IRS Liens and Levies
IRS Enforced Collection: Liens and Levies
- Federal Tax Liens
- Tax Levies
- Assets the IRS Can’t or Won’t Seize
- Exempt Assets
- Avoiding a Levy
- Getting a Tax Levy Released
- IRS Sales of Levied Assets
If you don’t deal with the IRS using any of the options discussed in Chapter 6, “When You Owe the IRS,” you are likely to face IRS enforced collection measures. These are the IRS’s awesome lien and levy powers.
The average IRS levy (seizure) brings in about $1,600, mostly from bank accounts or wages. And, just because it happens to you once is no reason to believe it won’t happen again—and again—until the debt is paid in full.
Federal Tax Liens
Whenever you owe taxes to the U.S. Treasury and don’t pay, a claim against you by the federal government arises by law. (Internal Revenue Code § 6321.) This claim is called a tax lien. The existence of the government’s claim is not public information—at least initially—and so it is sometimes called a “secret” or “statutory” or “automatic” lien.
The tax lien automatically attaches to just about everything you own or have a right in. If you owe interest and penalties on the tax, which is often the case, the lien covers these amounts as well.
States may also have tax lien rights; those aren’t covered in this book.
Notice of Federal Tax Lien
If the IRS sends you a valid tax bill and you don’t pay it, you may receive a written demand to pay. This paper is called a CP-501 notice, referring to the IRS number on the right-hand corner. If you don’t pay within 30 days, the IRS has to the right to file a notice in the public records showing your tax debt. This paper is officially called a Notice of Federal Tax Lien. The IRS files over 500,000 notices each year in the county and/or state public records offices where you live, work, or own real estate. In the few states without county recording systems, the IRS sends the Notice of Federal Tax Lien to the secretary of state’s office. The state or county fee for recording the tax lien is paid by the IRS and added to your bill.
The IRS does not check first to see if you actually own real estate before recording the lien notice. It has no reason to. Even if you don’t own property now, you might later and the IRS gets first dibs on the proceeds from its sale or financing.
Joyce owes the IRS and lives in Orange County with her Aunt Mildred. The IRS records a Notice of Federal Tax Lien at the county recorder’s office, even though Joyce owns no real estate. Aunt Mildred dies and leaves her home to Joyce. The IRS’s lien now attaches to the house. Joyce won’t be able to sell the house with a clear title without first paying off the IRS. And Joyce won’t get rid of the lien by getting rid of the property. Any buyer takes the property with the IRS lien on it. And the IRS then has two sources of collection—Joyce and the property held by the buyer.
Effect of a Recorded Notice of Federal Tax Lien
Just as a recorded mortgage tells anyone who searches the public records or pulls your credit report that you owe on your home, a Notice of Federal Tax Lien shows the world that you owe the IRS.
A recorded tax lien damages your borrowing ability by scaring off potential creditors or lenders, making it difficult for you to finance any purchases or get a home loan. Tax lien notices are picked up by credit reporting agencies, such as Experian, Equifax, and TransUnion.
There’s a lot of helpful credit information. For information on credit ratings and rebuilding your credit after a financial setback, including owing the IRS and many other debt and credit issues, see Solve Your Money Troubles: Get Debt Collectors off Your Back & Regain Financial Freedom or Credit Repair, both by Robin Leonard (Nolo).
Neutralizing a Recorded Federal Tax Lien
Keep in mind that the automatic, secret, or statutory tax lien and a recorded Notice of Federal Tax Lien are two distinct things.
You can’t escape a valid automatic tax lien without (a) paying the tax, interest, and penalties owed, (b) eliminating it in bankruptcy, (c) reducing and paying it through an Offer in Compromise, or (d) having the time limit for collections run. An automatic tax lien will not appear in any public record, such as a county recorder’s office. Hence, it’s sometimes called a silent or secret tax lien.
A recorded Notice of Federal Tax Lien tells the world your secret. The best way to get rid of it is to get an IRS Certificate of Release of Federal Tax Lien. The IRS will issue a Certificate of Release if you fully pay the tax owed, discharge it in bankruptcy, or pay it through an Offer in Compromise or if the time limit for IRS collections has run out.
The IRS will not reduce the original amount shown on a tax lien as you make payments. So, if the lien starts out at $100,000 and you pay it down to $1,000, the lien will show as $100,000 until the last penny is paid. Only then will the IRS issue the Certificate of Release.
When the tax is paid in full, eliminated, or reduced and paid through an Offer in Compromise or bankruptcy or the time for collections has lapsed, the IRS must issue the Certificate of Release (Form 668Z) within 30 days. Once you get the Certificate of Release, you should record it (if the IRS doesn’t) and pay the recording fee in the counties where the IRS filed the lien. Also send a copy to the major credit reporting agencies to make sure it gets into your file.
Unfortunately, the original recorded IRS lien notice is not erased by the lien release. Credit bureaus can and do report the original lien—and the release—as long as ten years after the recording.
