Articles Posted in Tax Liens and Levies

It appears that the credit bureaus may be changing their policies and removing tax liens from credit reports. Often, when a person has a tax issue that is greater than $50,000 (for their federal taxes), the IRS will insist on filing a notice of tax lien in the county that you reside. Having a tax lien on your credit report has a substantial negative impact on your FICO score, so it is great news that it may not be a factor considered by banks in the future. Just to be clear, this change does not impact that you actually have a lien, or that the IRS files a notice of the lien, it only impacts your credit score and credit report.

a8-300x301-299x300As background, the tax lien is public notice that the Internal Revenue Service has a lien against your real and personal property. There are a few methods to remove the lien. The most obvious is to pay the debt owed. Once you full pay the debt, the IRS typically removes the federal tax lien notice in 30 days from the date you paid off the debt.

When you are not in the position to full pay the debt, there are other methods to deal with the tax lien notice. The first is a federal tax lien discharge which removes the tax lien from a specific piece of property. For instance, say you have a piece of real property that is encumbered by a federal tax lien. You may ask the IRS to discharge that lien so you can transfer the property to another party, as part of a sale of that property. It can happen in instances where you have no equity in the property, but it best to get rid of the property since it costs to much to keep. The other method is to ask the IRS to subordinate the lien. The IRS lien subordination does not take the lien off the property, but it does lower its standing in line, so a superior bank loan can be ahead of the lien. This is useful since banks will insist on being first in line for the equity in the property in cases where they lend you money. Lastly, (but not least) is a withdrawal of the federal tax lien. The method may be somewhat moot now that tax liens may be falling off credit reports. This method requires asking the IRS to withdraw the notice of federal tax lien even though the debt was not paid. Often the IRS would agree to this once the tax debt amount went below $25,000 (if you already had a payment plan). This method was a result of the 2011 IRS Fresh Start initiative, and has proven to be very useful. Another variety of the same type of technique, would be when you never had a payment plan before, all your tax returns were filed, and your tax debt in total is less than $50,000. In this case, you would also need to be paying the IRS under  direct debit payment plan, and never had a payment plan before. If you meet all these requirements the IRS would typically not insist on having a tax lien filed.

 

 

A question I often get from clients with a tax debt is how long does the IRS have to collect the taxes I owe?

There is a statute of limitations on collection of taxes, and it is generally 10 years. Once that time expires, you are free from the remaining unpaid tax debt and the IRS cannot collect from you unless they go to court and create a tax judgement which is rare.

a3-300x150When I say generally they have 10 years to collect, there are a few issues on when the time clock starts, and what can cause the clock to temporally stop. The 10-year time window begins when the tax debt is calculated and billed by the IRS. This would normally be when you file a tax return, or the tax audit is finished. For example, if you do not file a tax return for the 2010 tax year, you would not be free and clear in 2020, but rather 10 years from the date the tax bill for 2010 is generated after you file the tax return, or the IRS files a return for you. With a tax audit, unless it is an agreed upon case, the IRS will propose an adjustment and then you have a right to appeal or petition tax court. Once all the legal process is complete, then the tax debt becomes official and the 10 year collection statute starts.

Typically, when you owe a creditor, such as a credit card company, and you have an unpaid balance they would have to go to court and get a judgement against you before they could take steps to take your assets to pay the unpaid balance. Unfortunately, this same legal mechanism is not in place for tax debts owed to the IRS and the States. A tax lexy is a tax collection tool available to the IRS and the States where there is an unpaid tax balance owed, but it does not require court intervention. Technically, a tax levy is a seizure of your assets to pay back taxes owed. The tax levy is difference from a tax lien (or tax warrant), which does not require the taking the assets, but is a lien against your property (for instance your home), similar to how a bank would have mortgage against your property for the balance you owe to the bank. However, a tax lien will affect your FICO score in a very substantial negative way, so it is not harmless.

a1-300x300Before your assets can be seized by the IRS, typically you have been given a fair amount of warning that a tax issue exists. The first step is that the IRS will assess the taxes, either from a tax return you filed, or if you did not file a tax return they would prepare a substitute tax return for you. They will then send you a tax bill and demand payment. They will usually send out three bills, over a 90 day time period. If that tax bill is not paid, your account will go into collections and they will issue a CP504 letter (notice of intent to levy). Even at this stage, the IRS is not levying your assets. If the CP504 letter is not responded to, then they issue a CP90 Notice, that is also known as a Notice of Levy. If that demand letter is not responded to, they have a right to levy and take your assets.

The assets that the IRS and States most likley to levy are wages, bank accounts, physical assets, social security, accounts receivable, and vehicles. From a collection perspective, the IRS will use the levy mechanism that will produce the quickest and easiest method to get your assets to pay off the tax debt. For wage garnishments, they would notify your employer of the tax debt, and under the law in most cases can receive a substantial amount of your salary, often leaving the taxpayer with not enough money to pay their bills.   For bank levies, the IRS contacts your financial institution and tell them to put a 21 day hold on your account. The hope is that during those 21 days an alternate payment mechanism can be worked out with the IRS, such as a payment plan. If that does not happen, at the end of the 21 days they take the assets in the  account to pay the balance owed. For assets seizures (cars, motorcycles, boats) the IRS can just seize them and sell the asset to pay down the debt.

a4.jpg
There are many scenarios that may result in an individual accruing tax debt. In cases where an individual is notified by the IRS via a Notice and Demand for Payment of an outstanding tax bill, it’s wise to address such matters in a prompt manner. At times, an individual may refute the amount or existence of tax debt. When contacted by the IRS, individuals who fail to take action with regard to an outstanding tax bill may be subject to fines and penalties including a federal tax lien.

