

  • You have filled all of your tax returns.
  • You are not being audited.
  • You are not in bankruptcy.
  • You have made the needed estimated tax payments for the current fiscal year.

You may use this handy tool to check whether you qualify for an Offer in Compromise or not. 

Alternatively, you could consider getting on an IRS payment plan, such as the Direct Debit Installment Agreement, where you grant the IRS the right to take three or more consecutive payments out of your bank account. That way, you may be able to convince them to remove your tax lien from public records. That being said, you will still have to pay penalties and interest (and your tax debt, of course) until your tax balance is paid off. 

This list could go on forever. So, do reach out to us. Let’s sit down and go through your options together. Our expert tax relief professionals know the way to get you out of debt or at least relieve you of your financial strains considerably. Contact us today for a free tax consultation.