The IRS & Wage Garnishment
In an effort to collect delinquent taxes, the IRS can use both administrative and judicial measures. In most cases, the IRS opts to go the administrative route and levy or confiscate your personal assets. However, any levies must take place within the 10 year statute of limitations. Judicial procedures, which involve filing a lawsuit against you, must also occur within the 10 year statute of limitations. The statute of limitation sets a guideline of 10 years for the IRS to collect your taxes once it is in fact assessed by the IRS.
For the government to secure a legal claim, they must file a Notice of Federal Tax Lien (NFTL). However, this doesn’t lead to actual seizure of your assets. Instead, a levy allows the IRS, in reality, to seize assets, money, or wages. Usually this is separated into two groups.
1. Often referred to as a “seizure”, this group usually includes personal and physical property in your possession.
2. The second group, often referred to as a “garnishment” or “levy” includes financial institutions where you may hold bank accounts, as well as through your employer through which the IRS can garnish your wages.
Before the IRS can file a lien, they must issue a levy. A levy must be filed before they can they seize your property. Typically, levy action is the severest form of collections the IRS will take against most taxpayers who owe back taxes. When you hear an IRS employee talk about an “enforced collection”, this is the type of action they are referring to.
Notice of Intent to Levy (Form Letter CP-504)
Around 30 to 45 days after you have received an actual tax lien, you’ll be automatically sent another notice, known as the “Notice of Intent to Levy”, which will contain a label in the upper or lower right corner stating “CP-504.” While the IRS is required by law to send you a CP-504, the only thing you really need to take notice of is the date it was sent. Let’s just say that 30 days from this date, the IRS can start doing ugly things to you such as bank levies and wage garnishments.
Final Notice of Intent to Levy (Letter 1058)
Exactly 30 days from the day you receive a CP-504, you’ll receive another notice courtesy of the IRS, labeled “Final Notice of Intent to Levy.” You will see “Letter 1058” in the upper or lower right corner. There are two reasons that Letter 1058 is so important.
1. This gives you your first opportunity to file an appeal.
2. The IRS can actually levy you 30 days after you receive this letter.
When it comes to Letter 1058, this is what you need to know. If you opt not to file an appeal, the IRS has every right to initiate levy action 30 days after this notice. Essentially, letter 1058 is something you CANNOT ignore, unless you are ready to face some significant financial repercussions.
Keep in mind that Letter 1058 doesn’t automatically mean the IRS will levy you. This is especially true if they do not have the information needed to issue a levy. For example, if the IRS is unaware of where you work or what bank you use, they can’t issue a levy. Of course, if you are still employed at the same place you were when you filed your tax return, the IRS is well aware of where you work. How? Your employer sent them a copy of your W-2. In addition, if you have ever requested that the IRS deposit a tax refund check into your banking account, they have this information as well.
If you received letter 1058 from the IRS intent to levy fill out the form to the right of the article for a free case review today.
Bank Account Levies
The actual action taken by the IRS to collect owed taxes is an IRS levy. For example, the IRS can issue a bank levy to acquire any cash in your checking or savings account. They can also levy your wages or any accounts receivable, if you are a business owner.
Any company, institution, or person that is served a levy is required by law to comply or deal with the IRS themselves. If the IRS issues a levy against your bank account, your bank has no choice but to comply. The bank must take the funds from your account to which the levy is attached on the day they process the levy. For 21 days, they are required to hold the funds. At the end of the 21 days, they must send this money to the IRS. If they choose not to comply, they will be penalized by the IRS.
The reason a bank is not allowed to release your funds to the IRS for a 21 day period is because it provides you with the opportunity to contact the IRS and amend any errors regarding your accounts. If there is a valid dispute regarding the amount of taxes you owe, the Area Director of the IRS may grant an extension of the 21 day period. In addition, the levy can be released at any time during the 21 day waiting period. During this 21 day period, it is critical that you exercise your right to an appeal. In this instance, you want to file a Collections Appeals Process (CAP) Appeal. The IRS is required to hear your case within 5 days of the date you file your CAPS Appeal.
It should go without saying that you want to avoid a levy at all costs. When the IRS issues a levy on a bank account, it is only for the exact day the levy is received by the bank. Keep in mind that the bank has no choice but to take whatever money is in your account that day up to the full amount of the levy. 21 days it must be sent to the IRS. This levy doesn’t impact deposits in the future. What does this mean? It means that if your bank account is levied today to be sent to the IRS 21 days later, you can make a deposit tomorrow that cannot be touched by the levy.
