Dealing With A Tax Levy

We recently spoke about IRS liens. Let’s continue the conversation and talk about levies.

A levy taps into our primal fear of the IRS. This is where they come and take your checking account, repossess your car and sell your house. You get behind on your taxes and you get to relive the Grapes of Wrath.

Rest assured that your fear of losing your car and your house are greatly overblown. Your fear of losing your checking account may not be, however.

How did you get to this point? 

Somewhere in the recent past, the IRS sent you a notice – actually, a series of escalating notices. An early one may have read something like:

According to our records, you have an amount due on your income tax.”

There will be several notices, increasing in intensity. It is likely that you ignored them. Perhaps you just knew that their numbers were wrong. Perhaps you were broke and had nothing to send. Whatever the case, the one thing you failed to do was talk to them. 

Eventually you will receive the CP 504 letter (“Intent to Seize Your Property or Rights to Property”), where the IRS says that they intend to intercept your state tax refund. The notice also allows IRS to increase your penalties, but it is the state refund that catches people’s attention. Not that much attention, though. I do not get too many calls on a 504. Chances are if you are behind on federal taxes, you are behind on state taxes too.

The 504 is the demarcation line when your account leaves Automated Collections. You are now moving to regular Collections. The 504 is also the last notice before the IRS sends Form CP 90 “Final Notice of Intent to Levy and Notice of Your Right to a Hearing.” 

If you have a CP 90, you have serious business. The IRS will send it certified mail to your last known address, so if you have moved – especially if you did not file returns – you may not even know that this notice went out. The IRS has to go through certain hoops before it can levy, and this notice is key. You have 30 days to claim a Collection Due Process Hearing. If the IRS moves against you without issuing a Final Notice, or before the 30 days are up, you can stop them. If you claim a CDP Hearing, you can present your side of the story.

What if the 30 days pass?

One thing the IRS can then do is levy your bank account. How do they know your bank account information? One way is pretty simple: you had your refunds electronically deposited to your bank account. They can still get to that information otherwise, but electronic transfer made things easier for them. A bank levy is a one-time shot. The IRS instructs the bank to turn over whatever you have in your account as of a given date. The bank has 21 days before they have to turn over the money. There are important points we should review:

·        It is 21 days from when the bank received the notice, not the date of the notice.

·        The levy amount is your balance when the bank received the notice. If you deposit money later, that later deposit will not go to the IRS.

·        If the IRS wants that later deposit, it will have to issue another levy.

My experience has been that banks may not be overly concerned with informing you about the levy. Odds are that you will have less than 21 days before you find out, unless you attempted to withdraw funds or some similar action shortly after the bank received the levy. I have had clients who learned about the levy after the 21 days ran off. Let me tell you, there is almost no chance of getting that money returned when that happens.

Another thing the IRS can do is a wage levy. The IRS contacts your employer and tells him/her to send money. IRS Publication 1494 has tables telling you and your employer how much of your money you get to keep. For example, if you are divorced with two kids and are paid monthly, you keep $1,720. The balance goes to the IRS. The upside is that the $1,720 is after taxes, health insurance and whatnot. The downside is that you and your two kids might not be able to live on $1,720 per month.

It gets worse. The wage levy is continuous. It need not be reissued like a bank levy. People have quit their jobs over a wage levy. There isn’t much an employer can do. If your employer refuses to remit the money from your paycheck, then he/she is personally liable to remit the money from his or her own funds. Good luck finding an employer who will do that for you.

Can the IRS levy monies you receive as an independent contractor? You bet. Can it levy your social security? Yes, up to 15 percent. Can it go after your PayPal? Surely, you jest. Of course they can.

What about your house and car? Not so much. Let’s go over some statistics to put your mind at ease. In 2011, the IRS issued almost 3.8 million third-party levies. The IRS seized less than 800 houses, cars and other personal property. The IRS does not want the hassle of taking and selling your property. It wants cash.  It does not want your car, unless your car is a late-model Ferrari or something of the sort. In fact, if you have minimal equity in the asset, the IRS is prohibited from taking the asset from you.

Alright, you have received a Final Notice. What do you do next?

First, be aware of time. Remember that you have 30 days. Use it.

File a collection appeal. This will temporarily pull you away from the part of the IRS that is trying to collect and puts you in another part that will hear your case. How long is temporary? Figure on about 4 to 6 months before your hearing. 

Be ready to talk about a payment at the hearing, though, because that is where Appeals will take the conversation. They will ask for full payment immediately, the same way my dog is always hopeful I have brought her home a hamburger or something similarly tasty. 

What if you are truly broke? Then the IRS may place your account on “cannot collect” status. This means that you are so broke that you cannot make a payment, any payment. How can that happen? Let’s say that you could not pay rent if the IRS wiped-out your checking account. Perhaps you could not pay for necessary prescriptions. The term is “hardship,” and they will consider this. 

