Tax Liens and Levies
Tax Liens and Levies
Tax Liens
A lien is an encumbrance- it does not result in the physical transfer of the taxpayer’s property to the IRS.
Tax Levies
A levy allows the IRS to seize the taxpayer’s property.
Levies are divided into two categories.
- The first category includes tangible real and personal property owned by the taxpayer
- The second category includes third parties who hold property belonging to the taxpayer these include bank deposits and wages
- The first category is often referred to as a seizure, while the second category is usually referred to as a levy or garnishment.
- The IRS must place a levy upon the taxpayer’s property before the IRS can seize the taxpayer’s property
Wage Garnishments
The IRS wage garnishment is a very powerful tool used to collect taxes owed through your employer. Once a wage garnishment is filed with an employer, the employer is required to collect a large percentage of each paycheck. The paycheck that would have otherwise been paid to the employee, instead will now be paid to the IRS. The wage garnishment stays in effect until the IRS is fully paid or until the IRS agrees to release the garnishment.
IRS Bank Levies
An IRS levy is the actual action taken by the IRS to collect taxes. For example, the IRS can issue a bank levy to obtain your cash in savings and checking accounts. Or the IRS can levy your wages or accounts receivable. The person, company, or institution that is served the levy must comply or face their own IRS problems. The additional paperwork this person, company or institution is faced with to comply with the levy, usually causes the taxpayer’s relationship to suffer with the person being levied. Levies should be avoided at all costs and are usually the result of poor or no communication with the IRS.
When the IRS levies a bank account, the levy is only for the particular day the levy is received by the bank. The bank is required to remove whatever amount is available in your account that day (up to the amount of the IRS levy ) and send it to the IRS in 21 days unless notified otherwise by the IRS. This type of levy does not effect any future deposits made into your bank account unless the IRS issues another Bank Account Levy.
An IRS Wage Levy is different. Wage levies are filed with your employer and remain in effect until the IRS notifies the employer that the wage levy has been released. Most wage levies take so much money from the taxpayer’s paycheck that the taxpayer doesn’t have enough money to live on.
Federal Tax Liens
- Once the IRS makes a valid assessment against the taxpayer, the IRS is required to give notice and demand for payment within 60 days.
- If the taxpayer does not pay the taxes owed, a federal tax lien arises and attaches to property and property rights either owned by the taxpayer or acquired after the date of assessment.
- Both federal law and state law are relevant in determining the effect of the federal tax lien on the taxpayer and the taxpayer’s property.
- Federal law determines whether the tax lien has validly attached.
- State law determines to what property the lien attaches.
- Notice of lien must be filed in the proper location as established by local law
Certificate of Release of Paid or Unenforceable Lien
The IRS must issue a certificate of release of lien no later than 30 days after one of the following events occur:
- The tax liability is paid in full
- The tax liability is no longer legally unenforceable- the 10-year CSED has expired
- The IRS accepts the bond of a surety company- where payment of all taxes owed is to made no later than six months before the expiration of the 10-year CSED.
- The taxpayer should deliver a cashier’s check to the IRS and receive a Certificate of Release of Tax Lien.
Levying the Taxpayer’s Property
The IRS’s levy power is very broad and does not require the IRS to go to court
- The IRS can use its authority to gain possession of the taxpayer’s property to pay back taxes owed.
- To levy a taxpayer the IRS must do the following:
- First, the IRS must file a notice and demand payment.
- Second, the taxpayer must neglect or refuse to pay the tax within 10 days of the notice and demand.
- Finally, the IRS must provide at least 30 days’ notice of its intent to levy on the taxpayer’s property.
Once these criteria are met, the IRS can levy property and rights to property belonging to the taxpayer
Effect of a Levy
The effect of a levy is to compel the taxpayer to turn the property over to the IRS.
Amounts realized by the IRS from a levy or garnishment are applied as follows:
- First to the expenses of the levy and sale
- Second to the tax relating specifically to the levied property
- Third to the delinquent tax liability that caused the levy or seizure
- Funds collected by levy are considered to have been paid involuntarily, accordingly the taxpayer cannot specify to the IRS how to apply the funds.