If the IRS Records a Tax Lien
Legally, the IRS must notify you in writing and give you a chance to pay or try to prevent the lien from being recorded before sending the notice to the public records offices. But if you’ve moved or the notice is lost in the mail, you may never get the warning and only learn of it when you apply for credit or a loan—and are turned down.
Below is a flowchart from the Internal Revenue Manual instructing IRS personnel when to file a Notice of Federal Tax Lien. The IRS does not always file tax lien notices. It’s hit or miss.
You can appeal an IRS tax lien notice filing to the IRS Appeals Office. First request a telephone conference with the manager of the IRS unit filing the lien. If the manager turns you down, fax or mail a completed Form 9423, Collection Appeal Request, to the collection office. (A copy with instructions is at the IRS website, www.irs.gov.)
The appeal request is usually decided within five business days. The appeals officer looks at whether the collectors followed correct procedures and considers the facts and circumstances of your case. The officer should telephone you, so list your work and home telephone numbers in your letter. Most taxpayers lose.
Avoiding or Eliminating a Tax Lien
A recorded tax lien can be the kiss of death on your credit rating. It may effectively prevent you from selling or refinancing real estate. It won’t, however affect your right to sell personal property, such as a motor vehicle, boat, or furnishings.
As discussed in Chapter 6, the best way to deal with a tax lien is to avoid one in the first place.
For some, a tax lien is just one more black mark on their credit report and won’t make it much worse. But you should respond to an IRS letter threatening a lien filing by contacting the IRS at the telephone number on the letter, or calling 800-829-1040, or calling the Taxpayer Advocate Service. Be ready to convince the IRS that you fall into the category “Will filing notice impair collection of the tax liability?” Point out that a tax lien will kill your chance of getting a bank loan, for example.
If you tried but failed to convince the IRS to forgo recording a tax lien, here are your options after the lien notice has been filed:
- Appeal the lien filing. The IRS has five business days after filing the lien to provide written notice to the taxpayer. This must include notice of the right to request a hearing within 30 days from the sixth day after the lien filing. If you win the appeal, the lien will be withdrawn; unfortunately, the fact of the lien filing will still appear on your credit report. (Internal Revenue Code §6320.)
- Pay in full. If you don’t have the funds, can you borrow from friends or relatives? It is better to owe just about anyone other than the IRS. The IRS must record a release within 30 days of full payment, but often the agency doesn’t follow through. Call the IRS Centralized Lien Processing Office at 800-913-6050 to verify the release was filed. Or, obtain a copy of your credit report. If it’s still in the report, call the Taxpayer Advocate Service for fastest service. (See Chapter 8.)
- Request a partial discharge. If you own several assets that are encumbered by the tax lien and want to use one to pay off the IRS, ask for a discharge from the tax lien. The IRS will likely do this.
Bankruptcy doesn’t wipe out a recorded tax lien. If your tax debts qualify for a discharge under any chapter of bankruptcy, the lien will remain, although your personal liability is wiped out. If you owned any real estate going into bankruptcy, it is still subject to the tax lien. The IRS could seize that property after your bankruptcy is over. Or, the more likely scenario is that the IRS would allow you to pay over the value of the property rather than seizing it. And, in some cases, the IRS never tries to enforce the lien after bankruptcy—it is hit or miss. (See a bankruptcy attorney for an analysis of your situation.)
When the IRS Files a Tax Lien in Error
The IRS occasionally files a tax lien notice in the public records when you don’t owe anything. For example, you paid the bill but the IRS did not properly credit your account. When this happens, under the Taxpayer Bill of Rights you are entitled to a Certificate of Release stating that the lien was filed in error.
Deliver or mail photocopies of the release to the big three credit bureaus—Experian, TransUnion, and Equifax. Get their phone numbers from the yellow pages and call to find out where to send the copies of the release to minimize the damage to your credit rating caused by the IRS error.
Getting a Tax Lien Released
The IRS must issue a Certificate of Release of Lien within 30 days after either:
(a) the taxes are fully paid, discharged in bankruptcy, or satisfied through an Offer in Compromise, or
(b) the lien becomes unenforceable because the statute of limitations for collections has run—usually ten years after the tax was first due (Internal Revenue Code §6325(a)). See prior section regarding liens filed in error. The lien eventually will become uncollectible after the ten year statute of limitations on collection runs.
If 30 days pass and no release has yet been issued (not uncommon), then write or call the IRS Centralized Lien Processing, P.O. Box 145595, Stop 8420G, Cincinnati, Ohio 45250-5595; 800-913-6050. Give the date of your request and your name, Social Security number, employer identification number, address, telephone number with the best time to reach you and tell why the lien should be released (such as the taxes were paid, the lien was filed in error, or the statute of limitations has run). Enclose a copy of the tax lien you want released. If you paid the tax, also enclose a copy of an IRS written acknowledgment of payment, an IRS transcript showing payment or a canceled check.
For emergencies (such as a mortgage loan closing held up by the tax lien), call the Taxpayer Advocate Service. If there is a balance due and you need quick action, be prepared to pay with a certified check, cashier’s check, or money order. Alternatively, the IRS should agree to accept payment out of the proceeds of the real estate escrow.