On the other hand, a wage levy is completely different. When a wage levy is filed with your employer, it remains in effect until the IRS contacts your employer and tells them the wage levy has been removed. To be honest, an IRS wage levy often takes so much of your paycheck that it is impossible to support yourself. In most cases, an IRS wage garnishment will take 70 to 80% of your paycheck. For most of us, this is the worst thing the IRS can do.
Property Exempt From Levies
The IRS does make mistakes and there are times that levies are completed on property that may be exempt from this aggressive collection. State law is not irrelevant if a certain property is excluded from IRS levies. To name a few the following is exempt from IRS levies:
- School books and apparel (not luxury apparel)
- Books and tools of a trade, business or professions up to $4,400 (2013)
- Unemployment Benefits
- Certain railroad and military service annuity and pension payments
- Workers Compensation payments
- Certain payments made for service-connected military disability.
- If you are experiencing a levy from the listed above items fill out the form to the right of the article for a free case review today.
Personal Property Levies
Not only does the IRS have an extremely broad levy power, but they aren’t required to take you to court. The IRS can use its authority to take possession of your property in order to collect on back taxes. In order to do this, all they have to do is file a notice in demand of payment, wait for 10 days, and then file a 30 day notice of intent to levy. When the 30 days are up, they are allowed to levy. A levy’s outcome is meant to compel you to turn over your property to the IRS. Any money the IRS gains from a garnishment or levy is applied to your tax debt as follows:
1. The profits of the levy in sale are applied to the expenses.
2. Profits from the levy are then applied to the tax explicitly related to the levied property.
3. Profits are then applied to the delinquent tax liability that was responsible for the whole problem in the first place.
4. Any funds amassed from a levy are considered to have been paid involuntarily. As a result, you are not allowed to tell the IRS how you want these funds applied. If you make payments voluntarily, you do have the option of specifying how the funds are applied, which is another reason it is best to avoid a levy.
As discussed above, the IRS must notify you of their intent to levy you at least 30 days before the levy. A Letter 1058, which states “Final Notice of Intent to Levy” across the top, is used to do this. When you receive a Letter 1058 from the IRS, you have a wide variety of appeals options in regards to the proposed action. Keep in mind that these appeals must be submitted within 30 days.
Obviously, the best way to avoid a levy is by being proactive with your communication to the IRS. Of course, you also need to comply with all information request deadlines and negotiate one of the following as soon as possible.
Offer in Compromise
The number one cause of levies is a lack of follow through. While filing an Installment Agreement request or Collections Due Process (CDP) is an excellent way to delay the process, the IRS does have the right to throw them out as frivolous. As a result, your Installment Agreement and Appeals request could be canceled and voided.
Collection Due Process Appeals
You have the option of filing a Collection Due Process (CDP) appeal when you believe that the planned enforced collection activity is unjustified because there is a better option for resolving the tax situation. Essentially, a CDP is filed when you oppose the proposed levy action. When you receive a Letter 1058, Final Notice of Intent to Levy, you can file a CDP as a response.
A CDP appeal can be filed in any of the following situations:
A Notice of Federal Tax Lien is filed against you.
You receive a Final Notice of Intent to Levy
You receive a Notice of Jeopardy Levy
The IRS takes your state tax refund
When any of the above actions are taken against you, you have a 30 day period to file a CDP. This is done by using the IRS Form 12153. It is filed with the Revenue Officer, service center, or the division that sent you the notice.
If you request a CDP hearing within the required time period, the proposed levy action will usually be stopped. Keep in mind that the Appeals division is rather busy, CDP are given a lower priority than other types of appeals. It may be several weeks before a Settlement Officer is assigned to your case and you receive a hearing.
If your CDP appeal is not filed on time, you have the option of requesting an “Equivalent Hearing” and Appeals will hear your case. However, you will not be protected from levy action while waiting for the Equivalent Hearing.
You will receive a notice from Appeals confirming that they have received your request. When you do, make sure you look for the following information included on the notice:
If scheduled, the date and time of your hearing
Whether you should call them or they will be calling you
Any request for financial information (Form 433), as well as the deadline set for sending this information
It is crucial that you keep all appointments and deadlines set by Appeals. The truth is that if you miss a deadline or hearing, you will not receive another. If there is a legitimate reason, such as a work schedule, that the date is inconvenient, it is perfectly okay to call and request another date and time. In most cases, they will accommodate a reasonable request.
Any financial information that you provide to the IRS should correlate with your proposed alternative collection option. For example, if you have asked for an Installment Agreement, then your Form 433, as well as any supporting documents, should indicate the amount you believe that you can pay monthly. Along the same lines, if you are requesting CNC status, any financial information you submit should pretty much indicate that you are dead broke and don’t make enough to pay for your basic living expenses.