What if the taxes belong to your ex-spouse from a year when you filed a joint tax return? An innocent spouse claim will get the IRS to stay collection.

What if you file an offer in compromise? An offer will get the IRS to stay collection.

What if the IRS assessed you without your knowledge? Let me give you an example. I represented a client whose wife passed away. He received IRS notices when she became gravely ill, and upon her death he retreated from the world for a year or more. The IRS – not hearing from him – made adjustments and assessed all kinds of taxes and penalties. What did we do? We requested a reconsideration, which is also a way to stay collection.

Then we get to a payment plan. The particular type of plan depends on how much you owe. If you owe less than $50 thousand, you can request a “streamlined” plan. You promise to pay the IRS over 6 years, which translates into a maximum of $694 per month ($50,000 divided by 72). It is called streamlined because you get to submit minimal information to the IRS. This is a big deal, as the normal paperwork can be a pain. 

Let’s say that you owe over $50 thousand. You will now be submitting financial information, including bank statements and copies of bills, to the IRS. The IRS will apply “standards” to your expenses, and if your expenses exceed those standards they may (and likely will) disallow the excess. I have been through this exercise many times, and I can assure you in advance that the IRS’ calculation of what you can pay is more than what you think you can pay. You likely will be saying goodbye to your I Phone data package, your satellite TV, the leased car you really cannot afford and so on. The IRS does not want to subsidize your lifestyle. 

There may be variations in your particular payment plan. A standard payment plan requires you to pay-off the IRS over time. What if you cannot? The IRS may agree to a “partial pay” plan, which means that the plan will not completely pay-off the IRS unless the plan payment or plan term is changed. In my experience, I have had to go to Appeals to get this plan, but I have gotten it. 

Another possibility is to file bankruptcy. Although a last resort, a bankruptcy results in a “stay” of all credit actions, including the IRS.

What if you miss the 30-day window on the Final Notice? Not all is lost. You can still request a hearing, now called an “equivalency” hearing. You still get Appeals involved, but the IRS does not have to delay collection action – including bank levy or wage garnishment - until the hearing.

Depending on your situation, consider a tax professional. You want an attorney or CPA who specializes in taxes. As a heads up, most CPAs and attorneys do not specialize in taxes. Another alternative is an Enrolled Agent, who – by definition – specializes in taxes. Be sure to clarify whether they have done tax representation before.  One can “do taxes” and have never represented. It really is two different things, and you do not need to pay someone while they learn the ropes.

The Collections Appeal and Pace

This past Tuesday I submitted financial and other information regarding a collections appeal with an IRS officer in California. We have several clients with unpredictable income streams, and this client is one of them. We are pursuing something called a “manually monitored installment agreement,” which allows for changes in an IRS payment plan as one’s income varies. It can be difficult to obtain. In fact, a revenue officer I often work with informed me that this type of agreement was “above his grade.” That comment struck me as odd and is something I intend to follow-up on.

Back to our client. I was concerned as time was running out, and the client did not seem to register the urgency of the matter. I am working within a compressed time period. To her credit, the IRS officer showed patience and goodwill. She was within her rights to be much stricter with me, but she agreed to move the file and hearing back to Cincinnati. I was greatly relieved, as Rick wanted the file here.

“How much more do they want?” “They have everything.” “What are they going to do if I don’t?” These are all common questions. So much so I should just post the questions and answers on my office wall to save time.   

Today let’s talk about this part of IRS representation: the collections appeal. Let’s also talk about Pace v Commissioner, who got himself into collections appeal and perhaps should have been less confrontational and more forthcoming.

Your entry into the IRS will likely be through Examinations. This step is what we consider the “audit”, although these days the whole matter may be handled through the mail. The IRS is becoming fond of computerized matching, for example, as Congress provides it with ever-more tax reporting for anything that you do. Such is the new audit, I guess.

If you owe money your file will be transferred to Collections. Collections will send you a bill, and you will be working with Collections if you want a payment program, a cannot-collect status or an offer in compromise. The problem with Collections is that they are not really interested in the how-and-whys of you getting there, but they are very interested in getting money from you. They can back this up by garnishing your wages, liening your assets, levying your bank account or terminating your installment plan. Collections appeal exists as a safety valve for these more-aggressive collection actions. It takes your file out of Collections and gives it to an appeals officer. You have a chance to present information – geared to writing the IRS a check, of course – to someone who may be less “eager” to separate you from your last dollar at the earliest possible chance.

Perhaps you are talking to the appeals officer about delaying payments while you look for work, about setting up a payment plan, or having the IRS restart a payment plan they decided to terminate. Understandably, that appeals officer is going to want to know your finances. You will be sending him/her a Form 433-A or B, which is a listing of your assets and your earnings and expenses for (at least) the last three months. He/she will also want copies of bank statements as well as of significant bills, like your mortgage or car payments. You may have to send them a copy of your broker statement, for example, if you have a few dollars invested in the market. None of this is surprising. What if you don’t provide what he/she wants? Well, he/she can stop working with you and throw you back into the Collections pool. For you to do this seems self-defeating, doesn’t it? With that, let’s talk about Pace.