Suing the IRS for Collection Actions
It is possible to sue the IRS in U.S. District Court for damages if it fails to release a tax lien or takes unauthorized collection actions. (Internal Revenue Code § 7430; IRS Regulation 1.7430.) To win in court, you must prove that you suffered direct economic damages from the IRS’s actions. Before suing, you must first try to solve the problem using channels within the IRS. Your litigation costs are recoverable, too, but not any costs of fighting the IRS before you filed the suit.
Don’t get too excited about suing the IRS. The law makes it tough to prove your case or to recover any big money. And judges are reluctant to award attorneys’ fees and costs even when you win. Very few lawyers are willing to take this kind of case on a contingency basis (in which the fee is a percentage of the amount recovered).
Recorded tax liens are just notices to the world that an individual or business owes the IRS. No money or property is taken by the filing of a notice of lien. Instead, the IRS collects by seizing your real or personal property through the levy process. Typically, levies are made on money or other financial accounts held for you by others—such as a bank, stockbroker, or employer. Although the IRS usually records a tax lien before levying on property, it does not have to. The IRS makes about four million levies per year.
Significance of a Tax Levy
Most levy notices issued by the IRS to third parties are computer generated. Some notices are mistakes and not that hard to straighten out if you contact the IRS quickly. The vast majority of levy notices are issued to tax debtors’ financial institutions and employers. The rest are usually for seizures of vehicles, business equipment, and miscellaneous property. With few exceptions, any type of property you own—wholly, partially, or jointly with others—may be seized and sold to satisfy your tax debts.
The likelihood that the IRS will seize your property depends on factors such as your previous history of payments—good or bad—and where you live. For some unknown reason, a delinquent taxpayer in Los Angeles is six times more likely to suffer a levy than his counterpart in Chicago. About 3% of all taxes owed to the government are collected by levy. The IRS files about three million notices of levies each year.
Contesting an IRS Levy
Congress provides procedural protections for taxpayers threatened with IRS levy actions. (Internal Revenue Code § 6330.) Before the IRS can seize property or money, it must give you a written notice of Intent to Levy with a Letter 1058 explaining your appeal rights. This must be (1)personally delivered, (2) left at your home, or (3) sent by certified or registered mail to your last known address.
The notice must be given at least 30 days before any seizure is actually made (except in rare circumstances).
The standard IRS Intent to Levy letter explains the tax debt and the levy process, your collection alternatives, and your right to an appeals office hearing before the levy takes place. (See Chapter 4.) You have 30 days to file an appeal.
If the appeals office turns you down, you may continue the challenge in the U.S. Tax Court or a federal district court. (See Chapter 5.) This will be an expensive legal process—probably at least $5,000 to $10,000 in legal fees and costs.
Assets the IRS Can’t or Won’t Seize
Not everything you own can or will likely be taken by the IRS levy machine. Some items are exempt by law, and others are protected by IRS policy considerations.
It should raise your spirits to find out that the IRS cannot use its levy power to seize everything you own. (Internal Revenue Code § 6334.) Don’t get carried away, however, as the list of items the IRS can’t take is hardly generous. The list covers tax debtors and their dependents (2007 amounts—subject to annual cost of living adjustment):
- wearing apparel and school books. This doesn’t include luxury wear, like a sable jacket, but your cloth coats should be safe.
- fuel, provisions, furniture, and personal effects to $7,700. Livestock is included if you are a farmer.
- books and tools of a trade, business, or profession up to $3,860
- 85% of unemployment benefits
- undelivered mail (no one knows quite what this means)
- Railroad Retirement Act and Congressional Medal of Honor benefits. All other pensions and retirement plans are fair game, with some exceptions for ERISA plans.
- workers’ compensation benefits
- court-ordered child support
- minimum exemption amount for wages, salary, and other income
- certain service-connected disability payments
- most public assistance payments, such as welfare and SSI, and
- assistance under federal job training partnerships.
Vehicles are generally not considered “personal effects” or “tools of the trade” and are not exempt or partially exempt from levy. However, you can often convince an IRS collector that the vehicle is necessary for your employment and it won’t be levied.
Assets of Last Resort That the IRS Can Seize
The IRS can seize anything not listed above; however, IRS policies discourage collectors from taking certain items. Retirement plans and homes are generally off limits. Vehicles needed for work are generally not seized if you can demonstrate there is a necessity for the vehicle.
The IRS can take your Keogh, 401(k), IRA, or SEP. With an employer plan, however, the IRS can only grab it if it is vested—that is, if you have the immediate right to take the benefits. In that case, you will be taxed when it’s levied by the IRS but do not have to pay the normal 10% penalty for early withdrawal if you are under age 59H.
In the case of hardship, the IRS can be stopped from taking retirement plans. Contact the Taxpayer Advocate Service immediately and plead that this will create “a significant and undue economic hardship” on you and your family. You may have to enter into a payment plan with the IRS in order to protect your retirement from levy.
Social Security and other federal payments are subject to IRS levy powers. The IRS can seize up to 15% of Social Security payments. If the IRS intends to levy on these payments, you will receive a CP-91 or CP-298 notice.
