Articles Posted in Tax Liens and Levies

A client who has unpaid IRS or State taxes is not without defenses to the IRS or State collection process of his or her outstanding income tax liability. In determining which defenses are available for their tax case,  the taxpayer and adviser will analyze many options to determine the best course of action.

  • Determine whether the income tax was properly assessed. While the IRS does not ordinarily does not assess an incorrect tax by not processing a tax return correctly, the IRS frequently will determine the tax owed of a taxpayer who has not filed an income tax return. In these cases, the IRS often computes an incorrect tax since they were not aware of any of the particulars of the taxpayer, such as the number of child they have, whether they are married, or if they had business expenses (which would offset business income).
  • Make sure that the statute of limitations (SOL) on collection of the tax debt has not expired. Normally the IRS has 10 years from when they assessed the tax to collect it. This period of time can be increased if you file an offer in compromise, or pending payment plan. Therefore, it makes sense to double check the IRS on the dates your tax debt expires since they sometimes miscalculate the date.

When a taxpayer owes the Internal Revenue Service (“IRS), they can enter into a payment plan to pay the taxes owed. Often, under this scenario the IRS may file a federal tax lien to protect their interest in case the payment plan defaults. The federal tax lien is against the assets of the taxpayer, such as real property or personal property. Examples of assets that the lien would go against include the taxpayer’s vehicles, real property, and personal property. Just for clarity, a federal tax lien comes about when you have unpaid taxes. In cases where that unpaid tax amount reaches certain dollar amount thresholds, the IRS will file a notice of federal tax lien to establish its lien status against other creditors, such a mortgage on real property by a bank. Typically, this is important since it matters when the lien has been filed, since the liens typically have to be paid off in the order they were filed. Therefore, if you first first, you would be paid off before a lien filed after you.

From a practical perspective, if there is a notice federal tax lien, it most likley has it most negative impact on real property since its rare that a taxpayer would sell a vehicle or other personal property and the lien issue even be raised by the IRS or the purchaser. This is not the case for real perty since title insurance causes an analysis of the properties title, and tax liens would show up on the lien search, and would have to be paid off at closing.

Therefore, you might ask what do you do if the proceeds of the property sale are not sufficient to pay of the tax lien in full, but you still want to sell the property?  The answer to that question is that by filing Form 14135, Application for Certificate of Discharge of Property from Federal tax Lien,  which asks the IRS to discharge the tax lien from a particular piece of real property in exchange for the fair market value of the IRS’s interest in that real property.  T complete the application, you need to attach the deed to the property, an appraisal, county valuation, contract of sale, the title report, and proposed closing statement. Be careful with the appraisal since the IRS will use that report to justify the monies it receives in the sale. This can sometimes be problematic since if the appraisal was ordered for the bank to justify the loan amount, it will typically be appraised at a value very close to the contract price. When this is a problem is when the seller, in order to entice a buyer, offers a sellers concession by inflating the selling price and then the bank loan is paying for the closing costs which helps the buyer. From the IRS perspective, they sometimes see the higher selling price (over fair value) and want that amount. In most cases we can correct their misunderstanding on this issue, but it is a item to pay attention to if your are looking to discharge a tax lien and also offer a seller’s concession.

In the event that you are in tough financial times that makes it difficult to pay your tax obligations, and this fact can be verified to the IRS that collecting from you will generate a monetary hardship, the IRS will place your tax account with them into a noncollectable position known by the IRS as conditionally “currently not collectible”. This status could be granted to both people and business corporations. Generally, this classification will be reexamined in one to two years to see if your finances have changed and you are collectable. Through the entire time that your accounts is deemed noncollectable, the IRS will not levy you or ask for payments. Most states do not follow this same rule, unfortunately.

a10-300x300In nearly all taxpayer situations, the IRS collects economic information of your noncollectable position simply by causing the taxpayer two complete comprehensive forms, which are forms 433-A, 433-B, and 433-F, that are used to verify your income and assets and your financial ability to pay your back taxes. These forms are actually challenging to complete properly since you wish to provide correct information used by the Internal Revenue Service to factor your ability to pay, while also making sure the payment plan is not to high in amount and you default it.  The factors the IRS considers is s persons age group, education level, their employment position, the cost of residing in the region of the country the taxpayer lives, medical problems, to name a small number of items they review. The IRS income uses countrywide and regional standards, consequently deviations from the standardized amounts have to be validated for every case.

The IRS defines financial hardship in perhaps a means that you’ll would not. If you don’t have any belongings, as well as your income is actually simply only plenty enough to cover your simple bills there is usually an excellent chance the IRS wouldn’t normally view your income as being a good levy source to focus on and you’d be deemed currently not really collectible “CNC”. For those who have belongings, or middle/high income, this will be more challenging to prove this position although having possessions or retirement assets may not result in not obtaining this status.  However, if the IRS recognizes you to be noncollectable, and you incur a fresh taxes debt, they will start collection activity again.

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:

Contact Information