Tax Liens – IRS and State Tax Collections
Tax bills arise for a variety of reasons and in a myriad of manners. Some taxes are simply the costs of doing business. Other taxes are assessed based on your employment wages and 1099 contracting income. Still other taxes may be incurred as part of a business obligation to assess, collect, hold-over, and turn-over payroll taxes. However regardless of the tax obligation, that obligation must be paid, or the taxpayer will face serious tax and financial consequences usually incurring a tax lien or levy. Taxpayers who fail to act even after receiving notice of impending state government or federal government collection action, also face the potential loss of their rights to appeal outside of the administrative process. In short, taxpayers facing collections actions by the IRS or California taxing authorities face serious tax problems, but an experienced tax attorney can help the taxpayer work out the matter while mitigating the costs of coming back into compliance.
How Do I Know I Have a Tax Debt Problem?
Before the tax authority can take any action against a taxpayer for unpaid tax debts, the agency must provide the taxpayer with notice of the action. That notice will contain a statement of your collection due process rights which includes the right to request a court hearing within 30 days. If your tax collection issue is with the federal government, you will likely receive a notice that is titled along the lines of:
- Notice of Federal Tax Lien
- Notice of Intent to Levy
- Final Notice – Notice of Intent to Levy and Notice of Your Right to a Hearing
If you receive one of the foregoing notices or a similar document from the IRS, it is wise to immediately seek the advice of an experienced tax attorney without delay. The attorney is likely to advise you that you must complete and file IRS Form 12153 Request for a Collection Due Process or Equivalent Hearing within 30 days. Furthermore, the taxpayer must list and explain all reasons for his or her disagreement with the collection action. Failure to timely file the request for due process can result in the loss of one’s right to go to federal court to appeal.
What Are the Consequences of Failing to Work out a Plan for Back Tax Debts?
Taxpayers with tax liabilities that remain unsatisfied will all, in time, face collection activity by the state or federal taxing authority. While the exact action taken will be dependent on the amounts owed and the obligation, these agencies have an array of legal tools to force repayment. For instance, if your tax debt is federal in nature the IRS may file legal papers to establish a tax lien, a wage or bank levy, offsetting of your tax refund, or the seizure of all or some of your property and assets. Left unaddressed, a tax debt can drain one’s savings, investments, and retirement accounts.
One difficulty that is common when a lien or levy has been put in place involves the sale, purchase, or refinancing of real estate. Typically, before one may sell a property with a lien, the lien must be addressed and removed to provide the new buyer with clear title to the property. Furthermore, if a taxpayer is considering refinancing his or her already existing mortgage, he or she will run into difficulties due to the lien. In order to refinance, the owner and taxpayer must request relief from the IRS through the agency’s consent to subordinating the lien so that the first mortgage may be satisfied. In some circumstances the IRS may be willing to grant this request because a reduced mortgage payment can free up resources to pay the tax debt. However, the agency is not under any obligation to grant this request.
Aside from the direct effects an unpaid tax debt can have on your financial accounts, the unpaid tax debt can also make it more difficult to get approved for a credit card, loan, or any other line of credit. This is because unpaid tax debts are reflected in one’s credit report. Unpaid tax debts will negatively impact an individual’s credit score and may result in additional financial difficulties. Any tax lien will appear in one’s credit history report for a minimum of 7 years, but the information may appear for as long as ten years.
Furthermore, when the IRS acts and files a Notice of a Federal Tax Lien (NFTL), the tax debt becomes a matter of public record. The taxpayer’s home address, tax amount owed, relevant tax periods, and additional information all becomes part of the public record. This may be embarrassing for some people. Others may not wish to have their name or family name associated with an unpaid debt.
Challenging an IRS Tax Lien to Get it Removed or Released
While the most straightforward way to remove a tax lien is to make payment and satisfy the debt, this approach is only appropriate when the taxpayer accepts that the debt is valid and is able to make the payment. Other options a taxpayer must address a tax lien include:
- Discharge of the lien– A taxpayer may apply for Certificate of Discharge from Federal Tax Lien. The seller must typically perform this action to provide the buyer with clear title. However, even if the IRS grants this request, despite discharging the lien against a specific piece of property, the lien will remain against other property.
