Collection Actions on a Tax Debt

If you owe back taxes or have unfiled returns the IRS will give you the opportunity to pay the debt. The amount of time they allow for a taxpayer to pay their tax debt varies from case to case. The reason for this is because tax debts occur in a variety of ways and the IRS has different processes and procedures for each way a tax debt is determined.

Once the time frame of allowing a taxpayer to voluntary pay a tax debt the IRS will enforce collection actions the law allows them to take in order to collect a tax debt. Collection actions include the following:

  1. Seizure of Property
  2. Issue a Tax Lien Notice
  3. Serve a Summons

Seizure of Property – Wage Garnishment or Bank Levy

This action is also described as a “levy” and is the most harmful action they can take. The IRS can take real property such as your house and car. They will sell them and the proceeds will be applied to your tax debt.

A levy can also be on your wages, bank account, and any federal payments. If it’s on wages the IRS doesn’t take an amount they determine is fair. Instead, they leave you an amount they calculate based on your status. For example, if you make $3,000 each pay period they will take everything above approximately $400 in some cases. The wage levy, or wage garnishment, will continue until the tax debt is paid in full. In this case one would only be living on $400 each paycheck until the tax debt is paid.

When a levy is issued on your bank account the IRS will freeze all money in the account at a given date and take it. What makes this levy tough is that the IRS will issue a bank levy at random. A taxpayer can never know when a levy will come. It may happen after a direct deposit of your paycheck or when you only have a few hundred dollars in the account. One thing for sure is that it always disrupts one’s life when it does get issued regardless of how much is taken. Professional tax help services are needed in most cases.

Issue a Tax Lien Notice

A tax lien is an IRS claim on your property. The claim is not just for your current property but for all future property as well. A tax lien can be easily described as a way the IRS gets priority above any creditor’s claims. A tax lien can be placed on person’s credit report or may be placed on their home.

Although this action may not appear serious because it doesn’t affect a taxpayer’s cash a tax lien can be destroying for a taxpayer. It substantially reduces your credit score which affects how expensive borrowing money is as well as how one may be viewed when a job requests a credit report before offering employment. A tax lien can also put significant barriers on a taxpayer who may need to sell their home because not all proceeds will go to the mortgage company since the IRS tax lien has priority.

Serve a Summons

The IRS uses this collection action when the total tax debt owed to them is not fully determined. For example, a taxpayer owes $15,000 for tax year 2007 and 2008 but has not filed their tax returns for 2009 – present.

A summons is when you must appear before an IRS officer so they may gather information to determine the true amount of a tax debt. A summons may require the person who owes the tax debt to

  • Testify
  • Bring records to be used for analysis of true tax liability
  • Produce documents needed to determine taxpayer’s ability to pay

In any of these cases it’s important to understand that the problem does not need to be addressed alone. This is what we do every day. We are good at it. Call for a free consultation with a CPA, attorney, or enrolled agent and see how we can solve your tax problem.