IRS Debt Do's & Don'ts Archives

How IRS Levies Work

I represent taxpayers in Gainesville and the state of Florida who have tax issues with the IRS.

The IRS Tax Levy is the method used to actually seize a taxpayer’s assets in order to collect on a tax debt. These levies happen when the taxpayer ignores the IRS about the debt, or there is a breakdown in the negotiations between the two parties. The Levy is the IRS’s hammer and they know how to use it.

The process is straight forward and happens after the IRS has sent various notices trying to collect on the debt. The process itself is as follows:

The IRS issues a Notice of Intent to Levy – you have 30 days to respond and either request a Collection Due Process hearing or negotiate some other deal such as a Payment Plan.
The IRS will next issues a Notice of Levy to any third party who is holding the taxpayer’s assets such as banks, IRA trustees, employers and customers in the case of contractors.
Banks will hold the money in your account at the time of levy for 21 days before sending it to the IRS. This means that it still might be possible to work out a deal and get the levy released before the money is sent to the IRS.
Employers will receive a “Continuing Levy” for wages and commissions which stays in place until it is released by the IRS. This type of levy is designed to hurt and drive the taxpayer back to the bargaining table.

What should you do if you have a received a Notice of Intent to Levy?

The time for inaction is over. You need to contact the IRS and make some sort of arrangement with the IRS or request the Collection Due Process hearing. Hiring an attorney, CPA, or enrolled agent who specialize in these procedures is probably your best plan of action.

If you or someone you know has received a Notice of Intent to Levy or some other federal or state tax issue, please feel free to contact me at either (352) 317-5692 or email jim@taxrepgainesville.com.

Bankruptcy Judge OKs IRS Pension Levy

During bankruptcies, an automatic stay prohibits creditors from taking collection actions while proceedings are ongoing. But a Wisconsin couple recently found that the stay was not an absolute thing. Enter the IRS.

In Pansier v. U.S., 2019 PTC 494 (E.D. Wis. 2019) a district court affirmed a bankruptcy court’s decision to lift the automatic stay. This lift let the IRS levy the debtor’s pension even though the bankruptcy case was still in motion. The reasoning from the bankruptcy court: The pension was exempt from regular creditors and was therefore still available to the IRS outside of the bankruptcy.

Take-away: The IRS has far more collection power than most creditors!

If you or someone you know has received a Notice of Intent to Levy or has some other federal or Florida state tax problem, please feel free to contact me at either (352) 317-5692 or email jim@taxrepgainesville.com.

Yes Dad, IRS CAN Levy Pensions

A common belief is that pensions, IRAs, and 401Ks are safe from all creditors. When it comes to the IRS—don’t kid yourself. The IRS CAN levy pensions. While it can’t force you to liquidate such accounts, it can levy any proceeds from them. Here are three ways to shelter your retirement funds:

Go with a Payment Plan

The easiest (proactive) way to protect your pension, IRA, or 401K when you the IRS is to sign up for an IRS installment agreement so the IRS does not issue the levy in the first place. This is what most people do, and the long-term monthly bite may not be too painful— but it’s not the only option.

Negotiate with the IRS

A more attractive, more complex alternative is to make an Offer-in-Compromise (OIC) to clear your tax debt for less than you owe. Despite what you may have heard, the IRS does not ‘nonchalantly’ clear tax debts for ‘just pennies on the dollar’ but the agency will accept an offer that represents their best bet to collect from you, based on a formula that takes into account your current assets and future earnings potential.

Lump-Sum Out for Fixed Income Retirees

Retired people living on a fixed income typically have little chance of ever paying off their tax debts in full. The IRS is often willing to take a smaller lump sum payment in these cases in order to get the debt off the books.

If you or someone you know has received a Notice of Intent to Levy or has some other federal or Florida state tax issue, please feel free to contact me at either (352) 317-5692 or email jim@taxrepgainesville.com.

How (Not!) to Make a Gift of your Refund to the IRS

The majority of taxpayers get a refund after filing their 1040. Late filing by these people is not normally a problem since all the penalties are based on the amount of tax due. But, filing too late can be costly.

When you file a 1040 requesting a refund you can think of it as having two different functions.

