How to Stop an IRS Tax Levy

Staff Writer - Angela
May 14, 2018
How to Stop an IRS Tax Levy

If you’ve been contacted by the Internal Revenue Service (IRS) and informed that you owe back taxes, you’re probably under a lot of stress while you figure out how to handle it. An IRS tax levy is a serious situation that can affect all aspects of your life. The IRS may use any possible means to get you to pay your taxes, including a tax levy. Read the guide below to find out how to stop an IRS Tax Levy.

Steps Toward a Tax Levy

When the IRS determines that you owe back taxes, there are several steps it must follow. It will send out five automated letters to notify you that taxes are due and give you multiple chances to pay before further action is taken. After the fifth letter is sent, if you do not make arrangements for payment, it will send you a Final Notice of Intent to Levy. Soon after that, you will receive Notice of your Right to a Hearing. Do not ignore these serious notifications; the IRS issued nearly 3 million of these notices to taxpayers, and it will follow through.

What Is a Tax Levy?

Just as a collection agency can seize your assets to pay outstanding debts, the IRS can do so as well. However, unlike a collection agency, it does not need a court order to do so. It can immediately take ownership of all assets you have: your bank accounts, the cash value of your life insurance policies, any real estate you own such as your private home or rental property, and your vehicles. It can even garnish your weekly paycheck, which means you will be unable to use that money to pay your other bills or pay for your regular living expenses.

Once in place, it becomes even harder to stop an IRS tax levy.  You can’t get to work if the IRS has taken your car. You may need to find another place to live. If you have rental property, you may lose your rental income. Avoiding a tax levy is in your best interest.

Remember, however, that avoiding a tax levy is in the IRS’s best interest, too. For that reason, the organization is happy to negotiate with you and make arrangements for you to pay on a schedule that works for you.

There are several ways to stop an IRS tax levy:

  • Pay the full amount that you owe to the IRS.
  • Arrange an installment payment agreement.
  • Ask for a deferment of payment due to financial hardship.
  • Contest the amount of your tax bill and prove that the IRS has made a mistake.
  • Prove that the statute of limitations or period of collection expired before the final collections notice.
  • Apply for an offer in compromise to reduce your tax debt.

Pay the Full Amount Due

The best way to stop an IRS tax levy is to simply pay the entire tax bill in full including any penalties and interest that may have accrued. If there’s any possible way you can swing this, you should do so. After all, the main goal is to get the IRS off your back and get on with your life.

If you’ve got any emergency funds stashed away, it’s time to break the piggy bank. Since the IRS has not yet placed a tax levy on your assets, you are free to sell them as soon as possible to raise the cash. Some possible solutions include:

  • Sell valuable personal property such as vehicles, boats, RVs, motorcycles, or collectibles.
  • Sell any stocks and bonds you have in your investment portfolio.
  • Cash in life insurance policies that have cash surrender values.
  • Borrow against your whole life insurance policy.
  • Some types of retirement accounts allow you to borrow against the policy. This type of loan won’t affect your credit since you are essentially borrowing from yourself; interest rates are typically low as well.
  • Take out a home equity loan or line of credit on your primary residence.
  • Ask friends or relatives for gifts or loans to help you out. Any individual is allowed to give cash gifts up to $14,000 per year with no tax consequences for either the giver or the recipient.
  • As a last resort, use a credit card.

If you’ve received that fifth and final notice, you will need to make that payment as soon as reasonably possible. Payment may be made at the IRS office in person, by the U.S. Postal Service, or over the telephone using a credit or debit card. You can also use the IRS’s Direct Pay System found on its website stop an IRS tax levy.

Apply for an Installment Payment Agreement

When taxpayers aren’t able to pay their entire tax bill at once, the IRS is happy to assist by setting up installment payment plans. If you make monthly payments as agreed, there will be no further attempts by the IRS to collect back taxes by threatening to issue a tax levy.

Part of this application is IRS Form 433-F, the Collection Information Statement. This is a long, complicated form that requires you to disclose to the IRS all of your income sources as well as all of your regular expenses. It also asks for every asset you own, such as real estate, retirement accounts, and life insurance policies. You will need to list all of your credit cards and lines of credit, whether they are paid in full or carry balances.

The IRS uses this information to determine whether or not you can afford a reasonable monthly payment based on your income and expenses and to also determine what that payment should be.

However, if you owe $50,000 or less, there’s good news — you can skip Form 433-F and apply for a streamlined installment agreement. This allows you to set up a payment plan using direct debit payments from your bank account without providing every last detail of your financial information to the IRS. To qualify for this, you will need to set up your payment schedule so that your debt is paid in full within 72 months.