If Appeals does agree to a resolution option, they will draft the agreement and have it delivered to you to be signed. As you should with any paperwork you receive from the IRS, carefully read through the entire document to make certain you are signing what you think you are signing. It is also highly recommended that you have the document reviewed by an experienced tax professional who can offer advice on the agreement.
Obtaining Levy Releases
Be aware that the IRS has no obligation to release a levy, unless it was inappropriately violated. For example, if a levy is sent to a client’s bank regarding a tax period that has a pending Installment Agreement request, the levy is considered invalid. It is not unusual for the wrong “Installment Agreement Pending” code to be entered by the IRS.
Your ability to obtain a levy release can vary depending on what stage of collection your account is in. For example, if a levy is issued by ACS, ACS must be directly contacted by phone, which usually takes around 2 hours.
How to Obtain ACS Levy Releases
1. Call ACS and prepare to wait 45-90 minutes for an agent.
2. After the agent is on the line, tell them up front that you are calling for a release of levy.
3. If the account is supposed to be in the Installment Agreement pending status, be certain to have a current transcript downloaded from the IRS in your hands before you make the call. You will need to make certain the correct Installment Agreement pending code has been entered or be ready to provide evidence that the account is supposed to be in pending status.
4. If, according to IA pending criteria, the levy isn’t releasable, then it’s time to consider economic hardship criteria. If you report that the taxpayer may suffer an undue economic hardship as a result of the levy, you must be able to prove it. If you own a business, the most common reason cited is an inability to make payroll. However, you will need a recent payroll summary and proof the payroll checks will be returned due to insufficient funds. Individuals should be able to prove that the levy would leave you unable to pay your basic living expenses. Essentially, you will need all the information that you would use to complete a Form 433-F.
5. If the levy was issued without past communication, you will need to be able to provide the information from the 433-F and negotiate an Installment Agreement on the spot. If your personal tax liabilities are less than $50,000, the ACS representative can create an Installment Agreement and release the levy.
6. If the above options do not get you anywhere, you will need to file a Collections Appeal Request.
Revenue Officer Levy Releases
If the levy was issued by a Revenue Officer, you will need to call the RO directly in an effort to resolve the issue. If he or she refuses to release the levy, you should consider filing a Collection Appeal Request.
Collection Appeals Program
The Collection Appeals Program (CAP) is rather interesting with the IRS world. This is a truly time-sensitive program within the IRS. The CAP program was created by the Congress in 1998 in an effort to create an urgency of action and provide timely solutions to a taxpayer’s issues.
To request a CAP hearing, you must file an IRS File 9423. It is only available for the following actions:
An actual levy
Filing of a Federal Tax Lien
Denial of a lien discharge or subordination
Termination of an active Installation Agreement
Denial of an Installment Agreement request
In the event one of these actions takes place, you can file a collection appeal request with the office responsible for issuing the action. In most occasions, this will be directly with your Revenue Officer. The best thing about the CAP program is the fact the IRS is required to give you a hearing with a manager of the department that filed the action against you. This hearing must be within two business days of the day you file the request.
Under the tax code, you are permitted a stay of enforcement when a CAP request is filed. If a manager conference is held before the filing of Form 9423, you were given two days to file it after the manager hearing to receive protection against further levy action. In the event you are appealing an Installment Agreement denial, you are given 30 days to file the appeal. You receive the same protection during this time. Be aware that a managerial hearing isn’t mandatory when filing a CAP on an Installment Agreement’s termination or denial.
You have 10 days to file a CAP if you are appealing a seizure action. In some cases, you may be entitled to a CAP hearing and CDP hearing for the same notice. However, you cannot file both. The IRS only allows you to file one. If you need the extra time provided by the CDP, be sure to file it. However, if you want this to be over with as soon as possible, opt for the CAP program.
In the majority of cases, Appeals is mandated to hear you and make a decision within 5 days. In regards to Appeals, CAPS are given the highest priority. During these 5 days, the levy action is stopped (if it has not already been) as the result of the additional government legal requirements discussed above. There is an exception, if the Collections’ personnel believe that the CAP is being filed solely with the purpose of delaying levy action and preventing collection. For example, individuals have filed CAP appeals to give themselves a few days to move money out of the country or to drain accounts so that the government is unable to take it. According to the IRS, this is a “jeopardy” case, which means they believe the collection is in jeopardy. In this situation, levy action almost always continues.
If Appeals decides in your favor, Collections must immediately act upon the decision. Of course, it goes the other way as well. If Appeals sides with Collections, collections will resume unless the thirty day rule mentioned above for Installment Agreement terminations and denials applies.
Overall, the CAP program is a great way to get immediate relief from aggressive tax collections by the IRS. However, if your goal is a favorable outcome, you will need to be certain all of your ducks are in a row.
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