If you owe taxes to the IRS, they may take collection actions against you and your tax account. Collection actions describe different forms of enforcement the IRS utilizes to pressure taxpayers into fulfilling their obligations and paying their debts. In general, the IRS will issue liens, levies, and asset seizures against taxpayers that owe back taxes. Federal tax liens constitute a legal claim on all your assets and property effectively giving the government collateral against your tax debt.
Meanwhile, levies are a physical claim or seizure of your property or certain accounts allowing the IRS to recoup your back taxes through the sale of a property you own or by emptying a bank account. The IRS may also levy your wages in a process called wage garnishment. In general, collection actions are the IRS’s primary means of ensuring that indebted taxpayers pay their back taxes, and they constitute a major part of the collection process.
What Is the IRS Tax Collection Process?
Here are the basics of how it works. First, you file your tax return. Most people will file their tax return on or before Tax Day, giving the IRS an estimation of the tax you owe based on your reported income, filing status, and chosen deductions. Your tax return determines what you believe you owe the IRS. However, they have the ability to run that data against existing information returns to eliminate or discover discrepancies.
If there are discrepancies with the tax return (for example, the information on the return does not match up with the information provided by your employer, banks, and other organizations, or it is drastically different from the information provided last year), the IRS will dig into the matter and try to correct it.
If doing so means you owe more than you’ve paid – for example, you may have forgotten to account for a new source of income and haven’t made your estimated tax payments – the IRS will send you a bill. That bill constitutes your first notice of overdue tax. There is a due date on when that tax must be paid. Failing to do so before the due date will result in penalties. For every month the bill goes unpaid, it also accrues interest.
As your tax debt grows, the IRS continues to send you reminders of your unpaid taxes. After the final notice, the IRS will begin taking action against your account, beginning with the filing of a Notice of Federal Tax Lien. This is often the first of multiple collection actions the IRS may take against your account. Ultimately, the IRS will begin claiming properties, accounts, or even portions of your paycheck until your debt is paid.
The sooner you get in contact with them after a notice of the debt, the faster you can resolve your debt – sidestepping most major collection actions and even potentially reducing the amount you owe.
I Got a Notice of Debt, What Do I Do?
First, you should open it and see what it says. The first mistake many people make is ignoring these notices until they become a major problem. The IRS may issue several different notices to inform you of your current tax debt. Common notices include:
- CP11, which notifies you of a miscalculation on your return, which was automatically rectified, resulting in unpaid taxes.
- CP14, on the other hand, is sent when a taxpayer is reminded or informed of their unpaid taxes, and their opportunities for payment.
- CP161 is another common notice of a due balance, with a ten-day opportunity to notify the IRS if you think they’ve made a mistake.
Any notice of debt from the IRS will invite multiple possible responses, from confusion to shock. The first thing to do is breathe easy. The IRS does not act on your tax account without prior warning. A first notice does not mean that you are immediately subject to immense penalties and interest. It takes time for these to build up. The penalty for failing to pay within a timely manner is 0.5% of the principal debt per month. It cannot exceed a total penalty of 25%.
However, that does not mean you shouldn’t react expeditiously. When you receive a notice from the IRS detailing your debt, you have the option to accept or appeal the decision. Failure to pay, or failure to schedule a collection due to a process hearing may lead to collection actions, principally beginning with an issued federal tax lien.
What Is a Federal Tax Lien?
A lien is a legal claim on a person’s property. When a lien is placed on you, a creditor effectively ensures that no assets can be liquidated without first satisfying the debt in question. When the IRS issues a lien, their claim takes precedence over all others. This means you cannot take out a secure loan, you cannot satisfy other debts, and you cannot sell the property without first dealing with your tax debt and federal tax lien. It also becomes a matter of public record. This informs other creditors and organizations of the lien against you and your property.
If a lien is issued against a business, it applies to all business assets and accounts. A lien used to be a black mark on a person’s credit history as well, but the three national credit bureaus have since stopped counting liens as derogatory against a person’s credit history, because of too many mistakes. However, that doesn’t stop potential lenders from finding a federal tax lien against you or your business.
The only way to release a lien is to talk to the IRS and pay off your debt, or request an installment agreement payment plan. Under some circumstances, such as regularly scheduled payments or automated payments (Direct Debit), the IRS may release your lien before your debt is fully paid. Otherwise, your lien may be removed alongside your final payment. Liens can also be amended to allow one creditor or one debt to supersede it if it helps the taxpayer pay their debt.
What Is a Tax Levy?
Whereas a lien is a legal claim, a levy is a more direct claim on a taxpayer’s property. Levies are the IRS’s last tool to pressure debt resolution in cases where a taxpayer has completely failed to communicate any interest in paying their tax debt. When the IRS issues a levy, it intends to seize your accounts and/or assets, liquidate them and use the funds to pay your outstanding balance.
Unlike a lien, a levy is issued on a single property or account at a time. If the property or account levied was enough to satisfy the debt, the remainder may be sent back to the taxpayer. Otherwise, they may be subject to another levy until the debt is paid. Taxpayers are given a final notice of intent to levy whenever the IRS decides to claim an account or a property.
You have limited time to contact the IRS and consider your payment options before the seizure of your property goes through. The IRS may also levy your wages if you have no other property or assets. Wage garnishment involves taking a portion of each paycheck until your debt is paid. The amount garnished depends on your income and the number of dependents you have.
The IRS can also seize or levy your assets, both real and personal property, as a way of collecting on the debt. The IRS would go through the legal process, then sell the asset at a tax auction in order to satisfy the liability. It is most common with real estate and vehicles, though it can apply to any asset. While this is a rare scenario, it is a very real threat and must be mitigated.
Levies and asset seizures are not to be confused with civil seizures or civil forfeiture. The IRS is authorized to perform civil seizures if an asset or property is found to be involved in money laundering and other forms of financial fraud or criminal activity. For example, assets involved in money-laundering operations proceeds from criminal operations, and vehicles obtained through theft may be seized by the government via civil forfeiture.
Collection actions can severely impact your financial future and act as a warning to all taxpayers. If you are struggling with your tax debt, there are multiple options for recourse, including partial payment installment agreements or even temporarily halting collection actions until your finances improve. However, the best way to deal with tax debt is to resolve it as quickly as possible.