Failing to complete your tax return completely and on time can cause huge penalties against you. Yet around 5% of Americans do this every year – that’s 7 million people.
In fact, in 2009 the IRS said that around 8.2 million people in America owed $83 billion in back taxes, penalties, or interest. This works out at $10,000 per person. And that’s a lot to pay back in one go.
So what do you do when the taxman comes knocking with an IRS levy? Most people need to seek tax relief to help avoid financial ruin.
Read on to find out exactly what you can do to stop an IRS tax levy.
What Is an IRS Levy?
Don’t let the Internal Revenue Service’s terminology confuse you. A tax levy is simply what happens when the IRS comes to collect any tax debt you owe.
If you do not pay your taxes on time or don’t complete your return properly, the IRS can fine you. The IRS carries out audits of tax returns to ensure that people are honestly paying the correct amount of tax. And the more you earn, the more likely you are to be audited.
If you lie on your tax return, then you will receive a hefty fine and have to pay the remaining tax that you owe.
A levy is what happens if you don’t pay this back immediately. This legally entitles the IRS to clear the debt by seizing your property and assets to match its value. Unlike a tax lien, this isn’t a claim or theoretical; it is direct action.
Before a levy happens, you will receive a notice and tax bill that demands payment. If you do not pay these, then you’ll receive a ‘Final Notice of Intent to Levy’ along with a ‘Notice of Your Right to A Hearing’. At least 30 days later, the IRS is entitled to carry out a levy.
Certain aspects of your property are exempt from a tax levy under the Internal Revenue Code. And if you owe less than $5000 your property can’t be levied. But outside of that, everything is fair game for the IRS.
So, how can you avoid a levy of your property?
Pay Back the Tax Debt
This is the main aim of the IRS. They simply want their debt paid back as soon as possible. So paying it back is the quickest and most effective way to release a levy.
Ideally, you can pay back your tax debt in one lump sum. This will clear your IRS account balance and the IRS will lift the levy.
But tax debts can amount to thousands of dollars and not everyone has the liquidity to pay them off in one go. Having a levy on your assets can make it even harder to release funds to pay back your debt.
Most of the time the IRS won’t release your assets until you pay off the debt in full. So you can easily become trapped in a circle of debt. One way to avoid this is by setting up an installment agreement with the IRS.
This allows you to pay your debt off in a regular monthly payment plan. They may spread these over a long period of time to ensure that you can continue to pay them. The IRS will use your income data to ensure that the payment scheme is something you can stick to.
The IRS’ Fresh Start Program is an example of one of these payment schemes. You have to meet specific criteria for this scheme, for example, you must owe less than $25,000. But if you do it could relieve you from some serious tax debt.
Once you make an agreement then the IRS will lift the levy on you and release any property back to you.
Making an Offer in Compromise
Sometimes paying back the tax debt that you owe is an unrealistic expectation. In this case, you may be able to make an Offer in Compromise (or OIC.)
This is when you make an agreement with the IRS to clear your debt through a single payment, which is lower than the debt itself.
This can seem like a very attractive option for anyone looking to resolve a tax levy quickly and is a sort of tax debt forgiveness. But in order to succeed in your offer then you should be realistic about how much you can afford to give. The IRS won’t accept token offers that pale in comparison to your income value.
Appeal Your Levy
Paying off your tax debt isn’t the only way to get a levy lifted.
If you feel that the claim of tax debt against you is not fair then you can make an appeal against the levy. This is a way of temporarily stopping it. Until the IRS makes a decision based on your appeal they won’t carry out the levy.
After you receive your Final Notice of Intent to Levy you have 30 days in which to make an appeal. You should do this formally using the IRS form 9423. Whenever you make an appeal make sure you keep a copy of this form complete with dates and evidence of submission.
To help your appeal succeed you might want to hire a local tax attorney. They have experience with appealing the IRS system so will be able to advise you on the best type of appeal to choose.
It’s important to put in a strong case. If the IRS doesn’t believe there is enough evidence supporting the appeal then the levy will continue.
So, what are your options for appealing a levy?
Lack of Notification from the IRS
There’s very little wiggle room on this type of appeal but if you have the evidence then it’s a strong appeal to make.
This type of appeal essentially works if the IRS has failed to notify you of your tax debts. This might involve them sending the information to the wrong person or address.
The IRS has an obligation to send out of a series of letters before they conduct a levy of your property. This includes:
- Sending a Notice of your tax debt to you
- Sending a Demand for Payment, or tax bill, to you
- Sending a Final Notice of Intent to Levy to you
- Sending a Notice of Your Right to A Hearing, or levy notice, to you
You must receive your Final Note and Notice of Your Right to a Hearing at least 30 days before the IRS carries out the levy.