If you need to apply for a non-streamlined installment plan, we recommend consulting with a tax professional who can help you negotiate your monthly payment amount. This professional can also make sure that the complex documents the IRS requires are filled out and submitted properly and can prevent the IRS from filing tax liens to protect its interests.

Depending on the plan you are applying for, a set-up fee may be required. These fees vary depending on whether you are applying for a short- or long-term installment plan or if you qualify under guidelines for low-income individuals.

Deferment of Payment Due to Financial Hardship

The IRS recognizes that some people may be unable to pay their tax debt due to financial hardship. If you qualify, the IRS will suspend collection efforts against you, including pending tax levies on your assets and wages. This does not mean your debt is forgiven; it means that you have a longer time to pay it. However, if you can defer payment for 10 years, the IRS runs out of time to collect it and must clear your debt.

Qualifying for financial hardship deferment is not easy. This is one of the most common strategies people use to get out of paying tax debts. Therefore, the IRS has strict rules for allowances. It defines “financial hardship” as lacking the ability to meet basic, reasonable living expenses along with making tax payments.

The IRS uses strict, frequently updated Collection Financial Standards. These include allowances for food, apparel, personal care products and services, housekeeping supplies, and miscellaneous. The amount of money the IRS allows for each category depends on the county where you live and the number of dependents in your household. You may consult the IRS website for details.

Contest Your Tax Bill and Prove the IRS Wrong

If the IRS sends you a notice that you owe more taxes than you reported, you just have to go along with them and pay it, right? The answer is, not necessarily. The IRS does make mistakes. The IRS has issued a 10-item Taxpayer Bill of Rights, and one of them is the right to challenge the IRS’s position.

When you receive a notice from the IRS that you owe them money, included in that notice will be the instructions you should follow if you want to dispute the claim. The matter might be a simple, clear-cut issue that is easy to resolve. Simply check a box stating that you disagree, and include a short note of explanation along with copies of any documentation you have that might prove you’re right and they’re wrong. Send this to the IRS via certified mail before the deadline indicated on the notice.

The next step, if this is not approved, is to contact the supervisor of the IRS employee who rejected your appeal. Stay calm and positive, with the attitude that the error is simply an oversight on the employee’s part. Disputes like this work particularly well when the amounts are relatively small.

You can take your case, at that point, to the IRS Office of Appeals. Finally, your case can be presented at the U.S. Tax Court. This is similar to a small-claims court, and you do not need an attorney.

There are several reasons the IRS might make an error when auditing your tax return, resulting in a notice saying you owe more money. These include:

  • Your employer accidentally sent the IRS two copies of your W-2.
  • The IRS made an error calculating the cost basis of an investment you sold.
  • A 1099 form that should have gone to your business was addressed to you personally. Even if you reported it properly on your business taxes, the IRS might think it is personal income instead.
  • The IRS miscalculated the Alternative Minimum Tax, which is complicated.
  • You are eligible for a tax credit that the IRS believes you are not eligible for.
  • The IRS computer misread a number on a hand-written tax return.

This is only a sample of the many reasons the IRS may be wrong about your tax calculation. We recommend hiring a tax resolution service to help you solve these problems, which can be complicated and time-consuming. Let Solvable handle the hassle of all the telephone calls and forms.

Apply for an Offer In Compromise

Another way to stop an IRS tax levy is the offer in compromise (OIC), a plan that the IRS offers allowing taxpayers to negotiate the amount of debt that is owed, so they can pay less and avoid tax levies. If your current financial situation makes it difficult for you to pay your entire tax bill, it’s worth a try to stop an IRS tax levy.

To apply for an OIC, you will need to fill out Form 656 and provide documentation that details your income, debts, and assets. There is a $186 application fee. When you submit your application, you will also need to send a payment of either 20% of your proposed offer or the first month’s payment for your projected payment plan.

Keep in mind, however, that the success rate for OIC applications is around 40%. Since errors and omissions regarding calculations and asset valuations account for most of these rejections, it’s a good idea to hire a professional to assist you with this process. We also recommend using the IRS’s OIC pre-qualifier on the IRS website to see if you stand a chance of success with this strategy.

Although the IRS provides help to taxpayers who want to dispute or arrange payment to avoid tax levies, dealing with them can be a stressful and time-consuming process. Solvable can help you navigate the complexities of IRS rules and regulations and help you stop an IRS tax levy. We have helped tens of thousands of our clients avoid tax levies and learn how to avoid problems in the future. Visit our website or give us a call at (855) 324-1775 today. Just answer a few questions to get started on your path to financial freedom.

 

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