Tax liens and tax levies are both the result of owing tax to the IRS, but they are not synonymous. It’s important to understand how they come about and what consequences they bring in order to avoid/handle properly.
What is a tax Lien?
If you owe the IRS money and you don’t pay them, they have the right to place a tax lien on your assets. The lien represents the government’s interest in your property. It’s important to note that when the government places a tax lien on your home or your business, that does not mean that they are actively looking to seize it. In recent years, the IRS very rarely forces a sale to pay a lien; they just ensure that they are first in line for proceeds at the time of sale. A tax lien will remain in place until you have full paid the balance or the statute of limitations expires (10 years from filing). Liens most commonly become problems when you try to sell your home. IRS liens are superior to your mortgage company, meaning they need to be fully satisfied before the loan payoff. If there aren’t enough proceeds to cover both, then the sale can fall through.
What is a tax Levy?
A tax levy is the process by which the IRS can seize your property without the need to go through the court process. It’s easy to ignore the flood of IRS notice but it’s crucial not to ignore a Notice of Intent to Levy or Final Notice of Intent to Levy. If not responded to correctly, the IRS can bypass the channels required by other creditors (court) and instead straight up seize your assets in the following ways:
- Wage Garnishment. The IRS can withhold a portion of your salary to pay off what you owe until the debt is settled.
- Bank Levies. The government can freeze the funds in your bank account for 21 days, after which they are forwarded to the IRS.
- Property Seizure.The IRS has the right to seize your property, including your home or your car. And they can use it to offset the amount you owe.
- Reduced Refund. The IRS can take money out of any future tax refunds that you are due. They are also allowed to keep your state tax refunds.
HOW DO YOU DEAL WITH A TAX LEVY?
The best strategy is one of proaction. If you have a balance and you know you can not full pay, then start the process immediately, when it’s uncomfortable. You can prevent a levy in one of the following three ways:
- Pay in Full: If there is no balance, there is nothing to collect. That’s simple but not always possible.
- Installment Agreement (payment plan): If you can’t pay the full amount, you can stretch out what you owe over time. An installment agreement allows you to stay in the IRS’s good graces and they won’t levy as long as you continue to pay as promised.
- Negotiate: It might be possible to negotiate a settlement with the IRS so that they don’t place a lien or levy on your assets. An Offer in Compromise is a program that calculates your ability to pay over the life of the statute. And if your “reasonable collection potential” is less than your balance, you may be able to walk away owing substantially less:
Example: We recently had a client that owed $59,837 in Federal taxes. After determining they were eligible, we prepared the Offer and represented them during the entire process (over a year). In the end, it was worth it because we settled for $1,447.
Levy Release Due to Hardship
If you’ve waited and the levy is attached, not all hope is lost. Once the levy is attached, you do have the right to appeal and stop the process from going forward. And if the IRS has already seized your assets, it might be possible for you to get them back. But, it’s not easy and you will need to show that the levy will create an undue financial hardship. And this will take putting pen to paper and showing them with numbers.
The best way to avoid a lien or levy on your personal property or assets by the IRS is to take action. Ignorance is not bliss when it comes to the IRS. If you are having a hard time paying the IRS, contact Onyx Tax today and allow us to help you sort through the complexity of your IRS debt and get you back in good standing. We are the tax firm to call for IRS levy help!