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What Your Clients Should Know About Federal Tax Liens

Updated: Feb 13, 2021

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Taxes can be assessed for different reasons. The most common reason tax is assessed is that a tax return has been filed and an amount is due. Other ways of assessing taxes are through notices of deficiency (NOD). An NOD can be issued after an examination, appeals, or something similar.

Once a tax has been assessed, the taxpayer is informed through a letter. If the taxpayer doesn’t pay the NOD, then he or she is put into the Automated Collections System (ACS). ACS will send more threatening letters, every 30 days. Eventually, a letter will come that is a Final Intent to Levy Notice, giving the taxpayer 30 days to appeal the amount being owed. If nothing is done, the IRS will then issue a tax lien against the taxpayer. The IRS files liens to protect the government’s interest on the amount of taxes being owed. Tax liens are filed with the clerk of the court, which is made public information. The lien will also go on the taxpayer’s credit report. With a tax lien, the IRS can start the collection of the tax that was owed.

What Happens Next?

The next step for the IRS in order to retrieve the debt owed is to do an asset search on the taxpayer. The IRS will try to locate the taxpayer’s bank accounts, employers, and other assets that the agency can levy in order to cover the taxpayer’s debt. The IRS can place a lien on the property that the taxpayer owns. For instance, it is common for the IRS to put a lien on a taxpayer’s home or automobile. If you’re familiar with watching movies, you would think that the IRS seizes property all of the time. However, the IRS isn’t an institution that seizes property, but the US Department of Justice (DOJ) is.

In 2013, the DOJ put liens on 11 million pieces of personal property and seized 547 pieces of real property, according to official records for that year. The reason for this is the presence of very few seizures, in that the tax laws prevent assets, such as homes or cars, to be sold unless there is substantial equity in them. Furthermore, if the IRS is going to seize an asset, the tax debt owed would have to be in the six figures and have six-figure equity, as well, in the asset being seized. There is no written document to justify this; all is from experience, and it’s certain this is exactly the way it’s being done. The IRS policy as pertaining to the seizure action is usually the last option in the collections process, whereas taxpayer rights must be respected, and many factors must be considered before acting.

The IRS can also levy bank accounts, payroll checks, and accounts receivable from those who are self-employed. When a levy begins against a taxpayer, the IRS does not see the levy as a means to an end. Typically, the IRS uses levies to get the taxpayer’s attention so the individual can make arrangements toward paying his or her tax debt.

If a levy is issued against a taxpayer’s bank account, the bank receives a notice and then informs the account holder. When levying, the bank sets aside the money in the bank account for the IRS, and the IRS gives the taxpayer a 21-day ultimatum to try to resolve the debt or the amount the bank has set aside would become theirs.

How to Stop a Bank Levy and Garnishment

To stop a levy, you have to pay the taxes due. If a taxpayer is unable to pay the taxes due, that individual will need to have a payment plan in place. From experience, I can confidently tell you that it would take much more time for that to happen within 21 days, so the best thing to do is contact the Office of the Taxpayer Advocate.

An employee’s wages can also be garnished to satisfy a tax debt. In this case, a notice is sent to the employer, informing them that they are to set aside an amount. Typically, the IRS will garnish 70 percent or more of an employee’s wages. This is usually done so the taxpayer will contact the IRS and resolve his or her tax debt. The exact amount that is exempted from the garnishment depends on the taxpayer’s filing status and numbers of dependents listed on the person’s tax return. The IRS uses a chart that can be found in Publication 1494. For example, if a taxpayer is single with no exemptions and he’s paid weekly, $182.69 of each paycheck is exempted from his garnishment.

To stop a garnishment from occurring is more tedious than stopping a bank levy. You will need to obtain an IRS wage garnishment release to stop the garnishment. In the same regards as levying, the easiest way to stop a garnishment is to pay the tax due in full. If you can’t pay the amount in full, you will have to make necessary payment arrangements with the IRS to stop a garnishment.

A levy on accounts receivable can happen if a taxpayer is self-employed. The IRS will contact the vendors of the self-employed person and instruct them to pay the IRS instead of the taxpayer. The total numbers of accounts that are qualified to be levied is the total numbers of levies that have been issued. To deactivate an active levy, you would have to pay the taxes in full. If the taxpayer can’t pay the full amount, then he or she will have to make payment arrangements with the IRS.

The Taxpayer Has Rights

Something very important to remember with IRS collections is that the taxpayer has rights. Knowing fully well what those rights are and the administrative activities of the IRS would go a long way in helping your client navigate the collections maze.

For example, when a taxpayer receives a Final Intent to Levy, they have 30 days to request for a Collection Due Process (CDP) hearing. A CDP hearing will halt all collections means that the IRS can perform. A CDP hearing is usually scheduled to take effect for 90 days after it has been asked for. Typically, you are going to a CDP hearing with some sort of plan. For example, it could be an installment arrangement, an offer in compromise, or it could simply be that you are representing an injured or innocent spouse. If you miss the deadline for a CDP hearing, you can still ask for a CDP Equivalent hearing. With a CDP Equivalent hearing, the collections process does not halt, a lien will be issued, and a levy could possible happen.

To get a tax lien subordinated, you have to satisfy the tax debt. There are certain circumstances where you could get the lien subordinated without paying the tax debt, but they have to be extreme cases. For example, if filing a tax lien against a taxpayer would end up jeopardizing the person from earning a living, and you can prove it to the IRS, you can subordinate a lien or not have one issued in the first place.

When the debt has been satisfied, you’ll have to make a request to the IRS to release the lien. The agency would then send you a letter stating that your lien has been satisfied and approved, and you would then submit that letter to the different credit agencies to have it removed from your credit report.

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