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This Special Report is meant to familiarize you with the Tax Collection process and does not cover all the possible scenarios that a taxpayer may encounter. This Report covers the following subjects (listed in the order of usual occurrence). References to State actions may vary by State.
The Billing Process
After you file a tax return that reflects a balance due and you don't send in a payment with the return, the government will start sending you a series of bills that contain progressively harsher language with each bill. A bill is sent every 30 days. The fourth bill, at 120 days, contains language threatening legal actions. If that bill goes unpaid, the case is referred to the Automated Collected System (ACS). From there a Revenue Representative will attempt telephone contact with you and may take levy actions. These Revenue Representatives in ACS may also accept payment agreements with you. As a case progresses, it may be referred to field collection personnel for more aggressive action.
A tax lien may be filed against you if the case falls into certain parameters that the Internal Revenue Service feels it needs to protect its interest. Generally when your tax debt exceeds $10,000. States may file at lower amounts. A tax lien is filed in the county of the taxpayer's residence, or any other county in which the taxpayer may own property (such as vacation or lake homes). In the case of a business the Internal Revenue Service will also file a tax lien at the Secretary of State's office. A tax lien attaches to real estate and personal property. Filing a tax lien does not mean that the Internal Revenue Service will take seizure action right away. Some personal property is exempt from the tax lien unless the Internal Revenue Service can and does perfect their tax lien by recording the lien on the title of that property, such as auto's and other property that is titled. The Internal Revenue Service is not likely to enforce foreclosure or seizure on their tax liens unless it is a last effort to collect the taxes. However, if the property is sold or transferred, the Internal Revenue Service stands to collect any moneys that would be due to the taxpayer upon the sale or transfer.
When the Internal Revenue Service files a tax lien against a business, anyone who holds a secured interest (UCC) in the accounts receivables or inventory of that business only has 45 days to get their interests satisfied. Thereafter, under Federal statute, the Internal Revenue Service takes a priority position in those assets and they can seize those assets without any consideration for the secured creditor. This does not however, change that creditor's secured position in regard to other creditors. States often cannot foreclose on their tax liens on homesteaded property; real estate that is the primary home of the taxpayer. When a taxpayer owns real estate that is jointly owned with another party who is not jointly liable for the taxes, under some State laws the Internal Revenue Service cannot seize and sell the property unless they get permission to do so from the non-liable party.
If the Internal Revenue Service has not been able to resolve payment of a delinquent tax liability with you they may serve a legal notice to your bank, or any other holder of assets such as stocks, bonds and retirement accounts; to surrender the property or moneys that they have in your accounts. This includes any and all accounts in which you are a joint owner, or which may have your name on such as your children's savings accounts. In some cases you may be able to exempt some of these accounts. Generally the bank will turn over to the Internal Revenue Service the balance that was in your account at closing of the prior day. Therefore, any checks that come in on that day, or thereafter, may bounce. However, in most cases, any deposits made the day after the levy is received by the financial institution, won't be turned over to the Internal Revenue Service. The bank is instructed to hold or freeze the funds in your account that were on deposit, for 21 days before they remit the funds to the Internal Revenue Service. This gives the taxpayer an opportunity to resolve the tax liability or to prove that the funds are exempt from levy. The levy is only good for the day on which it is served to the bank. It does not attach to funds deposited thereafter. Although in some States the bank levy is continuous. Again, in most cases, the bank will determine your balance that is subject to the levy as the closing balance on the day before the levy was received. States will often exempt 75% of deposits that were from wages and on deposit less than 20 days.
Although some States take 100%. The Internal Revenue Service will release a bank levy if your can provide proof of a notice that you will be evicted from your residence or that your utilities will be turned off within the next 10 days.
A wage garnishment, also known as a 'continuous wage levy', is a legal notice sent to the taxpayer's employer that instructs the employer to withhold and remit to the government additional moneys from the employee's paycheck for delinquent taxes. Once a wage levy is issued they are very difficult to get released, but not impossible. It is also possible to negotiate with the government to reduce the amount that will be withheld. The Internal Revenue Service and the States vary in the amounts that they may take from wages.
Most States will only take 25% of your wages after legal withholdings, the same as any other creditor who may garnish your wages.
The Internal Revenue Service is the most aggressive. For example, for a taxpayer who is married and has a wife and two children, and is paid on a bi-weekly basis, they will allow the taxpayer to keep approximately $1,000 of his net paycheck after legal withholdings (Social Security, Federal and State withholdings) per Internal Revenue Service Publication 1494 for 2010. This amounts to approximately $2,170 per month for the taxpayer to live on, which for most people (especially a family of four), this is impossible to live on. Then subtract from that any health insurances and other payroll deductions. Most States can only levy 25% of the employee's net paycheck after legal withholdings. A couple are aggressive and take 100%. Some States' exception is if the net paycheck is equal to or less than minimum wage earnings.