Function 1 is your report to the IRS to self-assess your total tax liability.
Function 2 is to file an administrative claim for a refund on the overpayment.

If you file your tax return more than 3 years after its original due date, you will lose the right to claim the excess. This is because the claim is only good for tax payments made within the three years prior to the claim itself.

This recently happened to some taxpayers in Wisconsin who filed their 1040 more than three years after the due date and lost their right to claim a $7,000 plus refund. The Golden Rule here is “FILE THE BLOODY RETURN WHEN IT’S DUE”. These things simply do not age well.

If you or someone you know has received a Notice of Intent to Levy or some other federal or state tax issue, please feel free to contact me at either (352) 317-5692 or email jim@taxrepgainesville.com.

The IRS Option to Sue You

Generally, the IRS has 10 years to collect from someone. This period starts on the date of assessment and can be tolled (suspended) for a variety of different reasons. Once the Statute runs out, the IRS is barred from doing anything to collect on the debt.

A big part of the strategy to minimize the impact the IRS can have on someone’s life evolves around getting to that statute date. You might be tempted to believe that your almost there at year nine, but you need to be aware that the IRS has a very big weapon in its arsenal. They could sue you in Federal Court and get the debt reduced to a judgement. Judgements usually run 20 additional years from the date of judgment.

When will the IRS head for court? According to the Internal Revenue Manual, the Revenue Officer should consider doing so in cases where:

There is a significant amount of money involved. How much is considered significant is anybody’s guess. My guess is under $100,000 not likely at all, over $500,000 there is probably a good chance.
The taxpayer has some asset that they could get to if they had more time. Examples include IRA accounts, life insurance policies with a large cash surrender value, or maybe a pending inheritance.
The taxpayer’s personal residence has a significant amount of unclaimed equity built up and the IRS wants to force the sales.

Finally, I have heard of cases where the taxpayer did something incredibly stupid such as buying an expensive yacht or luxury vacation in the last years before the statute would have run. This kind of stuff is pretty much guaranteed to tick off the Revenue Officers and result in them suing for judgment.

The IRS and Third-Party Contacts

You get a call from your stockbroker or maybe even a customer that they have been contacted by the IRS requesting information about you. The IRS is supposed to notify you in advance of such contacts, but that notification in the past has been less than clear about their intent. The result is that you are taken by surprise and embarrassed while trying to explain to someone why they were called. That IRS process has now been changed for the better.

The 2019 Taxpayer First Act includes a requirement for the IRS to improve their notice requirements before contacting a 3^rd Party regarding the assessment or collection of taxes. Effective 8/15/19 the IRS will send a clearly stated notice of their intent to contact which will have a definite time that covers no more than one year in the future. They will also send you this notice a minimum of 45 days in advance of the contact.

Why is this good news? With proper notice you will have an opportunity to satisfy the IRS’s request for information without them contacting the other parties. Better that you provide the documents rather than the government demanding it.

You may also request from the IRS a list name for of all 3^rd Parties that they have contacted. This can be a written or oral request made with the auditor.

Dissipated Assets May Maim Your Offer-in-Compromise Application

Dissipated Assets can maim your OIC application.

Let’s say you spent many hours producing an Offer-in-Compromise Application that shows it’s in the Government’s interest to accept your payment offer of 50 percent on each dollar owed. Your tax debt, cut in half. With a smile, you submit it to the IRS. Many months later, the IRS responds with a counteroffer that is $20,000 higher. Why?

IRS Eyes Form 4797 for Dissipated Assets

It turns out that part of the IRS process when evaluating an OIC Application is to look back at your last three years of tax returns, specifically at Schedule D and Form 4797 where you report sales of assets.

There, they found a big sale of stock that netted you $20,000. Now they want that money plus your offer amount.

The moral of the story? Always look back in time — three years of returns worth — before finalizing an Offer-in-Compromise Application. Maybe that stock sale was on the earliest return and waiting a year before you make your offer is possible.

Another strategy is that if you owe the IRS and have a big sale that nets cash, make sure you spend it on “allowable expenses.”. Allowable expenses are housing, food, medical expenses, not vacations and personal loans. Paying down a credit card debt is not an allowable expense unless the underlying charge can be categorized as such.