As a last resort for dealing with an uncooperative taxpayer, the IRS can take a personal residence, mobile home, boat, or any other place you call home if you owe more than $5,000. (Internal Revenue Code § 6334.) For married couples, if only one spouse owes the IRS, the other may be able to stop the seizure.
Seizing your residence requires a court order. If the IRS threatens to do so, contact the Taxpayer Advocate Service immediately. Offer to make arrangements to pay the taxes owed. A second home or vacation place, however, can be levied without a court order.
If all else fails and you are about to lose your pension plan or house, call your Congressperson. A sympathetic staff person, or even the representative, may persuade the IRS to back off. Again, expect to negotiate a payment arrangement in return for keeping your house or retirement plan.
You and Your Spouse’s Income
The tax code allows the IRS to take some—but not all—of your wages or other income. If your income is fairly low or you have several mouths to feed, all of your earnings may be exempt from levy. In most parts of the country, you would be hard pressed to live on the paltry amount the law allows you to keep from the levy.
A portion of each paycheck or independent contractor payment you receive is exempt from IRS levy. The amount you get to keep is determined by the tax code. It is based on the number of exemptions you (and your spouse) can claim on your tax return, plus your standard deduction. (See table in IRS Publication 1494.) The amounts exempt from IRS seizures are subject to annual revisions.
In 2005, Ben earns $26,000 as a baker for Acme. He and his wife, Bonnie, owe the IRS $32,000 in back income taxes. If the IRS levies Ben’s wages, Ben, Bonnie, and their two kids are allowed $438 per week exempt from IRS wage levy.
All amounts paid to Ben over $438 per week (after income tax and payroll deductions) go to the IRS. If Bonnie also worked, the IRS could take all of her net income for their joint tax debt.
Claiming the Wage Exemption
If you claim only yourself—and not a spouse or dependents—you get the one exemption automatically ($172.12 per week in 2008). Otherwise, you must file a claim for additional exemptions for others that you support.
To seize part of your wages, the IRS sends a levy notice to your employer or to anyone the IRS suspects is paying you for services as an independent contractor. The recipient of the notice must immediately give you a copy of the notice by law.
On the back of the notice is a simple form you must complete to claim the exemption amount to which you are entitled. List your spouse and dependents, date and sign the form, and immediately take it to the IRS office that issued it. After three days, your employer or the business that owed you money as an independent contractor must pay the IRS any nonexempt money owed to you. If the employer or business doesn’t, it is liable to the IRS for any money paid you above the exemption.
You only have three days to get the exemption claim form back to the IRS. If you don’t, the IRS grants only one exemption, no matter how many you are entitled to by law.
Defending Against a Wage Levy
Once a levy on your income takes effect, it remains in force for as long as all of the following are true:
- any part of the tax debt is unpaid
- the statute of limitations on collections hasn’t run, and
- you still work for the same employer.
How to stop or minimize a wage levy:
- Negotiate with the IRS to release the levy, for example by proposing an installment payment plan or asking for time to sell an asset.
- File an Offer in Compromise. This doesn’t automatically stop a wage levy, but the IRS should hold off unless it concludes your offer is just a stalling tactic.
- Change employers or temporarily quit your job. Neither you nor your employer must inform the IRS if you quit. The IRS must hunt you down at your new employment, which could take months. If you quit and are rehired after a month or two, the wage levy is no longer effective as long as your employer notified the IRS that you quit.
- File for bankruptcy. This automatically stops a wage levy, but don’t do it without considering all of the ramifications.
- Contact the Taxpayer Advocate Service and ask for hardship relief. See Chapter 8.
- Reduce your income to the exemption amount. A friendly employer, especially if you work in a family business, may let you cut back your hours temporarily. But if you keep working full-time while your boss holds back all wages over the exemption amount, your employer could later be forced to pay it to the IRS.
Jointly Owned Assets
The IRS can legally seize property owned jointly by a tax debtor and a person who doesn’t owe anything. But the nondebtor must be compensated by the IRS, meaning that the co-owner must be paid out of the proceeds of any sale.
If, however, you owe taxes and add a co-owner to a piece of property—without that person paying you fair consideration for the property—the IRS can ignore the interest of the other person. In law, this is called a fraudulent transfer or conveyance.
Rudolph owns a vacant lot worth $25,000. He sells a one-half interest in it to his sister, Wilma, for $10. The IRS could seize the lot and sell it to pay off Rudoph’s taxes, ignoring Wilma’s ownership because she did not pay a fair price. Wilma might get her $10 back, though.
Avoiding a Levy
There are several ways that you might be able to avoid an IRS seizure of your assets, or at least slow an IRS collector down.
Transfer Your Assets
Under certain circumstances, you may be able to transfer ownership of property or assets—sell, give away, or a combination of the two—and avoid losing it to the IRS.
For the transfer to withstand later IRS attack, you must have conveyed your assets before the IRS issued a Notice of Intent to Levy. However, there are two “gotchas” that can defeat asset transfers, as described below.
