This page provides additional details on the IRS Collection Process, taxpayer due process rights and Collection Actions - Liens and Levy’s. In dealing with the IRS it is important to understand where you are in this process as it will establish how much time you have to resolve the situation before Levy.
Publications
The IRS has helpful publications that explain the Collection Process and taxpayer rights to appeal any decisions made. Recommend reading these pubs if you are facing collection.
- IRS Pub 594 - The Collection Process
- IRS Pub 1660 - Collection Appeal Rights
Collection Actions
Once a liability is in Collection, the IRS has two collection alternatives:
- Lien gives the IRS first right of collection on any property you attempt to sell and your credit rating suffers.
- Levy authorizes the IRS to seize assets, including funds in checking, savings, investment or retirement accounts and your home. A Wage Garnishment is a form of administrative Levy where they take most of your paycheck (up to 70%!) directly from your employer.
Levy must be prevented at all costs; it will not leave enough money to live on, forcing immediate settlement. Fortunately, the IRS has due process procedures. If you are currently subject to a Levy, get the help of a Tax Professional (see Appendix D) or contact the Taxpayer Advocate Service (see Inset 1) immediately. There are procedures to get help if a Levy causes undue hardship, but they are beyond the scope of the text.
- In most cases, taking action to assert due process rights, proposing a settlement (OIC or Installment Agreements) or declaring bankruptcy prevents the IRS from proceeding with Levy.
- Note - States are not as rigorous on notification rules. If you owe state taxes as well as federal, state levies against your bank accounts could to show up without much warning! A simple statement like, “we may take collection action” may be all you get.
Collection Due Process
You have the right to a Collection Due Process Hearing before Levy. Requesting a hearing within the allowed time frame will suspend collection and transfer your case to Appeals where an Appeals Officer will be assigned. The Appeals Officer is more likely to be helpful, and requesting a hearing is a good way to stop collections, get some time and help.
How to Request a Hearing
Request a CDP Hearing using IRS Form 12153, Request for a Collection Due Process or Equivalent Hearing upon receiving one of several notices. You must provide a valid reason for requesting a hearing; the last page of the form gives examples. Check the Offer-in-Compromise or Installment Agreement boxes in section 7 to indicate intent to propose a settlement.
- There is a limited time to request a CDP hearing after receiving a qualifying notice; usually 30 days from notice.
- Upon requesting a hearing, IRS will suspend the 10 year Statutory Collection Period until a final determination is reached.
Qualification for a CDP Hearing
You are entitled to a hearing if you receive one of these notices:
- Notice of Federal Tax Lien Filing and Your Right to a Hearing Under IRC 6320. Post mark Form 12153 by the date indicated on the notice.
- Final Notice - Notice of Intent to Levy and Notice of Your Right to a Hearing. Post mark Form 12153 within 30 days of the date on the notice.
- Notice of Jeopardy Levy and Right of Appeal. Post mark Form 12153 within 30 days of the date on the notice.
- Notice of Levy on Your State Tax Refund - Notice of Your Right to a Hearing. Post mark Form 12153 within 30 days of the date on the notice.
The Hearing
The IRS will make a determination at the hearing regarding the action it will take; however, you have a right to appeal to the US Tax Court. Since this course of action is a potentially expensive court appearance, try to resolve the situation beforehand unless you are willing to spend $20,000+ at trial. Of course, seek the assistance of a Tax Professional.
A CDP Equivalent Hearing can be requested within one year of Levy notice or one year plus five business days for a notification of Lien if the deadline for a CDP Hearing is missed. The differences between the two hearings are:
- The IRS is not required to suspend action prior to the hearing.
- You cannot appeal the decision in the US Tax Court.
- The Statutory Collection Period is not suspended.
Your case is still transferred to Appeals where your Officer may be more helpful in resolving the situation than a Collection officer.
Jeopardy Exception for Due Process Rights
If the IRS has reason to believe that a taxpayer is seeking to hide assets from Levy, they can consider their ability to collect in Jeopardy. Jeopardy gives them the powers to circumvent normal process and seize assets quickly.
Liens
“A tax lien is a lien imposed by law upon a property to secure the payment of taxes. A tax lien may be imposed for delinquent taxes owed on real property or personal property, or as a result of failure to pay income taxes or other taxes.”