They can deliver these letters in person or leave them at your home or workplace. If they send them via post then they must do so using a certified mail service and have a return receipt for the postage.
If you haven’t received any of these then it’s important to look into why. Failure on the IRS’ part to deliver them to you means you have a strong appeal against any penalties or accrued debt.
While checking on this you should ensure that all of your current information is up-to-date on your IRS account. You won’t be able to make an appeal if the IRS has sent a notice to your old home or place of work. So make sure you update these regularly!
A Case for Financial Hardship
You can also appeal against a levy if it would create severe financial hardships for you and your family.
The IRS has an obligation to ensure you still have enough money to live on. This includes a realistic budget for food and other domestic bills. Other things they will take into account include obligatory travel costs or medical bills.
In order to appeal against a levy, in this case, you will have to submit financial documents as proof of your situation. If this satisfies the IRS then they will release the levy.
If the IRS approves your case for financial hardship they will also give you a CNC status. This means ‘Currently Not Collectible’.
While you have CNC status you won’t have to pay off your tax debt. However, you might still accrue debts or penalties.
A Case for Innocent Spouse Relief
Successful cases of innocent spouse relief are quite rare.
This happens when you and your spouse file a joint tax return which includes an item that the IRS deems incorrect. This might be something you’ve claimed for when you shouldn’t have done or an inaccurate estimate of the tax you owe.
In this situation, you can claim that your spouse is the one who is liable for the tax debt. To make this appeal you must:
- Have filed a joint tax return.
- Be able to prove that the item in question is something that you can attribute to your spouse and has nothing to do with you.
- State that you weren’t aware of errors on the tax return when you signed it.
Only then will the IRS consider your proposal of innocent spouse relief.
This is evidently a risky strategy, which could have huge implications for your spousal relationship. However, if you agree on the appeal with your partner it might be a way to maintaining financial stability through a levy.
If the IRS only levies one person’s assets then you may maintain more liquidity. For example, let’s say they levy the spouse with a lower income and less valuable assets. This person can apply for a lower payment plan or make a smaller Offer in Compromise.
On the other hand, if you and your spouse are not on good terms or are no longer together you might want to consider an alternative. Separation of Liability Relief or Equitable Relief could suit you better.
Proving You Have No Assets of Worth
An IRS levy of your assets is a way of getting back the money you owe them. This is why they can levy more than your bank accounts.
The IRS can use your house, vehicles and other valuables to make money back. In this instance, they liquidate your assets down to equal your tax debt and write it off.
But if you can prove that your assets aren’t worth anything then the IRS might not seize them.
This is fairly tricky to do. The IRS will be on the lookout for anything you might do to decrease the value of your assets, so don’t risk being caught out. And obviously, you don’t want to actually devalue any property that you’re going to hold onto if they release the levy.
To make a strong case you’ll need to provide evidence from your bank and savings accounts. You might also be able to prove that certain types of property are on loan to avoid their seizure.
Proving Identity Theft
Again, this is a very specific type of appeal. But if you find yourself a victim of identity theft then you should investigate and appeal this. Several types of identity theft can land you in hot water with the IRS.
Firstly, someone could request a refund on your tax return. To do this they would have to submit fraudulent deductions to your return.
Or they might use your identity when working for an employer who doesn’t withhold taxes from salary payments. In this situation, it would appear to the IRS as if you haven’t paid any tax.
Proving this will immediately release any levy on your assets. You can protect yourself from identity theft by keeping your social security number private.
Use the Statute of Limitations
Using the statute of limitations in your favor is a long-game when it comes to avoiding tax levies. But it could save you thousands of dollars.
The Statute of Limitations gives the IRS 10 years to collect any tax debt that you owe. After this period they have to clear your debt and you won’t have to pay off any of it.
And you might not have to wait a full ten years. The IRS doesn’t immediately follow up all tax debts with a levy. They can spend some time in the system waiting for processing.
The Statute of Limitations starts from the date that you file your tax return. If you filed it in March 2010 and only heard from the IRS in March 2019, then you only have one year to wait until you no longer have to pay it.
This means if you can make a CNC appeal of financial hardship you might avoid having to pay it all together!
File for Bankruptcy
This is your final option and it can have a long term impact on your financial record. So it’s not something to rush into.
But filing for bankruptcy is a sure-fire way to keep the IRS off your back. During the filing process, the IRS can’t make contact with you or try to collect any debts.
This also means you might be able to consolidate your tax debt into manageable monthly payments. Or, if you’re lucky, it might be written off entirely.
The Bottom Line
Now you know everything there is to know about an IRS Levy and how to avoid it.
Don’t waste time Googling “tax help near me”. Get in touch today to speak to an experienced tax attorney. We’re here to help!