In another article I discussed federal tax liens (more about a recent development in that area later in this article). This article takes a look at the dreaded levy of a tax debtor’s assets.
The tax code gives the IRS the authority to reach and seize assets of a delinquent taxpayer that are in the hands of a third party. A bank levy is a notice of levy on a bank account which instructs the bank to take funds from the account on the day of service. There is a 21-day waiting period before the bank is required to remit the funds. This allows the debtor the opportunity to negotiate a resolution with the IRS. A wage levy is a notice of levy on salary and wages which is a continuous levy from the date served until it is released. Obviously, these create hardships, which is the intent of the IRS. It wants the taxpayer to work with the IRS. While there is an amount that is exempt from levy, it is generally insufficient to provide for the necessary living expenses of the taxpayer and his (her) family. Revenue officers often use this approach to change continuous levy to the equivalent of an installment agreement with the employer required to withhold and submit the payment to the IRS each month.
The Internal Revenue Manual provides that if a notice of levy is over 180 days old it is no longer timely and a new warning of enforcement action called a “notice of intent to levy” must be sent to the debtor before a levy notice can be issued.Subject to certain exceptions, the IRS will suspend collection activity while a taxpayer’s offer in compromise or a proposed installment agreement is being considered. The suspension is effective for 30 days after rejection or 30 days after termination of an existing installment agreement and during a timely filed appeal of the rejection or termination.
The tax code also gives the IRS the authority to seize property and advertise it for sale subject to certain restraints. For example, judicial approval is required before a taxpayer’s principal residence is seized. There must be the existence of unsatisfied tax liability in excess of $5,000 and nonexistence of collection alternatives. The IRS must have a warrant (Writ of Entry) to go on the private property of a person that has a reasonable expectation of privacy unless the occupant gives permission.The taxpayer may secure a release of seized property prior to a sale by either paying the liability or an amount equal to the property’s value, by filing for bankruptcy prior to the sale (the asset will be turned over to the trustee, or establishing that the property has no value. After a sale of real estate, the taxpayer has 180 days to redeem the property from the successful bidder by paying the bid price and 20% interest. There is no right of redemption for personal property.
Exemptions From Levy
There are a number of types of property that are exempt from levy. The most notable ones include necessary wearing apparel; school books; fuel, provisions, furniture, and personal effects limited to aggregate of $6,250; Books and tools of trade, business, or profession, limited to aggregate of $3,125; undelivered mail; child support on judgments entered prior to levy; and wages, on which the exempt amount is determined from an annual table which is based on the taxpayer’s salary, frequency of payment, and number of exemptions. As to retirement plans, there are many employer and self-sponsored retirement vehicles that are not exempt from levy. These plans include, for example, qualified pension, profit Sharing, and stock bonus plans, IRA’s, and retirement plans for the self-employed (such as SEP-IRAs and Keogh Plans). The general policy of the IRS is to use discretion before levying retirement income. Therefore, if the taxpayer is dependent on the funds or will be in the near future, has not engaged in flagrant conduct, has property other than the retirement assets that can be used to collect the liability, or if a payment plan can be reached, it is likely that the retirement assets will not be levied.
Update on the IRS Lien Policy
In February, 2011 the IRS issued a new and more liberal policy on filing federal tax liens on taxpayers who have unpaid taxes. Read last month’s article “Federal Tax Liens” on my website at www.rontaxcpa.com/new.phpfor the former policy. According to the IRS, the new changes may decrease the number of liens filed and lessen the negative impact on taxpayers’ ability to obtain credit. The changes include significantly increasing the general threshold for liens from $5,000 in unpaid taxes to $10,000; making it easier for taxpayers to obtain lien withdrawals after paying a tax bill; withdrawing liens, in most cases, when a taxpayer enters into a Direct Debit Installment Agreement; creating easier access to payment agreements for struggling small businesses; and expanding a streamlined “Offer in Compromise” program to help more people settle their tax debts.
Is the new policy as helpful as it sounds? As in any IRS policy that is aimed at helping the taxpayer, we’ll see, as only time will tell. Many taxpayer advocates, including your truly, say the only way to get real relief from an IRS lien is to avoid having one filed against you in the first place. While the new policy will no doubt allow the IRS to concentrate on placing liens on taxpayers with larger debts, it doesn’t necessarily mean that it will relax the aggressive attempts to collect on the debts. In fact, the IRS may likely be less sympathetic to taxpayers who do act quickly to settle their debts or enter into an agreement to do so. On the other hand, it does offer taxpayers more opportunities to avoid devastating enforcement actions.
A focal point of my practice is successfully working with clients to resolve their tax debts. If you are a current or potential client with tax payment problems, I would welcome the opportunity to work with you.
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