Category: Seizure

WHAT HAPPENS WHEN YOU OWE THE IRS AND DON’T PAY?

Tax Levy Versus Tax Lien: What’s the Difference?

Tax Levy Versus Tax Lien: What’s the Difference?

There are several reasons why the IRS is one of the most tenacious debt collectors. One reason is that tax debts are difficult to discharge in bankruptcy proceedings. Another reason relates to the tools the IRS has to collect unpaid taxes. Two of the most prominent are the tax lien and the tax levy, but what’s the difference between the two?

What is a Tax Levy?

A tax levy is one of the scariest tax collection tools in the IRS’s arsenal because it allows the IRS to seize taxpayer property to pay off an outstanding tax balance. Any property that’s subject to an IRS federal tax lien is potentially subject to an IRS tax levy (unless otherwise subject to an exception). This includes assets such as:

  • Bank accounts
  • Real estate
  • Vehicles
  • Income (through wage garnishment)
  • State tax refunds

This sounds pretty scary, and it can be. But understand that while the IRS can theoretically seize a taxpayer’s home or personal vehicle, the IRS rarely does so. This is because it’s a time-consuming and expensive process. In many cases, it’s easier for the IRS to take money from the taxpayer’s bank account or paycheck instead.

There’s also the fact that taking a home and/or vehicle can make it even harder for the taxpayer to pay off their tax debts. It’s hard to earn an income if the taxpayer is homeless or can’t drive to work. It also makes the IRS less likable than it already is.

The legal authority granting the IRS the power to levy property comes from the Internal Revenue Code (IRC) Section 6331. There are generally three conditions that the IRS must meet before the IRS can levy a taxpayer’s property:

  1. The IRS completed a tax assessment and sent the taxpayer a bill for the outstanding tax balance (Notice and Demand for Payment);
  2. The IRS sent the taxpayer a Final Notice of Intent to Levy and Notice of Your Right to a Hearing at least 30 days before the levy. This is often mailed via registered or certified mail, return receipt requested, but is sometimes delivered in person or left at the taxpayer’s home or business address; and
  3. The IRS notified the taxpayer that it may contact third parties regarding the collection or determination of the tax debt.

The IRS can sometimes bypass some of the notice requirements in special situations that warrant a jeopardy levy. The IRS uses a jeopardy levy if it believes the property it wants to seize is in jeopardy of “disappearing” or moved so it’s outside the reach of the IRS.

What is a Tax Lien?

A federal IRS tax lien is not quite as serious as a tax levy, but it can be almost as problematic in some cases. This is because a tax lien is a legal claim against a taxpayer’s property, both existing and future property.

In the colloquial sense, a lien is like the IRS saying they have “dibs” on the taxpayer’s property to prevent it from being sold or seized by other debt collectors until the tax debt is paid first. For the most part, the tax lien applies to all of the taxpayer’s property, from their bank accounts to their home to the furniture and personal property inside their home.

The legal authority granting the IRS the power to place a lien on a taxpayer’s property comes from the IRC Section 6321. There’s generally only one condition that the IRS must meet before the IRS will place a lien on a taxpayer’s property. Specifically, the IRS must first assess a tax against the taxpayer and send them a bill (Notice and Demand for Payment).

In most cases, the IRS will send several notices, asking the taxpayer to pay their tax bill before the IRS places a lien on their property. Assuming the taxpayer hasn’t paid off the tax debt or made arrangements to settle it (with a payment plan or an offer in compromise, for instance), the IRS will file a Notice of Federal Tax Lien.

Once this Notice of Federal Tax Lien gets filed, it’s difficult to transfer or sell property, subject to the lien. It can be done, but the taxpayer will typically need to first remove the tax lien. If a buyer purchases or otherwise obtains property, subject to a tax lien, the IRS can potentially come in and take the property without paying for it, and there’s little the buyer can do about it.

As bad as this sounds, federal tax liens aren’t quite as bad as they used to be. This is because IRS liens don’t affect credit scores or show up in credit histories. Despite this, it can still be difficult to borrow money, as many lenders will want to use the taxpayer’s property as collateral for the loan but will be unable to do so because of the IRS lien (or the creditor’s lien will be subordinate to the IRS’s lien).

In Summary

A tax levy is the physical taking of property to satisfy a tax debt, while a tax lien is creating a legal interest in property to protect the IRS’s ability to collect a tax debt in the future.

 

 

Kienitz Tax Law is here to help you with your tax issues. Schedule your FREE consultation today!

Do Not Ignore Your Tax Problems!

