Taxpayers who are not initially able to pay their taxes can first expect to receive some notices in the mail, along with a set of instructions explaining their rights as taxpayers. As troublesome as it may seem, this issue can often be resolved with an installment plan using Form 9465.

But taxpayers who owe large balances on their tax returns and refuse to communicate with the Internal Revenue Service (IRS) eventually face the possibility of having a lien or levy placed on some or all of their property. Here's how this process works and how you can avoid it.

Key Takeaways

  • The Internal Revenue Service has the power to put a lien or levy on some or all of your property if you owe any back taxes.
  • Tax liens prevent an individual from selling their property until the debt is paid in full.
  • Levies allow the IRS to seize your property and sell it, after which the proceeds are applied to the outstanding balance.
  • The IRS has a list of assets that are exempt from seizure.
  • Negotiate an arrangement with the IRS or, if all else fails, contact the Taxpayer Advocate Service to step in on your behalf.

Tax Liens

A federal tax lien is a public notice that someone owes back taxes to the IRS. It gives the IRS the authority to seize any proceeds from sales of real estate owned by a delinquent taxpayer. The rules pertaining to tax liens are outlined in Section 6321 of the Internal Revenue Code (IRC).

Tax liens prevent delinquent taxpayers from selling their property with a clear title until the IRS is paid in full. Furthermore, the lien follows the property and not the taxpayer/owner. This means that anyone unlucky enough to buy the asset from the taxpayer will inherit the lien as well. Then the IRS has two people it can go after for its money.

There are two types of tax liens. The first one is a silent automatic lien and the other involves a notice sent from the IRS to the recorder's office of the taxpayer's county of residence. The latter is listed by credit reporting agencies and have a substantial negative impact on an individual's credit score.

The only way a lien can be released is via payment in full, plus interest and penalties. Other options include bankruptcy or an offer in compromise. The expiration of the time statute for tax collection can also release the lien.

Appealing and Avoiding a Tax Lien

Taxpayers can protest a tax lien with the IRS Office of Appeals. They should try to contact the manager of the unit that is filing the lien first. If that does not prevent the lien, they must then send Form 9423 (the Collection Appeal Request) to the collection office. An appeals officer will decide the taxpayer's case within three business days.

It should be noted that these steps seldom prevent a lien. Taxpayers who receive notices of liens should contact the IRS or the Taxpayer Advocate Service (TAS) immediately and do their best to convince them that posting the lien is not in their best interest, because it will reduce your credit score and thereby interfere with your ability to pay your taxes by means such as a loan.

The Taxpayer Advocate Service is an independent agency that is available to all taxpayers who cannot reach a resolution with the IRS on their own.

Taxpayers with liens on several properties may be wise to request that the IRS release the lien on one of them so that it can be sold to raise tax money. The IRS will usually grant this request.

Once a lien is satisfied, the IRS must issue a notice of release of lien within 30 days of payment. If no release is issued, the taxpayer must contact the IRS Centralized Lien Processing Department in Cincinnati.

Tax Levies

If the IRS can't recover unpaid taxes with a lien, the next step is to levy the taxpayer's assets. A levy is the actual seizure of taxpayer assets by the IRS. This is the final method of enforcement of taxation when all other attempts to collect taxes have failed.

Tax levy notices are usually issued to employers and financial institutions of delinquent taxpayers. However, not all taxpayers who are issued notices of levy will actually have their assets seized. Various factors, such as the taxpayer's place of residence and payment history determines the likelihood of whether this actually occurs.

The rules and procedures for asset levies are outlined in Section 6330 of the Internal Revenue Code. The IRS must provide the taxpayer with a written notice of intent to levy along with an explanation of the right to appeal at least 30 days before taking action.

Exempt Assets

Although the IRS has the authority to seize the majority of a taxpayer's assets, it cannot take everything. The following is a list of items that are off limits for the IRS (as of 2020):

  • Basic clothing
  • Up to $6,250 of personal items
  • Up to $3,125 of educational, trade, or professional textbooks and equipment
  • Unemployment benefits
  • Undelivered mail
  • Railroad and Congressional Medal of Honor benefits
  • Worker's compensation and assistance under the Job Training Partnership Act
  • Child support
  • Minimum exemption for salary or other wages to pay basic living expenses
  • Social Security and welfare

The IRS can also garnish wages, but not all of them. The taxpayer must have enough left to live on from each paycheck. Low-income taxpayers or those with many dependents may be exempt from garnishment. However, once a wage levy is implemented, it remains in effect until all back taxes are paid in full.

Although the list does not include automobiles, taxpayers who depend on their cars to get to work can usually persuade the IRS not to take them. That's because they may not be able to commute to work and earn money to pay their taxes. The IRS can also seize retirement accounts and residences, but it will only do this as a last resort.

When All Else Fails

Taxpayers can negotiate with the IRS by setting up a payment arrangement or by selling off an asset. An offer in compromise can work, but more drastic measures such as bankruptcy or changing employers may also be necessary.

Taxpayers may choose to gift or transfer certain assets to other family members to prevent IRS seizures. Putting paper assets into safe deposit boxes with their own tax ID number can often keep them out of reach. Taxpayers can also try to show the IRS that an asset being seized has little value. But the most effective strategy when dealing with levies is to convince the IRS that the levy will directly create a financial hardship that will only make it more difficult to pay the tax.

The IRS Auction

Once the IRS seizes your assets, it will sell them at an IRS auction to the highest bidder. Taxpayers can continue to negotiate with the IRS right up until the actual bidding process begins.

Assets sold at auction must be sold for at least their fair market value. For example, a $400,000 house cannot be sold for $100,000. However, an appraisal may be required to enforce this in some cases.

The Bottom Line

The IRS has considerable power to issue liens and levies against taxpayers who refuse to pay their tax bills. This can be a very effective means of collecting tax in many cases, but taxpayers have rights during these proceedings as well.

There are many strategies that can be used to try to prevent or delay the IRS from seizing personal and business assets. For more information, consult your financial advisor or a qualified tax attorney.