Notice of Intent to Levy
- The IRS is required to notify the taxpayer of its intent to levy on salary, wages, or other property, at least 30 days before the levy
- This is done thru a Letter 1058 and states that this is the final notice of intent to levy
Notice of Seizure
The IRS must issue a Notice of Seizure to the owner of real property or the possessor of personal property as soon as practicable after the property is seized
- This notice has the same effect as the Notice of Levy and can be delivered in person to the owner-possessor, or left at his usual place of home or business
- Lien, levy, or seizure must be approved by a supervisor
- The supervisor must review the taxpayer’s information, verify that a balance is due, and affirm that a lien, levy, or seizure is appropriate under the circumstances.
- Failure to give the proper notice will invalidate the seizure
- The IRS publishes tables to be used for the current calendar year in computing the amount of income exempt from levy.
Bank Account 21-day Waiting Period
When a financial institution receives a levy on a bank account, it cannot surrender the money until 21 calendar days after the levy has been served
- The 21-day waiting period provides the taxpayer the opportunity to notify the IRS and correct any errors regarding the taxpayer’s account.
- An extension of the 21-day period may be granted by the Area Director if there is a legitimate dispute regarding the tax owed.
- During the 21-day waiting period, the levy can be released
Seizure of a Taxpayer’s Residence or Business
- Seizures of homes and business have become relatively infrequent- in part due to the adverse publicity that the IRS has received in the past
- TBOR 3 prohibits the IRS from seizing real property that is used as a residence by the taxpayer for tax amounts of $5,000 or less- this includes penalties and interest
- TBOR 3 only permits a levy on a principal residence if a judge approves of the levy in writing
Fair Debt Collection Practices
- The Fair Debt Collection Practices Act includes a number of rules controlling debt collection practices.
- TBOR 3 follows these guidelines and restricts communications with the taxpayer on telephone calls outside the hours of
- Unless prior consent of the taxpayer is given directly to the IRS, the IRS may not communicate with a taxpayer in connection with the collection of a taxes owed:
- At an unusual time or place or a time or place known or which should be known to be inconvenient to the taxpayer
- At the taxpayer’s place of employment if the IRS knows or has reason to know that the taxpayer’s employer prohibits the taxpayer from receiving such communication
- If the IRS knows the taxpayer is represented by someone who is authorized to practice before the IRS- this provision no longer applies if the authorized representative does not respond to an IRS communication within a reasonable period of time
The Collection Information Statement
The Collection Information Statement (CIS) is commonly used by the IRS to gather the necessary information to determine the taxpayer’s ability to pay- the CIS is the taxpayer’s financial statement
- The forms used are Form 433-A for an individuals and Form 433-B for businesses.
- In addition to these forms, IRS personnel may use an abbreviated one page Form 433F for individual taxpayers who owe less than $100,000
- The IRS has established standards for allowable and necessary monthly living expenses
Analysis of Taxpayer’s Financial Condition
There are three categories of necessary expenses (see Internal Revenue Manual Sec. 5)
- They are National Standards, Local Standards, and Other Necessary Expenses (see the IRS website at www.IRS.gov for current standards
- National Standards are set for five necessary expenses.
- Four of the standards- food, housekeeping supplies, apparel, and personal care products and services are set according to the Bureau of Labor Statistics
- The fifth standard- miscellaneous expenses is set by the IRS.
- Housing and utilities and transportation expenses are covered by standards established by geographical region.
- Taxpayers are not required to substantiate the amount of expenses categorized as National Standards for the taxpayer’s corresponding income level
- Taxpayers are required to substantiate expenses categorized as Local Standards or Other Necessary expenses.
- Necessary expenses are those that provide for the health and welfare of the taxpayer and the taxpayer’s family, or relate to the production of income.
- Necessary expenses must be reasonable in amount
- Other Necessary Expenses may include child care, dependent care for the elderly, or disabled, taxes, health care, court-ordered payments, secured debts, term life insurance, disability insurance, union dues, professional association dues, accounting and legal fees for representing a taxpayer before the IRS.
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