Pace operated a chiropractic business through a corporation (Dauntless). Pace fell behind on his 2006 and 2007 taxes. The IRS sent a Final Notice of Intent to Levy.  Pace did the right thing and requested a collection due process (CDP) hearing to discuss a collection alternative. The appeals officer requested a 433-A and B. During this process the officer learns that Pace is associated with two more entities – Achievement Therapeutic Services LLC (Achievement) and Kenneth D. Pace LLC (KDP). The officer requests a 433-B for them, as well as evidence that they are up-to-date on their tax filings. Pretty routine.

Pace provides none of it. He does have an argument. Whereas he is the registered agent for both, he has derived no income from these two entities, and he does not think producing any information regarding them is appropriate.

NOTE: Me? I think I can still play linebacker for the Bengals this upcoming football season.

The collections appeal hearing takes place.  Tell me, if you were the appeals officer, what would you do?

The appeals officer threw Pace back into Collections for their tender mercies, that is what he did. Pace next goes to Tax Court.

My Take: Pace is bonkers. I would have provided the IRS with copies of tax returns for Achievement and KDP, if tax returns existed. If the entities were dormant, then I would have discussed that fact with the appeals officer and asked what he considered a reasonable next step.  By not doing so, the Tax Court decided that Pace was the one being unreasonable.  Being unreasonable, Pace lost his case.

The IRS Wants More Levy Power

The IRS wants Congress to expand its tax levy authority.

This is a response against the taxpayer protections under the IRS Restructuring and Reform Act of 1998 (RRA). One of the changes required the IRS to provide at least 30 days notice of a levy action, as well as the taxpayer right to appeal such action. The purpose is to slow down collections and allow the taxpayer to propose alternatives or to reiterate information that collections has chosen to ignore.

After enactment of the RRA, the number of IRS levies dropped by approximately 85 percent, from 473,000 for fiscal 1998 to 75,000 in fiscal 2000. This has reversed recently, and there was a 73 percent increase from fiscal 2009 to 2010. During fiscal 2010 the IRS filed approximately 667,000 levies.

The IRS does have some valid arguments. In some circumstances, timing requirements may require multiple levy actions. Some sources of income are difficult to reach and are currently beyond the reach of a continuous levy.

NOTE: A continuous levy remains in effect until cancelled and provides recurrent cash to the IRS. The most common example is a wage garnishment. This is in contrast to a bank levy, which is good for only one instance. Should the IRS want more cash, it has to file another bank levy.

The IRS wants to expand the continuous levy to reach rental income, nonemployee compensation, royalties and fishing boat proceeds.

Then there are questionable IRS arguments. For example, the Treasury Inspector General for Tax Administration (TIGTA) reviewed a sample of 30 cases where the taxpayer appealed a levy action. It found that appeals can be used to delay collection action. Gosh, I could have told them that without a study; it doesn’t mean, however, that the appeal right per se is without merit. In 28 cases Appeals upheld the levy action. The IRS extrapolates this to mean that the appeals protection under RRA is being abused.

Let’s talk about IRS abuses. The RRA protections were not enacted because the IRS was an innocent party. There are cases where the IRS has pursued levies for less than $30.  There are cases of IRS levies without any notification. We presently have a representation client where collections is pursuing more than $20,000 while we simultaneously are reducing that amount by almost 80 percent through a reconsideration. We put in a CDP request to put the brakes on collections and clue them that there is a favorable adjustment coming from exam. Do I even need to comment on IRS inflexibility with an unemployed/underplayed taxpayer who cannot continue a payment plan at the same amount as before being unemployed/underemployed?

Let me clue you in on a tax “secret.” The IRS says it will work with you if circumstances overwhelm your payment plan. However, the IRS keeps a golden key to itself. The IRS can reject a restructuring if one has defaulted on a payment plan. Think about this. I have a client who entered into a payment plan. Circumstances have been difficult, including foreclosure. She has continued her payments to the IRS, although sometimes in smaller amounts than agreed to. She takes pride in having lived up to her obligation. I contacted the IRS to formally restructure the plan to something like the following:

                First three months          $25 per month

                Next three months         $50 per month

                Next three months         $75 per month

               

The IRS refused. Why? Because she “defaulted” on her plan. Now think about this for a moment. My client is held in the same regard as a tax scofflaw who has never paid and has no intention of ever paying. Her default? She reduced her payment because she works for $7.50 per hour and is broke. She did not miss a payment, mind you, only reduced it. To be fair, we will work something out with the IRS, but it is a needless headache for both her and me. I do think it shows a blockheaded attitude at the IRS. Some of us – government employees excluded, apparently – can be fired.

Count me on the “nay” side of any proposal to expand IRS levy authority. Show me some proof of “kinder and gentler” before I board this bus.