What You Need To Know About IRS Collections, Liens & Levys

The IRS uses many collection tactics to collect tax debts, but most people don’t understand what the IRS is doing or threatening.  The main items that people frequently don’t understand are the differences between levies, garnishments and liens.

A levy is where the IRS seizes something.  The IRS can take Accounts Receivable, Bank Accounts, physical assets, inventory and even your wages.  A levy against any one of these items is a one-time hit (except wages).  This doesn’t mean the IRS can’t levy it again, but to do so, they have to issue another levy.  In other words, if the IRS levies your bank account they are entitled to all the money that is in the account on that day.  If you make a deposit the next week, the new deposit is not subject to the levy.  Only the money that was there on the day the bank received the levy notice has to be turned over to the IRS.  The next week’s deposit it exempt from the levy.  That is, exempt until the IRS issues another levy.  Unlike a garnishment, there is no exemption amount (see below) on a bank levy or an accounts receivable levy, the IRS gets 100% of what is there.

When the IRS seizes wages, it is a recurring event and happens as often as you get paid.  This is called a garnishment, and is a type of levy.  Once the IRS notifies the employer of the garnishment, the employer has no choice, by law, but to honor the levy and from that point on, turn over to the IRS funds that are withheld from your pay.  A garnishment doesn’t take 100% of your pay. There is an exemption amount that the employer has to continue to pay the employee, and then anything above that goes directly to the IRS.  The exemption amount is very small and varies depending on a few factors such as how often you get paid, your filing status, and personal exemptions.  Anything above this small exemption amount is sent to the IRS.  A lot of people think a garnishment amount is a percentage of your pay, which is not true.  Whether you make $2,000 per month or $20,000, the IRS will allow you to keep the same exemption amount, and the rest goes to the IRS until the debt is fully paid.  The exemption amount for a single person with one exemption is $845.83 per MONTH.  That is the amount you keep, the IRS gets that rest whether you earn $2,000 per month or $20,000.  Imagine trying to pay your mortgage (or rent), utilities, car payment, and groceries on $845.83 per month.  I see a lot of car payments in the $500 range, and I see rent in excess of $900 all the time.  It’s hard to live like that.  Generally a payment plan with the IRS will let you live a much better lifestyle than that, as they do factor in allowed expenses such as car payments, rent etc. 

Before the IRS can levy or garnish they have to issue a letter called Form 1058 “Final Notice of Intent to Levy and Your Rights to a Hearing”. This is a very important letter and comes with some great appeal rights.  You have 30 days to file an appeal. If you miss the deadline to file an appeal the IRS must wait an additional 15 days to make sure the appeal isn’t in the mail.  After that the IRS has all levy powers and can seize your assets, bank accounts, and wages without further notice.  If you receive a Final Notice of Intent to Levy it’s definitely time to quit procrastinating, as things get serous real fast if you ignore it.
It’s always best to get into a solution before the IRS levies.

A lien is very different from a levy or a garnishment.   A lien is not considered a collection activity.  It is a notice of an already existing lien. How this works is that the when you file a tax return with a balance due a lien automatically arises and the term is ‘statutory lien’.  It would be unfair to enforce the lien against 3rd parties, so the IRS has to file a Notice of Federal Tax Lien before it can be enforced. That is the letter that you get in the mail.

After the IRS files the Notice of Federal Tax Lien, it shows up on your credit and attaches to personal and real property (for it to attach to real property it must be filed in the county of the property). This doesn’t mean the IRS will take the property, it only means it has a lien.  So, just like a mortgage, it must be satisfied (paid or released) before ownership can transfer.  

What happens is that the lien can been seen on your credit report and it fairly well destroys your credit. This is because liens are paid in the order filed.  Therefore, if a bank wanted to loan you money (for example to buy a house) then the IRS lien would come before the bank. So if the bank later wanted to foreclose on the property, the IRS would have to be paid before the bank.  The bank simply won’t go for that, and it becomes all but impossible to get a loan with a tax lien on your record.
The second result is that if you have property (such as a house) and the lien is filed, you cannot sell the property and receive any equity until after the IRS is paid.  Generally the proceeds go to the bank first to satisfy their lien, then any second liens, and then to the IRS, and if there is anything leftover, to the homeowner.
As a final note of interest, sometimes the IRS will remove a lien long enough for you to borrow money.  This process is called a lien subordination.  However, it has to be in the IRS’s best interest to do so.  Generally this would be done so you could borrow money to pay the IRS.  

The difference between a levy and a lien is that a lien ruins your credit and prevents you from accessing any equity in the assets either by borrowing or sale; a levy on the other hand is a where the IRS actually takes something from you (seizing assets). A garnishment is a recurring levy, generally on wages.

For more information on levies liens and garnishments you can find more on the IRS website at https://www.irs.gov/levy
There are many solutions to a tax problem that can stop a levy or garnishment.  The solutions range from making a payment plan with them to having the debt placed as uncollectable (depending on the amount owed, under the IRS’s Fresh Start program you may be able to get the lien release) .  You may even qualify for an Offer In Compromise, which permanently settles the debt for less than you own.

If you want to discuss these issues with a professional that understands these complicated rules or need help with a tax problem, please call the office at 303-753-6040

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