Foreign Financial Accounts Can Cost You Big Time

I represent taxpayers in Gainesville and the state of Florida who have tax issues with the IRS. Participating in the global economy can easily run you afoul of the Government for the failure to report on Foreign Financial Accounts. The civil penalties for failing to report can cost you 50% of your holdings. Here is the real kicker, you may have to file information on these accounts in two different places – the IRS with Form 8938 and Department of the Treasury with Form 114.

The complexity behind these filings is immense, so here are the bear minimums to alert you if you have a potential problem with this issue. You need to worry about this if:

You are a US Citizen or Resident, or any US business entity to include corporations, limited liability companies, partnerships and trusts.
You have either a financial interest or signature authority of a Foreign Account or Accounts that exceed $10,000 in value at any time over the calendar year.
The exception to the both rules are foreign accounts held by IRA’s, 401Ks, and US mutual funds.

From here, life gets really tough in that you must figure out if you need to file with either the IRS or the Department of the Treasury or both. Very likely – both. There are differences as to the threshold amounts requiring filing and whether a US Territory is considered to be a foreign account. For more information, here is the link to the IRS information on FBAR

The IRS and Private Debt Collectors

I represent taxpayers in Gainesville and the state of Florida who have tax issues with the IRS. The IRS reinstated an old program in 2019 of using non-government collection agencies to collect IRS tax debts. The IRS’s policy is to only assign accounts that have been “inactive” for more than a year. These collectors are limited in what they can do to collect these debts which is generally a good thing. However, they also do not have the ability to negotiate with taxpayers beyond recommending a payment plan.

What can the Private Debt Collectors do?

Ask that the debt be paid in full, and failing that
Offer to help with an installment plan.

They are required to be respectful and to not threaten you. If you do feel like you are being mistreated, you can report them with this link.

What can they not do?

They cannot negotiate an Offer-in-Compromise to pay less than the face value of the debt. This is an important option that allows the IRS and the taxpayer to come to an agreement that gets the debt off the IRS’s books and allows the taxpayer to get on with their life.
Additionally, from what I can tell, they cannot change the taxpayer’s status to “Uncollectable”.
They cannot report your debt to a credit bureau. The IRS will also not report you to the credit bureaus, but the filing of a Notice of Federal Tax Lien will almost certainly be picked up by the credit bureau processes.

What should you do if notified of your debt being assigned to a Private Debt Collector?

IRS procedures are to notify you with Notice CP40 that they are assigning your case. You have the right to request that it be reassigned to an employee of the IRS and I recommend you do just that.

Beware

You can bet that there will be a lot of telephone and email scams from people claiming to have IRS authority to collect tax debts. If you have the Notice CP40, there is a “Taxpayer Authentication Number” on the letter that you can use to verify that the caller is possibly legitimate. If the caller cannot tell you that number, they are most certainly scammers.

What about IRS Levies?

I represent taxpayers in Gainesville and the state of Florida who have tax issues with the IRS. A Federal Tax Levy is the actual seizure of a taxpayer’s assets because of past-due taxes. Usually, it involves a bank account or wages.

There are two types of Levy. A Regular Levy is one that seizes what the taxpayer owns at that moment such as cash in a bank account. The other variation is the Continuing Levy which stays in place to continue to grab wages as they are earned.

The IRS and Qualified Plans

One of the big myths is the idea that the IRS cannot Levy an IRA, 401(k) or other qualified retirement plan. While it may be true that other creditors can’t reach these funds, the federal government and its agencies are exempt from this restriction. If the taxpayer has the right to liquidate one of these accounts, then the IRS has the right to step into their shoes and grab the funds. Worse, the 10% early withdrawal penalty still applies.

What to Do

What is the best technique for avoiding one of these levies? It’s simple, don’t ignore IRS notices. Contact them and do your best to resolve the situation. As long as you are providing returns and information to the IRS to resolve the situation, there is no need for the IRS to resort to their big hammer — the Levy.

Should the IRS Levy your bank account or your wages, not all is necessarily loss. Your bank or employer is required to hold the funds for 21 days before sending it on to the IRS. If you move quickly, you can begin negotiations with the IRS and perhaps get the Levy released before the money is paid over to the IRS.