As a part of the collection process, if other efforts have not been productive, the Internal Revenue Service may seize items of personal property such as: cars, boats, snowmobiles, lawn tractors, valuable collectibles, and anything else of value. Before they can seize these items the government must be able to sell the property at a price that will pay for the cost of seizure, storage, and sale; pay off any prior secured creditors; and make a fair amount of money from the sale to apply to the taxes due.
States have a program by which they can block the renewal of business and professional licenses if you owe them $500 or more for income or trust taxes (withholding or sales taxes). However, it is possible to work out agreements with the State so that you can keep your license and continue in your business or profession. This program also covers CPA's, attorneys and other licensed professionals.
The States have a program through which they can stop the delivery of liquor product to any business that sells liquor such as bars and restaurants if that business owes $500 or more in income or trust taxes. This law does not provide any way to get around it such as payment agreements. Either the tax is paid or you are denied product from your supplier. However, the Revenue Officer does have the discretion in some cases not to refer you for this action if you can satisfy his needs to get the tax paid.
Sometimes a taxpayer will not file or pay taxes on time due to extenuating circumstances that are beyond the taxpayer's control. In such cases the Internal Revenue Service and State will abate (forgive) part or all of the penalties and/or interest. The government will require you to provide some kind of convincing evidence of the circumstances that made it impossible for you to file or pay on time. Some examples are: fire destroyed records; theft of records or moneys; embezzlement by a trusted employee; an incapacitating illness of the taxpayer or key person; or any other incident that destroyed records or took moneys from you that was not controllable by you, which means something sudden or unexpected in which you could not control. The Internal Revenue Service and State has been known to abate penalties where the taxpayer relied on professional advice from their accountant, CPA or attorney on substantive tax issues. For example. a substantive issue is determining if you are required to file a tax return, whereas the filing date is not a substantive issue but a procedural issue.
Offer in Compromise
The Internal Revenue Service and State will consider settling your tax liability for an amount substantially less than what is due. This is often determined without regard as to the tax balance. It is based upon the taxpayer's ability to pay. There are many considerations, but in short it is based upon the net value of the taxpayer's assets plus the amount the taxpayer could pay on a monthly basis computed at a present value rate.
A simple example:
A taxpayer owes for tax, penalty and interest $86,000 The net value of an auto the taxpayer owns is 10,000 The taxpayer can pay $300 per month The value of $300 per month is 3,600 The Internal Revenue Service will accept to settle the case 13,600
That's a reduction of $72,400 !
In several cases taxpayers have settled tax bills larger than this, and smaller ones, for as little as $20!
It's not as far fetched as you may think.
An offer in compromise usually requires that the amount of the settlement to be paid in full upon acceptance of the offer. This requires the taxpayer to seek a source from which to borrow the funds. However, there are exceptional cases where the amount of the offer may be paid over a period of time of up to 2 years. The State will consider a Compromise on other standards and will sometimes agree to accept a settlement that represents the same ratio as the Internal Revenue Service accepted. In the above example the ratio was 16% (16 cents on the dollar), or a 84% reduction.
If you are unable to pay your tax bill in full the government will often allow you to make payments over a period of time. In doing so you may be required to submit a full financial disclosure; a financial statement that reveals all your assets, liabilities, income, and living expenses. The Internal Revenue Service will scrutinize your information for any assets that may be sold to satisfy all or part of your tax bill. They will also scrutinize your income and living expenses. Any expenses that they feel that are not necessary they will disallow. Tax debt takes priority over any unsecured debt (credit cards) and over expenses not considered to be 'necessary' (a subjective term). Subtracting allowable expenses from income gives an amount that can be paid monthly, and they will ask for all that is left over. The mistake that people make on listing their expenses are forgetting about expenses that occur on a regular basis but not necessarily each and every month such as: home maintenance, auto maintenance, children's school needs, clothing, personal care, etc. Because of this, taxpayers often over-commit themselves to the government on their ability to pay and will wind up in default, and in more serious trouble, within 6 months. With businesses the Internal Revenue Service is much more aggressive with what they will accept, and they will demand more from you. If you owe for employment taxes there are possible implications of criminal charges and seizure of the business.
If your tax debt is less than $50,000 you can request a Streamlined Installment Agreement whereas you do not have to give a full financial disclosure. You are required to make monthly payments that will pay off the tax debt within 6 years including penalty and interest accruals. There is a formula to use.
The Internal Revenue Service and States has vast and powerful collection tools to enforce payment from you. But these tools and the process can be simplified and less painful with careful consideration. There are also programs within the government to make resolving your tax burdens much easier, and often at a reduced amount!
Copyright © 2001-2020 Gary W. Lundgren, EA All rights reserved.