- Subordination of the lien– A valid Certificate of Subordination will permit other creditors to move ahead of the IRS in priority. The IRS can agree to a subordination but is more likely to do so when such action will make it more likely for the taxpayer to satisfy the debt or make payment towards its satisfaction.
- Withdrawal of the tax lien – Moving to have the lien withdrawn by the IRS is the most complete form of relief because the withdrawal will result in a disposition where it is as if the tax lien was never filed. Taxpayers may request the withdrawal of a lien by filing Application for Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien when the taxpayer has satisfied certain requirements.
Taxpayers have additional options when seeking tax relief. Depending on their circumstances, they may consider an offer in compromise, being placed in “currently not collectible” status, a payment plan, a partial payment plan, penalty abatements, or a tax-motivated bankruptcy.
Removing an IRS Tax Levy
If you are already being levied by the IRS, it isn’t too late. The IRS can levy any federal payment, such as SSA and SSDI payments, OPM payments, APF payments, anything that comes from the government. This includes intercepting state and federal tax refund payments, although these are known as offsets, and not levies per se. The IRS can also levy your wages, aka a wage garnishment, or your bank accounts, any investment accounts or retirement accounts (401ks, IRAs, etc.), and the IRS can levy any combination of these things at the same time.
If the IRS is already levying you, it is because the IRS has already filed liens on all of your assets and income, whether you expressly know it or not. The liens make the levies possible. If you’ve only received an Intent to Levy notice and a levy hasn’t hit yet, you still have 30 days to respond before the actual levy is issued, but at that point you will certainly have federal tax liens filed.
You can have a levy removed if you are in compliance, meaning all tax returns with filing requirements are filed up to date, and you enter into a payment plan with the IRS, whether it be a partial or regular payment plan, or you enter into Currently Not Collectible status (see below for more about payment plans and CNC status). However, keep in mind that a bank levy that has been issued any more than 10 business days from the date of the levy notice cannot be guaranteed to be adjusted or removed, as once the bank has sent the money to the IRS, you’ll never get it back unless you can prove you never owed it in the first place.
Wage garnishments and monthly levies, such as on Social Security payments can be released immediately once a payment plan or CNC is set up. However, a wage levy, or wage garnishment, won’t stop until your employer receives the wage levy release notice from the IRS and releases the levy in their payroll system. Similarly, a levy on any federal monthly payment, such as SSA or any other government issued payment, won’t actually stop until the issuing agency processes the levy release notice from the IRS in their system. This means that a levy, though released, can hit one, or even 2 more times before stopping. For example, an SSA or SSDI levy will stop 2-3 weeks after you have set up a payment plan or CNC with the IRS and had the levy released.
Keep in mind, after entering into a payment plan or CNC status with the IRS in order to stop the levy, it is still possible to file an OIC. In fact, in cases of wage garnishments, it’s recommended to get the wage garnishment released before submitting an OIC application. This is because when an OIC is submitted to the IRS, all collection activity must be put on hold while the OIC is processed, but that only stops levies that are on federal payments automatically, and any bank/investment/retirement account levies from being issued. If you have a current wage garnishment and submit an OIC without first releasing the garnishment, you can expect to be garnished throughout the OIC process because your collections account will be on hold and the IRS won’t issue a levy release notice to your employer during this time. Sometimes an OIC examiner, once the OIC application is assigned to an examiner (which could take up to 90 days), will release a levy upon a showing of severe financial hardship, but it can’t be guaranteed. So it’s always a good idea to try to stop a levy before it hits in the first place, and if it already has, before submitting an OIC application, if that’s the best final solution for your situation.
Potential IRS & State Tax Collections Solutions
If you have a federal tax debt that far exceeds your ability to pay, the IRS Offer in Compromise program (OIC) may offer a pathway to resolve your tax debt. However, less than one-in-five offers are accepted by the IRS. David W. Klasing has a deep background in taxation and understands the criteria applied by the IRS in assessing these types of offers. As such, David has developed a proprietary self-assessment approach to offers in compromise to increase the likelihood that your initial offer is in the IRS’ “ballpark.” From that point, our firm can work to ensure that the OIC makes financial sense for you by comparing the minimal acceptable offer to the total tax, interest and penalties owed. If the OIC makes financial sense, we prepare your filings and documentation. If your OIC is refused, we can work to appeal it.