Individuals who receive a Notice of Federal Tax Lien are likely to have many questions and concerns about how a lien affects their financial standing and credit. An attorney who handles tax issues can assist with problems that stem from and disputes related to tax debt.

When the IRS issues a tax lien, the government is effectively notifying other creditors of its legal right to a taxpayer’s property. A lien not only attaches to all of an individual’s existing assets, but also to any future assets that are acquired or purchased while a lien is still in place. Individuals who are subject to a tax lien are likely to encounter difficulty when attempting to secure a home or car loan or other lines of credit.

a1.jpg
Tax day, April 15, is just a few days away and if you are like many New Yorkers, you may be hoping to win the lottery before then in order to be able to pay your tax bill on time.

Believe it or not, you may not need a winning lottery ticket in order to make good with the IRS this tax season.

A tax payment plan, or an IRS Installment Agreement, is a great way for people who cannot afford to pay their tax debt to avoid getting into trouble — and more debt — with the IRS. Here is how it works:

a5.jpg
This week, actor Robert De Niro was hit with a tax lien from the IRS on his Manhattan condo for owing $6.4 million in unpaid taxes. De Niro took action right away to pay the debt, and his spokesperson said that the taxes were unpaid because he had not received the notices.

This isn’t the first time that a celebrity has run into trouble — or a misunderstanding — with the IRS. In fact, there are at least three lessons that celebrities have had the opportunity to teach us about tax liens, in particular.

1. Make sure the IRS has your current address.

a3.jpg
Is the upcoming tax season drawing up a sense of fear and anxiety within you over your unpaid taxes? Do you feel overwhelmed and at a loss over how you will ever be able to pay the back taxes you owe? Are you expecting your tax debt problems to only get worse with the upcoming tax deadline?

If you answered “yes” to any of these questions, you can now breathe a sigh of relief because we are here to help.

Our firm of skilled tax attorneys knows how to work with the IRS to:

a4.jpg
IRS wage garnishment is a form of tax levy imposed by the tax authorities for unpaid tax debt under the tax law. A tax levy is a seizure of your property to satisfy an unpaid tax bill. Wages and salary include fees, bonuses, and commissions and can be subject to the tax levy. The tax levy may also attach to future payments until the levy is released.

Under the tax law, the IRS can not levy a taxpayer until three requirements are met: 1.) The IRS assesses your tax and sends you a Notice and Demand for Payment; 2.) You did not, or refused to pay, the tax; 3.) The IRS sent you a Final Notice of Intent to Levy and Notice of Your Right to a Hearing, at least 30 days before the levy. If the IRS levies your wages or salary, the tax levy will end when: 1.) The levy is released; 2.) you pay your tax debt in full; or 3.) The time expires for legally collecting the tax (usually 10 years). It is important to note that there is no limit on the amount that the IRS can levy from your wages. There is, however, an amount that is “exempt.” Anything you earn about the “exempt” amount is what the IRS can tax levy from your wages. This “exempt” amount from the tax levy is determined based on your filing status of your last tax return, how frequently you are paid, and the number of exemptions you claim. Overall, it tends to be that only about 10% to 20% of your wages are exempt from the tax levy.

Under the tax law, New York State Department of Taxation can not issue a levy until a tax warrant is filed (in most cases). A tax warrant is a formal legal action again a taxpayer. The warrant is a public record filed with your local county clerk’s office and the New York State Department of State, disclosing that you owe taxes to the State. The warrant states that the Department of Tax has a right to collect your tax debt through a tax levy, income execution, and seizure and sale of property. The warrant may show up on your credit report, which as a result will make if more difficult for you to borrow money or buy and sell property. For levies with the New York State Department of Tax, you may remove all or part of a levy if you: 1.) Pay your tax bill in full; or 2.) Document the funds as exempt (if they are exempt, the NYS Tax Department will work with you to resolve the levy). Examples of exempt funds include: social security and supplemental security income, public assistance (e.g., welfare), alimony or child support, benefits such as unemployment, disability workers’ compensation, and public or private pensions, under the tax law.

a7.jpg
Once the Internal Revenue Service (the “IRS”) has begun collection action, the taxpayer has several options. One of which is establishing a Currently Not Collectible, or “CNC” status. To qualify, a taxpayer must demonstrate that payment of the tax liability would impose a financial hardship.

Financial hardship means that paying the tax liability would leave the taxpayer without sufficient resources to cover necessary living expenses1.   Upon establishment of CNC status, all IRS collection and enforcement activity is suspended. In other words, the taxpayer will no longer have to worry about wage garnishments or bank levies.

Establishing CNC status does not relive a taxpayer of underlying liabilities, and therefore it is important to know that penalties and interest will generally continue to accrue. Further, tax liens may be placed on a taxpayer’s property and all returns must be filed, to date, for qualification.

a6.jpg
If you are audited by the IRS and owe money, the IRS collections department has a process that determines what a taxpayer can afford to pay. The IRS Collection Financial Standards are used in calculating the repayment of delinquent taxes. These standards are used to determine if a taxpayer is able to pay a delinquent tax liability.

The IRS can determine what your total income is and what your expenses are. These numbers are collected using IRS forms and your numbers are compared to national set standards.

National Standards apply nationwide, and you are allowed the total national standard amount for your family size, without questioning the amount you actually spent. These standards can include items like transportation, housing and utilities, clothing and miscellaneous. The amount of the National Standard depends on the size of the family, and taxpayers can claim the total amount for the number of people in the family, without needing any documentation or proof. There are also National Standards for out-of-pocket health care expense, and these are calculated by a set standard amount per person, and again, there is no questioning the amount actually spent.

Contact Information