Tax debtors sometimes try to defeat the IRS by transferring assets to family members or partnerships, trusts, or corporations for free or a bargain price. While this slows the IRS down, it may not ultimately save anything. The recipient of the assets is called your “nominee.” Nominees are not protected from IRS seizure—the tax debt attaches to the asset in their hand. The collector will call in an IRS attorney to determine if the transfer was legitimate. Bottom line: A nominee gives the IRS an additional person to pursue while you remain primarily responsible for the tax debt. Also, the IRS can charge transferors with a crime under certain circumstances. (See Chapter 10 and below.)
Hank, who owes the IRS $75,000, deeds his $80,000 rental building to his best friend Penn. The IRS can ignore the transfer and seize and sell the property.
The IRS doesn’t always discover or challenge property transfers made for less than full value, especially if they are made before the tax was assessed. For instance, if you are under audit and know that a big bill is coming, you might consider getting property out of your name.
The IRS can, but is less likely to seize an asset when there is another owner besides the tax debtor. The IRS must compensate the other owner for her share—but only if she can show that she paid full value for her share in the asset. Just putting someone else’s name as a co-owner of the asset is not enough.
A better alternative to giving an asset away is to sell it for full value to a friend or relative, with no down payment, taking back a promissory note. Secure the note with the property, which gives you the right to reclaim it if full payment is not made. Once the IRS is at bay, you can get the asset back.
Hank sells one-half of his rental building to Penn in exchange for a promissory note of $40,000, the fair market value of a 50% interest. Hank owes the IRS back taxes of $75,000. The IRS doesn’t like to be in the real estate business and isn’t likely to seize the building, especially if Hank agrees to a payment plan or makes some other financial guarantee. Of course, the IRS can claim any cash proceeds Hank receives from the sale.
Transfers made for no other reason than to deliberately evade IRS collection are fraudulent. Conveyances may be ignored by the IRS or set aside by a federal court. Before transferring assets, see a lawyer Make sure the transfer is legally effective—use a valid deed, for example. If you make a transfer after the levy process has begun, you might be charged with attempting to evade payment of taxes by deliberately placing assets beyond the government’s reach. (U.S. v. Mal, 942 F. 2d 682 (9th Cir. 1991).)
Convince the IRS That a Levy Would Be Uneconomical
If you can convince the IRS that the levy of a certain item would be uneconomical, the IRS may back off. Show that the expenses of the levy and sale would exceed the fair market value of the item. (Internal Revenue Code §§ 6334(e) and 6331(f).) This is termed a no-equity seizure and is against IRS policy.
Felice owes the IRS $10,000 and her primary asset is a nonrunning vehicle, which she is going to fix when she can afford the parts. Right now, the car is worth no more than $250. It would probably cost the IRS more than $250 to send a wrecker to tow the car, pay for storage, and then advertise the sale in the newspaper. The IRS backs off.
Show That the Levy Would Prevent You From Working
If the item targeted by the IRS for levy is essential for your work or to get to your job, tell the collector that it is exempt property. If he doesn’t agree, ask for an accelerated appeals process to determine whether or not the asset is exempt. (Internal Revenue Code § 6343(2).)
Arnold, a farmer, owes the IRS $43,000. One of his major assets is his pickup truck, which is absolutely essential for running his farm. Arnold convinces the IRS collector not to take his truck.
Keep Mum About Your Assets
Unless the IRS issues a summons—a legal order to produce documents or appear at an IRS office—you don’t have to reveal the existence or location of your assets. It is perfectly legal not to give information to the IRS or to ask to speak with a tax professional before answering any questions. Although the IRS may already know about your local real estate holdings from searching public records, it may not know about property in other states, or in the name of an entity or another person. But remember, it is a felony to lie to the IRS.
Keep Assets Out of Sight
It is illegal to actively conceal assets from an IRS collector. Rarely, however, is an ordinary citizen pursued for keeping a classic ’57 Chevy in a friend’s garage. Nevertheless, particularly if you are a known tax protestor or crime figure, don’t try this without first getting some legal advice.
Keep moveable items away from your home or business premises. The IRS won’t know where to look for vehicles, boats, and similar assets if they’re not located where the IRS expects them. Similarly, assets located outside the state or country can be quite difficult for the IRS to discover.
Move Financial Accounts
There is nothing illegal about moving bank accounts whenever you owe a tax bill. In fact, it is an excellent self-protection move. The IRS is not automatically notified of taxpayers’ financial accounts—except once a year on interest-bearing accounts when the institution must issue a Form 1099. Nor are IRS computers linked to financial institutions. (See Chapter 6 for more information on revealing financials to the IRS.)
Rent, Don’t Own
If you lease property—real estate, vehicles, furniture, or equipment—you aren’t the legal owner. The IRS can’t seize items you don’t own, unless you have built up equity, or an ownership interest, in a leased asset. For most items, such as a rented auto, you won’t have any equity or it will be too small for the IRS to consider. But if you have a lease-purchase option for real estate or business equipment, you may be building up equity—and provide a target for IRS collectors.
