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. Many times, this issue can be resolved with an installment plan using Form 9465. However, taxpayers who owe large balances on their tax returns and refuse to communicate with the IRS will 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 it can be avoided.

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

There are two types of tax liens; 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 type of lien is listed by the credit reporting agencies and will have a substantial negative impact on the taxpayer's credit score. The only way that they can be released is via payment in full, plus interest and penalties, bankruptcy or an offer in compromise. If the time statute for tax collection expires, then that 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, then they must send Form 9423, the Collection Appeal Request, to the collection office. An appeals officer will decide the taxpayer's case within three business days. However, it should be noted that these steps will seldom prevent a lien. Taxpayers who receive notices of liens should contact the IRS or the Taxpayer Advocate Service 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.

Taxpayers who have liens placed 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 has been satisfied via whatever means, 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 is not able to recover unpaid taxes with a lien, then 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 the 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 geographic location and history of payments will determine the likelihood that this procedure will occur.

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 vast majority of a taxpayer's assets, they cannot take everything. 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

Unfortunately, the list of exemptions does not include automobiles. However, taxpayers who depend on their cars to get to work can usually persuade the IRS not to take them, because then they could not get 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. As shown in the list, 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 has been implemented, it will remain in effect until all back taxes are paid in full.

Taxpayers can try to head off this action by negotiating with the IRS and setting up a payment plan or selling off an asset. An Offer in Compromise can work here too, but more drastic measures such as bankruptcy or changing employers may also be necessary. There are also situations where taxpayers can gift or transfer certain assets to other family members in order to prevent them being seized by the IRS. 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.

Once the IRS has taken possession of your assets, it will sell them at 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.