Nobody likes to pay taxes, but the IRS has powerful ways of making sure we do. If you’re in the unfortunate position of owing a significant amount of money to the Internal Revenue Service (IRS) for unpaid income taxes, the IRS will insist on payment by any means, including imposing a tax levy, seizing your assets and selling them to pay off your debt. However, there are steps you can take to keep this from happening and start rebuilding your credit and wealth.
If you’ve been notified by the IRS that you are subject to a tax levy, you have 30 days to challenge the levy, work out a payment arrangement, or pay the tax due. While a collection agency can seize your assets to pay debts, it can only do so by court order. The IRS does not have this requirement. It can take ownership of any assets you have: bank accounts, life insurance policies, real estate, boats, vehicles, and even your weekly paycheck.
The IRS first sends a Notice and Demand for Payment. If you do not pay as ordered, you will receive a Final Notice of Intent to Levy and Notice of your Right to a Hearing. There are circumstances under which a tax levy will be released by the IRS, such as proof that it causes you serious financial hardship.
The IRS defines “financial hardship” as the ability to meet basic, reasonable living expenses. Since this is one of the most common ways taxpayers try to get levies released, it’s important to know exactly what the IRS considers “reasonable.” This is not an arbitrary, subjective number; the IRS Collection Financial Standards are up-to-date and established allowances for five expenses: food, housekeeping supplies, apparel and services, personal care products and services, and miscellaneous. The amounts allowed are calculated according to the county in which you live and the size of your household. Details are available on the IRS website.
Besides financial hardship, there are several ways to get the IRS to release your levy:
If the IRS does release your tax levy for any reason noted above, you will still need to pay the outstanding debt. The only benefit to you is that you still get to keep your assets and your paycheck while working out payment arrangements.
The easiest and fastest way to get the IRS to release its levy on your assets is to pay your debt in full, including penalties and interest, which is easier said than done. If you had the cash on hand, you wouldn’t be in this situation in the first place; however, it may still be possible to get your hands on some emergency money.
If you have any assets that were not included in the levy, such as life insurance policies with cash surrender value, retirement accounts, stocks, bonds, or personal property, cash them in or sell them. However, keep in mind that these may be subject to income tax as well.
You could also ask relatives for gifts or loans; any individual is allowed to gift up to $14,000 per year with no tax consequences. If you have good credit, take out a home equity or personal loan. Using a credit card is a last resort but still a viable option.
If paying in full is your plan, you’ll need to make that payment within a reasonable period, which, according to the IRS, is 120 days after the levy notice is issued. This may be done in person at the IRS office, by mail, or by telephone.
Federal law permits the IRS 10 years to collect outstanding tax debt. This can work in your favor if you can prove that the statute of limitations ran out before the tax levy was issued. The 10-year period begins when you first receive a written notice of the amount you owe. If you owe taxes for multiple years, you might still be on the hook for later ones.
Keep in mind, however, that using the statute of limitations rule to escape paying your taxes can be tricky. There are many ways that the 10-year period can be extended, such as spending at least six months out of the country, declaring bankruptcy, or applying for an installment plan to pay the debt. If you do apply for installment payments, you need to waive the 10-year limit. If you try this strategy, it’s best to consult with a tax attorney first.
If your IRS debt is $50,000 or less, the IRS allows you to set up an installment agreement to make monthly payments. Once this is established, the IRS will release your tax levy right away.
You can qualify for a payment plan without financial disclosures if you owe $25,000 or less. The process is much faster and less complicated this way. In fact, if possible, you may want to pay down the amount you owe to under $25,000 to qualify. In this case, your debt must be paid in full within 60 months.
The process is as follows:
Do not stop paying if you can’t make your payments as agreed after your plan is in place. You can negotiate and restructure your existing plan by applying online. The fee for this is $89, or $43 if you qualify as low-income.
