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IRS Collection Procedures
In order to protect the federal government and to collect back taxes , the IRS has the ability to aggressively collect income and assets from taxpayers. IRS collection procedures can be brutally harmful to taxpayers.
In general, the IRS can engage in collection activity after notifying the taxpayer through a series of notices. After giving the taxpayer a Final Notice, the IRS must wait 30 days from the date of the Final Notice to engage in any type of collection activity. During this 30 day period, the individual taxpayer is giving the opportunity to resolve their back tax liability (i.e. full payment, Installment Agreement, Currently Not Collectible status, or Offer in Compromise) and a forum to disagree with the alleged back tax liability amounts owed or proposed collection activity (i.e. Collection Due Process Hearing).
After the 30 days have passed, the IRS can enforce a collection action against the taxpayer. The enforced collection action is typically either a levy on an account, a levy on a source of income, or a lien on property (i.e. real or personal property).
A federal tax levy is an action that redirects income or liquid assets (i.e. money in a bank account) from a taxpayer to the IRS on behalf of the federal government. For income, the levy acts as a garnishment by deducting a portion of the taxpayer’s income and directing it to the IRS to pay the taxpayer’s back tax liability. For liquid assets like a bank account, a levy freezes a taxpayer’s account and then liquidates and directs the entire account balance to the IRS to pay the taxpayer’s back tax liability.
A federal tax lien is a legal right or interest that the IRS has in the taxpayer’s property. The lien typically remains on the taxpayer’s property until the taxpayer’s back tax liability is paid in full, expires, or is compromised through the acceptance of an Offer in Compromise.
The IRS may take enforced collection action against a taxpayer. The enforced collection action is either done by the IRS Automated Collection System (ACS) or by an IRS Revenue Officer assigned to the taxpayer’s case.
Collection Notices
The IRS is required to notify a taxpayer before they engage in enforced collection activity. Thus, collection actually begins by sending the taxpayer a collection notice. The notice serves to make the taxpayer aware of the back tax liability owed and the IRS’s authority and intent to collect that amount unless the taxpayer pays the amount promptly.
The notice itself explains why it has been sent to the taxpayer. It also provides the taxpayer with contact information (i.e. telephone number, best time to call, and address) in order to address the underlying reasons for the notice.
The IRS may send a multitude of different notices to a taxpayer to make them aware of the potential collection activity. Please be aware that they may not all appear the same way. However, there are two specific types of Collection Notices that are the most common and most important.
Final Notice of Collection Activity
The IRS is required to send a Final Notice of Collection Activity thirty (30) days before engaging in enforced collection activity. Thus, the taxpayer has thirty (30) days from the date of the Final Notice to resolve their back tax liability.
The Final Notice will specifically identify what it means, how the taxpayer is to resolve their back tax liability, and how the taxpayer is to dispute the Final Notice – either the tax liability itself or the improper filing of the Final Notice.
Notice of Levy
The Notice of Levy notifies the taxpayer that a levy has been issued against his or her wages, salary, other income, or bank account. Like previous notices, it provides contact information. However, this notice also identifies the source of the income or account that is being levied.
It also includes a description of the levy. This language signifies whether or not the levy is a one-time event or will continue until the back tax liability is resolved. If, for example, the taxpayer were to receive a bank levy, it would have included the following description of the levy:
Banks, credit unions, savings and loans, and similar institutions described in Section 408(n) of the Internal Revenue Code must hold your money for 21 calendar days before sending it to us. They must include the interest you earn during that time. Anyone we send a levy to must turn over your money, property, credits, etc., that they have (or are already obligated for) when they have paid you.
The Notice of Levy will also include a list of all of the tax liabilities the levy is in reference to. Please be aware that this list may not include all of the taxpayer’s known tax liabilities.
Federal Tax Lien
The IRS may file a federal tax lien if a taxpayer owes back taxes. The IRS may also file a tax lien to assist in their efforts to collect the taxes owed since the tax lien gives the IRS a legal claim to your property as security for the tax liability.
A tax lien is different from a wage garnishment or bank levy in that it does not actively collect income from the taxpayer. Rather, a tax lien is much more passive. It acts to protect the federal government only when the taxpayer elects to sell property, personal or real. The value of the lien is equal in proportion to the amount of the back tax liability.
Upon the sale of the property, the proceeds of the sale are first given to senior lienholders (i.e. individuals or financial institutions who secured a debt owed to them through claim to the property before the IRS), the IRS, and then junior lienholders (i.e. individuals or financial institutions who secured a debt owed to them through claim to the property after the IRS), and then the individual property owner (i.e. the seller).
Process for Filing a Federal Tax Lien
Similar to the federal tax levy, before the IRS may file a Notice of Federal Tax Lien, the IRS should first assess the tax liability and then send a Notice and Demand for Payment notifying the taxpayers of the taxes owed and the need to pay them. If the taxes are not paid in full within 10 days after notification by the IRS, then a lien may be filed for the amount of the back tax liability. Once the lien is filed, public notice is given to creditors that the IRS has a claim against property owned. This includes property acquired after the lien is filed. The lien attaches to all of a taxpayer’s property (e.g. homes, land, and vehicles) and to all of a taxpayer’s rights to property (e.g. promissory notes or accounts receivable).
In order to have a lien released, a taxpayer must obtain a Release of the Notice of Federal Tax Lien. Generally, the IRS will not release a lien until the taxpayer’s back tax liability has either been paid in full or the IRS no longer has a legal interest in collecting the tax (i.e. the time period for the IRS to collect the back tax liability has expired or the back tax liability has been settled through an Offer in Compromise).
Source: RoniDeutch.com