Deposit Money Into Retirement Accounts
IRS policy discourages (but doesn’t forbid) tax collectors from seizing retirement plan funds. Exceptionally uncooperative taxpayers are the ones at risk. So, if you owe a lot to the IRS and the levy process hasn’t yet begun, consider fully funding your retirement plan with unprotected moneys.
File for Bankruptcy
Filing for any type of bankruptcy—Chapter 7, 11, 12, or 13—stops all IRS enforced collection actions. (See Chapter 6.) The relief from the tax collector is often only temporary, so use this time to work things out with the IRS while keeping your assets intact.
Use Safe Deposit Boxes
Don’t lie to the IRS. Silence is golden but it is illegal to actively conceal assets from the IRS. If in doubt, consult a tax attorney.
Banks require your Social Security number to open a safety deposit box. IRS collectors will canvass the banks in your area to see if there’s a box in your name. If the box is out of state or in the name of your entity, such as a corporation or an LLC, with its own tax ID number, the IRS may never locate it. To enhance your privacy, open the box at a bank where you have no accounts and pay the annual box rental in cash.
Getting a Tax Levy Released
It is not easy getting anything back from the IRS once it has been seized if you owe taxes. If the property taken is a bank account or other liquid asset, it may be nearly impossible.
Assets such as vehicles or business equipment may be returned when any of the following are true:
- The taxes for which the levy was made have been paid in full or through an Offer in Compromise or discharged in bankruptcy.
- The time limit for collections has expired—this is normally ten years from the date of assessment (see Chapter 6).
- The IRS believes the release of the levy will facilitate collection of the tax debt.
- You enter into an installment payment agreement.
- The IRS is persuaded that the levy creates a financial hardship on you or your dependents.
(Internal Revenue Code §§ 6331(e) and 6332(c).)
Figure out a way to fit your situation into one of these categories, typically the financial hardship one. An especially good argument is that the seized item, such as an old car, has little value and causes a hardship.
Begin by calling the IRS officer who signed the levy notice. Request an immediate release based on one of the above grounds. If the officer balks, ask for an appointment with his manager—within a day or two. To get your property returned, you will probably have to:
- Pay the IRS in full. Borrow on credit cards, take a home equity loan, or ask Uncle Mack.
- Request a short reprieve—some more time to pay in full. Explain how you expect to raise the money—a bank loan, selling other assets, or whatever. If your plan sounds reasonable, the IRS may go for it. Do your utmost to follow through.
- Propose an installment agreement. The IRS will usually agree to one as long as you propose reasonable payments, don’t have a past record of defaulting on another installment agreement with the IRS (see Chapter 6), and are current in your tax form filings.
- Submit an Offer in Compromise. If the officer believes you are sincere and that your offer has a shot at being accepted, he may release the levy.
- Cry hardship. The IRS must release a levy if it would cause economic hardship. But the IRS levy officer initially decides what qualifies. Be ready to show that the levy affects your health or welfare or keeps you from earning a living to keep a roof over your family’s head. If your situation is dire and the officer is playing Scrooge, go straight to the manager and then to the Taxpayer Advocate Service. (See Chapter 8.)
- Show the asset has little value to the IRS. A valuable asset, such as a truck or business equipment, may have little equity value because chattel mortgages or other liens take priority. Show the IRS all your agreements with the secured creditors. The IRS has a policy against no-equity seizures made just to teach a lesson. If the collector persists, go straight to the manager and then to the Taxpayer Advocate Service.
- Post a bond with the IRS. Although this is legally an option, it is so difficult to get a bond that it is not realistic. Essentially, if you meet the qualifications to post a bond, you could pay the taxes owed in full.
- File for bankruptcy. A bankruptcy court may order the IRS to return any seized property to you.
- Appeal. You can appeal an IRS levy or other collection action. You must first request a telephone conference with the manager of the IRS unit filing the levy. If the manager turns you down, fax or mail a completed Form 9423, Collection Appeal Request, to the collection office. You must request the appeal within two days of the manager conference. The appeal request is usually decided within five business days. The appeals officer looks at whether the collectors followed correct procedures, and considers the facts and circumstances of your case. Don’t get too excited, however, as the vast majority of taxpayers lose collection appeals.
An IRS release of levy on an item does not prevent the IRS from levying on the same item sometime in the future. (Internal Revenue Code §6331(e).)
How Long Does a Levy Last?
The IRS can seize your assets as long as you owe any part of a tax debt and the ten-year statute of limitations on collections has not expired. Generally, levies are one-shot affairs; the government must prepare and send a new levy notice every time it wants to grab something (unless it’s wages or independent contractor payments).
Example: The IRS levies Remington’s account at Piker Bank on Monday. After a 21-day holding period, the bank must send to the IRS everything in Remington’s account on the day of the levy notice. If the balance is $0, then the IRS gets nothing from Piker. If Remington deposits $150,000 on Tuesday, the day after the notice, the IRS can’t touch it without sending a new levy notice. If Piker Bank sends the IRS anything from Tuesday’s deposit without having received another levy notice, it will have to repay Remington the amount it sends the IRS.