If you can negotiate the amount of your debts and only pay a fraction of what you owe, it would be well worth the effort. The IRS has a plan called Offer-In-Compromise (OIC) in which you can do just that — in rare cases. Taxpayers who successfully settle with the IRS using OIC can pay 20 percent or less of the amount they previously owed.
An OIC may be worth a try if you find that your current financial situation is making it impossible for you to pay what the IRS is billing you, even with a payment plan in place. Here are the steps:
The IRS will consider your offer and any documentation you provide. If the organization agrees that your offer is reasonable, your tax debt will be reduced to the amount of your offer. Pay this amount, and your tax levy and debt will be canceled. While you are waiting to hear from the IRS and if you are planning to pay in installments, you must continue to make monthly payments, which will not be returned to you if your application is not approved.
Current statistics for the OIC indicate a success rate around 40%. Common reasons for rejection include errors on applications and incorrect calculations on asset valuations and cash flow. If you want to try this option, visit the IRS’s OIC pre-qualifier on the IRS website.
If you do succeed with an Offer-In-Compromise, you absolutely must not fail to file or pay taxes for the next five years. If you do, the IRS will cancel the offer, and you will be billed for the entire amount once again.
The two most common types of bankruptcy are Chapters 7 and 13. You’ll need to consult with an attorney to choose the one that is right for your situation and to proceed with the filing.
Chapter 7 bankruptcy is usually selected for those with large debts — resulting from medical bills, credit cards, and other unsecured debt — and little income to pay them back. It forces you to liquidate, or sell, your assets to pay off your creditors. Certain types of property are exempt, however. Exemptions vary by state, but individuals who declare Chapter 7 bankruptcy are usually allowed to keep their homes, personal possessions, at least one vehicle, and retirement plans.
Not everyone qualifies for Chapter 7 bankruptcy, though. First, you’ll need to go through credit counseling to consider if there are any alternatives to bankruptcy. You must also pass the “means test,” which determines if you have the financial ability to make payments on your debts after your reasonable and necessary expenses have been paid. If you “fail” the means test, meaning that you could still afford to make payments on your unsecured debt, you are discouraged from filing Chapter 7. You can still file Chapter 13 bankruptcy.
Chapter 13 bankruptcy gives you extra time to catch up on your debts. Your attorney will help you create a repayment plan for your debts. You will be allowed to keep all of your property during this process. As with the Chapter 7 bankruptcy proceeding, you must attend credit counseling sessions and pass a means test to make sure you will be able to make your expected payments.
The decision to declare bankruptcy should not be made lightly, mainly because of its impact on your credit report and score. A Chapter 7 bankruptcy shows up on your credit report for 10 years, and if you file for a Chapter 13 bankruptcy, it stays on your credit report for seven years.
Of course, if you’re at that point, chances are your credit is already not that great. However, remember that credit scores affect more than loan and credit card applications — a bad one can keep you from renting an apartment, result in higher insurance rates, and even mess up your chances of being hired for a job.
Bankruptcy does, however, force the IRS to release a tax levy. This is because it creates an “automatic stay” on collections by creditors, including the IRS. While your bankruptcy proceedings are in progress, the IRS cannot attempt to collect your back taxes. It cannot garnish your wages, seize your bank account or any other assets, or place liens against your property.
What bankruptcy does not do is eliminate your debt to the IRS. Although some types of debt are discharged during bankruptcy proceedings, taxes are not usually among them. Bankruptcy also does not discharge debts from child support, alimony, student loans, or mortgages. Once the bankruptcy case ends, the IRS is free to resume its collection efforts.
No matter which strategy you use to remove your tax levy, Solvable can help. Don’t try to navigate the complexities of the IRS rules on your own. We’ve helped tens of thousands of clients resolve tax levies and other forms of debt so that they can start fresh and achieve their future financial goals. Give us a call at (855) 324-1775 today or visit our website. Answer a few simple questions, and you’ll be on your way to tax relief and financial peace.