- Wikipedia
A Tax Lien gives the IRS first right of collection against assets. Liens apply not only to property at the time of Lien, but any property acquired thereafter. Its does not force the sale of property; however, if you do it will direct proceeds to the IRS.
Liens also show up on your credit report and are seriously damaging. According to my research, they may impact scores up to 100 points and disqualify you from certain types of loans regardless of score - for example home loans and certain types of student loans.
Liens are released after the liability is paid or after the Statutory Collection Period expires. You must request a Certificate of Release of Federal Tax Lien in order to get Liens removed from credit reports. The IRS will not automatically issue one.
There are other limited situations in which you may request a Lien be released as covered in Pub 594.
- In response to the economic down turn, the IRS instituted a Tax Lien Relief program in 2008 designed to allow home owners to refinance or sell their homes even though a Lien is filed. This make the IRS Lien subordinate to a refinanced mortgage allow the lender to execute the financial transaction. See the IRS article ‘IRS Speeds Lien Relief for Homeowners Trying to Refinance, Sell’
Lien should not be confused with Levy. A Lien secures the government’s rights to property should it be sold, Levy is administrative actions to seize property for payment of taxes. You may receive a notice of Lien after the IRS has issued one; however you are required to receive an notice before Levy.
Levy
“A Tax levy, under United States Federal law, is an administrative action by the Internal Revenue Service (IRS) under statutory authority, without going to court, to seize property to satisfy a tax liability. The levy "includes the power of distraint and seizure "by any means". The general rule is that no court permission is required for the IRS to execute a section 6331 levy.” - Wikipedia
Levy is the IRS’ most feared collection tool - it will force you to settle or live on very little money. The rights of distraint and “seizure by any means” allow the IRS to freeze, seize and liquidate any property or assets you possess or that another holds for you, such as a bank.
The IRS provides information in its Levy article on IRS.gov; recommended reading if your tax situation is approaching Levy.
As part of Levy, the IRS can:
- Freeze and seize the assets in financial accounts including primary checking.
- Force liquidation of and seize retirement accounts.
- Seize and sell your home or any other assets with equity.
- Garnish wages.
Financial Account Levy
You will probably learn of a financial account levy when debit cards are declined or checks bounce. The financial institution will issue a letter, but you will know before then. The good news is your money is not immediately sent to the IRS. Funds are held for 21 days after a Levy is received; during this period, your account may be unfrozen provided you can negotiate a settlement. After 21 days the money is sent to the IRS and you will not get it back.
Retirement savings can be levied was well as regular accounts, but you are not subject to the 10% early withdrawal.
- If you desire use retirement savings as part of an OIC or installment agreement, request the IRS issue a Levy against the account. This will allow withdrawal funds without penalty.
All states do not have the same rigorous requirements for due process; in some cases ‘notification’ may be very vague like a statement in a letter, “we make take action to collect...” This can result in a “surprise” state Levy against a bank account. Remember to deal with your state situation in conjunction with the IRS. Consider asking the state to allow settlement with the IRS first then used the IRS settlement as leverage to argue your case with the state.
Wage Garnishment
Wage garnishment is a form of Levy that this a favorite tool of the IRS for salaried employees. It allows them to force your employer to redirect most of your paycheck to the government. If you get paid by direct deposit, this effectively seizes your paycheck.
The exact formula for garnishment is complex, involving the amount of payroll deductions claimed, the amount of taxes owed, standard deduction and child support amounts. Bottom line - it is likely to be 50-70% of your paycheck.
Personal Assets & Home Equity
The IRS automatically takes a 20% reduction in any asset when figuring the value for tax liability settlement. This rules out most homes as targets - here’s how it works: A $300,000 home with $50,000 equity is valued at zero by the IRS and will not be seized. The mortgage payoff of $250,000 is more than the $240,000 value the IRS assigns (80% of $300,000.)
Suspending Levy Action
Levy action is suspended if you request a CDP Hearing in the time frame allowed or have submitted an OIC or Installment Agreement for the IRS to consider. Even if they reject your proposal, you generally have 30 days before action resumes.
If you are facing Levy, you must take immediate steps - submit a Request for CDP Hearing or a proposal to settle. Hire a Tax Professional or contact the Taxpayer Advocate Service if you cannot afford a professional.