Independent Contractors and Employees: As long as you work for the same employer, it must continuously withhold a portion of each paycheck for the IRS. This rule also now applies to independent contractors. The IRS can intercept funds owed to a self-employed person from a business.
IRS Sales of Levied Assets
When the IRS seizes assets other than real estate, it physically takes custody of them—cars, cash, stock, equipment, and other items. For financial assets, the IRS sends a notice to your financial institution ordering it to freeze your account and send the balance after 21 days. For other things, the IRS hires a local mover to drive a truck to your door and empty your home or office of furniture, machinery, and the like. Real estate is handled differently, as explained below.
IRS Sales of Personal Property
Once the IRS has seized your personal (non-real estate) property, the IRS can sell it at an IRS auction. (Internal Revenue Code § 6335(e).) Before the auction, the IRS will set a minimum bid price and send you notice of it. If you believe the price is too low, you have five days to object; present documentation, such as an independent appraisal, that the bid price is unfairly low.
The IRS must also notify you of the time and place of the auction. Up until the auction, you can try to negotiate to stop the sale. If you aren’t successful—or don’t try—the revenue officer handling the case usually acts as the auctioneer. You will then receive a letter from the IRS after the auction informing you of the outcome.
IRS auctions are usually held on the steps of federal courthouse buildings—very public. You don’t have to attend, but go for it, especially if you’d like to try to get the property back from the buyer. Some people make a living out of buying property from the IRS cheap and may offer to sell it back to you or a friend after the auction.
If no one bids the IRS minimum bid figure, the IRS has two options:
- Bid the minimum amount itself and dispose of the property by private sale later.
- Give the property back to you. While this is rare, it does happen. If the local district director decides that keeping the property is not in the best interests of the government, you may get it back with the expense of the levy and attempted sale added to the amount you already owed. The IRS considers the cost of maintaining, repairing, transporting, or safeguarding personal property in deciding whether or not to give your property back. And if the IRS gives the property back to you, the lien remains and it could be levied again in the future.
The winning bidder must give the IRS a bank certified or cashier’s check for at least 10% of the bid price and pay the balance within a few days. The IRS won’t turn over the levied property until it has been paid in full.
The IRS applies the payment first to your tax bill and then to the costs of the seizure and sale, such as advertising and storage. There is no commission owed to the auctioneer, as he is a government employee. If there is still money left over, send a letter to the revenue officer handling your case asking that it be returned to you. If you don’t, the IRS will keep the excess and apply it to your future taxes.
If the proceeds from the sale of your asset don’t cover your tax bill, you are still liable for the balance.
IRS Sales of Homes and Other Real Property
If the IRS levies on your home or other real estate, it must post a notice of seizure prominently on the property. If it is your residence, the paper is usually taped on your front door. And if the IRS knows of your whereabouts, it must attempt to hand deliver a copy of the notice to you. If you can’t be found or are hiding inside and don’t come to the door, the IRS will most likely mail a certified letter with the notice to you. As mentioned above, the IRS must obtain a court order before it can levy your residence.
The IRS will not evict you. You do not have to move out of your home when you receive a levy notice. If IRS personnel ask to enter your home—to inspect the interior or bring in a real estate appraiser—you don’t have to let them in unless they have a court order. Rarely will the IRS do this.
The IRS must publish the date, time, and location of the auction in a local newspaper. This information is also posted on a public bulletin board at the nearest federal courthouse or federal office building or in the public area of the local IRS office. The sale is usually set for a date 45 days after the seizure notice is first posted.
Any mortgages, judgment liens, real estate taxes or other liens on your property at the time of the IRS sale remain in place after the IRS auction—as long as they were recorded before the IRS recorded its Notice of Federal Tax Lien. This means that the auction buyer takes the property subject to any liens, such as a mortgage. But any lien recorded after the IRS recorded its Notice of Federal Tax Lien is wiped out at the IRS sale—so the buyer gets it free and clear.
A well-off relative or friend can buy your home at the auction and lease or sell it back to you. Obviously, you don’t want the property back in your name until the IRS bill has been entirely satisfied, or you risk losing the house again.
Staying in Your Home After the IRS Auction
You do not have to voluntarily move out of your home after the IRS has sold it—no matter what. The high bidder at an IRS auction of real estate receives only an IRS certificate of sale. (Internal Revenue Code §6335.) This certificate does not give the buyer the full rights of a deed holder. You still are the deed holder although your ownership right is now subject to the rights of the certificate holder.
If you are living in the home, the certificate holder cannot enter it against your will or even ask you to leave. He must bring an eviction lawsuit in your local state court. An eviction usually takes time and money, and so you may be able to negotiate a voluntary move-out date or ask for moving expenses in return for vacating right away. You may even be able to rent back the home. Having this right to stay also gives you time to figure out whether you can possibly redeem the property.
Redeeming Your Property
Even after the auction and the issuance of the certificate of sale, you may be able to get your property back. (Internal Revenue Code § 6337.) This is called the right of redemption. And you might be able to stop an eviction if you can convince a judge that you intend to exercise your redemption right.