Tax Law is Our Specialty. Contact us to Get Your Life Back to Normal
Get a FREE Case Evaluation

kienitz tax law What Happens When You Owe the IRS and Don’t Pay

What Happens When You Owe the IRS and Don’t Pay?

For the most part, we can’t get away with not paying our taxes. So what happens when you don’t pay your taxes when they are due? Does an IRS agent come to your bank and take money from your bank account? Or do you get a letter in the mail a month later saying the IRS has a lien on your property?

Both situations are possible, at least to some degree. However, a lot can happen from the moment a tax obligation comes into existence and the IRS takes action against you.

Continue reading “What Happens When You Owe the IRS and Don’t Pay?”
kienitz tax law tax seizure

The IRS’s Ability to Seize Assets

When a taxpayer has an unpaid tax debt, the IRS has several tools at its disposable to collect the taxes it’s owed. One of these tools is a levy, which is the taking of the taxpayer’s property and assets. The IRS will then use the property to pay off the taxpayer’s debt. But before the tax collection process gets to that point, a few things must happen first.

Continue reading “The IRS’s Ability to Seize Assets”

wage garnishment

How to Stop Wage Garnishment

When a taxpayer fails to pay taxes and the IRS’ initial efforts to collect the back taxes are unsuccessful, the IRS can take money directly from the taxpayer’s paycheck. This is commonly referred to as wage garnishment, although sometimes it may be called a wage levy. Wage garnishment is one of the more severe methods the IRS can rely on to collect back taxes and it’s not easy to stop, but taxpayers have a few options to consider.

Continue reading “How to Stop Wage Garnishment”

AdobeStock 132767371 e1487280836121

Which Personal Assets Can the IRS Seize?

The IRS’ official task is to collect taxes as required by the Internal Revenue Code. But because not every taxpayer pays taxes on time or in the correct amount, the IRS effectively becomes a debt collector — and what an effective and powerful debt collector it is.

The IRS has several tools to collect taxes owed. One of its most feared and powerful tools is the tax levy. Tax levies are particularly burdensome because they allow the IRS to take your personal property and assets. Luckily, the IRS can’t go about taking whatever personal assets it wants. It has particular rules about what it can levy and how much it can take.

Tax Levy Basics

A tax levy is the actual taking of property by the IRS in order to pay a tax debt. The two main types of tax levies include wage garnishments and the seizure of personal assets.

A tax levy usually won’t occur unless a tax lien has been placed on the taxpayer’s property first. A tax lien is a security interest taken by the IRS in all of a taxpayer’s property. The purpose of the tax lien is to protect the IRS’ ability to collect the tax debt from a particular taxpayer.

 

Personal Property Subject to IRS Seizure

The specific types of property the IRS may seize in order to satisfy a tax debt is vast. Examples include paychecks, personal residences (subject to exceptions), vehicles and financial accounts. Basically, almost anything a taxpayer owns can be levied, unless specifically excluded by law. So an easier way to identify which personal assets can be seized by the IRS is to find out what personal assets must be left alone.

 

Personal Property That Cannot Be Collected by the IRS

Section 6334 of the Internal Revenue Code lists types of property that the IRS may not seize when attempting to recover an unpaid tax debt. These include:

  • Essential clothing
  • Up to about $7,700 worth of personal effects and furniture
  • Up to about $3,800 worth of books or tools necessary for schooling or work
  • 85% of a taxpayer’s public assistance, worker’s compensation and unemployment benefits. The IRS may levy these income sources, but only up to 15% of the amount.
  • Undelivered mail
  • Certain pension and annuity payments
  • Wages necessary to pay child support and provide for basic living expenses

Personal vehicles and residences are subject to IRS seizure, but there are limitations and exceptions to this. Additionally, the IRS understands that there’s no point in taking something that might hinder a taxpayer’s ability to pay its tax debt.

For example, if a taxpayer needs his or her car to get to work, the IRS is probably not going to seize the car. Doing so might result in the taxpayer becoming unemployed and therefore the IRS will have a more difficult time collecting the tax debt.

An overarching theme of the IRS’s seizure powers is that it will take as much as it can to collect its tax debt, but it won’t take so much that the taxpayer is either unable to pay the rest of the tax debt or becomes destitute.

 

In Closing

The IRS’ public policy considerations and list of exempt property are hardly going to serve as a consolation to anyone facing a tax levy. A taxpayer facing a potential levy is understandably going to be scared and extremely concerned. In order to stop the IRS from taking your personal property, you’ll likely need help from a tax professional.