In other circumstances, a tax-motivated bankruptcy may provide needed relief for a taxpayer. Despite perceptions, bankruptcy can be used to stop new collection attempts and wipe away some tax debts. In still other scenarios – particularly following a divorce or separation – innocent spouse relief may provide release from tax debts. However, this form of relief is only appropriate when the other spouse was responsible for the fraud or false filings that created the tax debt.
Alternatively, if your financial analysis compared to the IRS allowable standards shows that you qualify, by means of having no monthly disposable income, there are options such as obtaining a “currently not collectible” status, or “CNC” on the tax debt until the statute of limitations on collecting on the debt runs out. The good thing about this option is that if you don’t expect a spike in income until the statute of limitation expiration date, you end up not paying the debt. However, the debt will stay on your account until that point and will continue to accrue penalties and interest until it expires, which could take up to 10 years for recently assessed balances. Furthermore, the IRS will monitor your account and can ask you to update your financials every year or two to confirm that you still qualify for CNC. If you don’t respond to their notice requesting updated financials, you’ll automatically be taken out of CNC and collections actions will resume on any debt that hasn’t expired. Therefore, CNC can only be a permanent solution in certain instances.
If you don’t qualify for any of the above tax debt solutions, but you can’t afford to pay off your tax debt in full, you can be placed on a normal monthly payment plan over up to 72 months. If your tax debt is so high that you can’t afford to pay off the entire debt within 72 months, you can be entered into a partial payment plan for the amount you can afford, upon submission of a financial statement form and supporting documents. In a partial payment plan, the IRS accepts that they’ll never get the full amount of the balance owed from you, but will accept as much as you can afford to pay monthly until the debt’s statute of limitations runs out and the debt expires. If you continue to make those monthly payments and are in any type of active payment plan, collections actions cease, however interest and penalties continue to accrue on any unpaid amount.
In most situations, you can qualify for a penalty abatement, either by virtue of complying for at least 3 years prior to any year in which you have a balance, or for cause. A “for cause” penalty abatement can be obtained when extenuating circumstances out of your control caused you to incur a penalty, or when the IRS has made a mistake in assessing the penalty.
Questions and Answers on Tax Liens, Levys and Tax Garnishments
- Spouses tax liability at life and death
- 2016 Changes to IRS Collections
- What Do You Do If You Owe Money to the IRS and You Cannot Pay the Balance Due Right Away?
- How long can the IRS collect on a past due debt?
- Do You have Unfiled Personal Income California Tax Returns?
- What are some events that can suspend or extend the collection statute allowing the IRS more time to collect on an outstanding tax debt?
- What happens when the collection statute expires?
- How much time does the CA Franchise Tax Board have to collect on an outstanding tax debt?
- Frivolous Collection Due Process Hearing Requests
- IRS Collection Notices
- What do you do if you owe sales tax to the CA Board of Equalization?
- When should I file a Collection Appeal Protest (CAP)?
- Differences between a CDP Form 12153 and Form 9423
- My Employer Received Form 668-W, Notice of Wage Garnishment
- Can the IRS levy my Social Security benefits?
- How to release the wage levy?
- What is a federal tax lien?
- What is the effect of a federal tax lien?
- Can a taxpayer challenge the filing of a federal tax lien?
- How do I get a tax lien removed or released?
- What do I do if the IRS issues a bank levy?
- How to Release a Bank Levy?
- What if I am an employer and the levy attached to payroll?
- What additional information does the IRS need from me?
- What is a Collection Due Process (CDP) Hearing?
- What is an Equivalency Hearing?
- I received a notice from the IRS, what do I do?
- I moved and never received notices from the IRS
Facing IRS Tax Lien or State Tax Collection Attempts?
If you have received a Notice of a Federal Tax Lien (NFTL), you are already facing the legal consequences of an alleged failure to satisfy a tax obligation. The receipt of legal documents of this type could ultimately result in the loss of your money, assets, and property. As such, this is a difficult experience for any individual. However, this is a problem that will only get worse without timely and strategic action.
The experienced tax professionals of the Tax Law Offices of David W. Klasing are experienced in handling unpaid tax debts and tax liens. To schedule a reduced-rate tax consultation with an experienced tax professional, call the Tax Law Offices of David W. Klasing at 800-681-1295 or contact us online today.