You have 180 days from the date of sale to redeem your property from the certificate holder, who must let you do so. If you do not redeem within that time period, the IRS will issue a deed to the buyer. Redemption means paying the holder, not the IRS—unless the IRS was the high bidder. Payment must be by cash or by bank-certified or cashier’s check for the full bid price plus interest at the rate of 20% per year, prorated to the date of your payment. You must present payment to the certificate holder on or before 180 days from the auction date. If you are a day late, the right is lost.
Georgina’s house sold for $100,000 at an IRS auction to Charlton, the high bidder. This satisfies Georgina’s debt to the IRS in full. The home is worth about $150,000 and Georgina wants to redeem it so she and her three daughters can remain there. She finds a mortgage company willing to lend her $110,000. She will have to pay Charlton $104,932:
|Interest (90 ÷ 365 days x 20%)||4,932|
|Total needed for redemption||$104,932|
It might be possible to buy the property back from the certificate holder with a promissory note and mortgage if you can’t get a loan from a financial institution. It doesn’t hurt to ask.
Make sure you communicate and document your intent to exercise your right of redemption. Notify the holder of the certificate of sale in writing by certified mail, and send a copy to the IRS office handling your case. Follow up with telephone calls to the buyer and the IRS employee who handled the auction. If you can’t contact the certificate holder or she states that she won’t take your payment, ask that the IRS contact the holder and inform her of your right to redeem. If the IRS won’t, contact a lawyer ASAP.
see an expert
Get professional help when exercising your right to redeem. Many certificate holders will be unhappy about your redemption or unaware of your right to exercise it. Even if the holder is cooperative, you need a quitclaim deed. A lawyer or a title or escrow company should perform this service and see that the deed is recorded in the public record.
After the redemption is completed, write a letter with copies of the proof of payment and the quitclaim deed from the buyer to the IRS local office: Hand deliver or send it by certified or registered mail. The letter should simply state that you have exercised your right of redemption and that a deed to the certificate holder should not be issued.
If the IRS was the buyer, then you won’t get a quitclaim deed, but instead will get a release of lien document. Once you record this document you will once again have title to the property—except for any mortgages or other recorded liens against the property that existed prior to the IRS lien.
Levies of Business Assets
The IRS has the power to take just about anything if you owe taxes. If you are a partner or a sole proprietor of a business, the IRS can levy on the business’s bank accounts for your personal tax debts. The IRS might also intercept your accounts receivable by notifying your customers to make future payments to the IRS instead of to your business. If you’re in a partnership, the IRS can go after the business’s assets, even if only one partner is having IRS problems.
If your business is incorporated, the IRS can seize your shares of stock in the corporation (but not the assets of the company) for your individual tax debts. If the IRS believes you have created the corporation simply to shield your assets from the IRS, it may levy the corporate assets. If you’re faced with this, see an attorney.
Before levying on assets located inside your business, however, the IRS will ask your permission. If you refuse, the IRS can still take property from public areas of your business. If you own a restaurant, for example, the IRS can grab the tables and chairs, but not the kitchen equipment. To get the nonpublic area items, the IRS needs a court order, which can take days or weeks. This gives you time to negotiate or raise money to pay your bill.
As a practical matter, the IRS rarely seizes a small business’s inventory, equipment, or fixtures. It is usually not worthwhile—auctions for used business equipment and inventory typically bring only pennies on the dollar. The IRS also realizes that if the auction proceeds don’t cover the complete tax bill, the chance of collecting the balance is reduced severely if you’re put out of business.
Payroll tax exception. The IRS can seize assets and even padlock your doors if your business gets behind in payroll tax deposits. This is doubly true if you are pyramiding employment tax liabilities—you owe past payroll taxes and are not making current payroll tax deposits. The IRS will do its best to put you out of business, just to keep the problem from getting worse. For more information on a business’s obligation to pay payroll taxes, see Chapter 11.
Levies of Joint Tax Refunds
If the IRS takes a joint income tax refund when only one spouse owes back taxes, the other spouse can request her share of the refund money. File an amended tax return, Form 1040X. Attach an Injured Spouse Claim and Allocation (Form 8379), listing the injured spouse’s separate income, deductions, exemptions, and credits. The IRS computes the refund and issues a check if she qualifies.
Suing the IRS for a Wrongful Levy
If the IRS erroneously seized your property —for example, you didn’t owe anything—you can sue. (Internal Revenue Code §§ 6343(b), (c).) The IRS must return the property or its value together with interest, reasonable attorney’s fees, and related legal costs. See a tax attorney to find out if you have a case. Be warned, however: Successfully suing the IRS won’t be easy.
Acknowledgement. R. R. Bobby Covic, EA, of Incline Village, Nevada, assisted in the updating of this chapter. Mr. Covic is an IRS procedure expert who can be contacted at email@example.com or 775-831-7694.
- A tax lien filed in the public records severely damages your credit.
- The IRS has power to levy (seize) most of your worldly goods, with a few important exceptions.
- You can contest a lien or levy within the IRS or in court.