The IRS Collection Process
The old saying that an ounce of prevention is worth a pound of cure applies to IRS collections. However, many let it go too far, and that's where I come in. You're not alone: It's human nature to avoid the unpleasantries in life, like having to deal with a tax problem!
This is the order in which the IRS ramps up collection. It starts with a computer and ends up with a IRS Revenue Officers breathing down your neck...
You File Your Return. The collection process begins when you file a tax return and the tax due from that filed return is not paid. The tax liability is assessed by the IRS and recorded in your master tax file.
Computer Notices Are Mailed. The collection process begins with computer-generated notices. If you do not respond to the first computer notice, the IRS sends a second one, then a third and a fourth. Each notice becomes more urgent, but none is reviewed by a human being. With each notice, the tax liability increases. You should treat these computer notices very seriously. If you ignore them, it's going to get ugly fast...
You Receive a Final Notice. The final notice explains that unless the IRS receives full payment within 30 days, it may take collection action, including levies and liens. Unless you take action—which will be explained later—things can ugly.
You May Receive a Summons. The IRS collection summons is used to gather information. Revenue officers use the summons to get information concerning income and assets. The IRS also directs summons at people who have failed to file tax returns. WARNING! If you get an IRS summons, it's probably wise to hire an attorney who can take control.
You May Receive a Wage or Bank Levy. An IRS levy transfers property to the IRS. Usually the IRS will first go after wages and bank accounts. Later, the IRS may seize the citizen’s retirement accounts, real estate, and other assets. The IRS liquidates the assets to pay the delinquent tax. As explained later in this book, levies can be prevented or stopped.
A wage levy attaches to your paycheck and transfers your paycheck to the IRS after withholdings and exemption amounts—which are far from generous—are deducted. Complete the exemption form that is included with Form 668-W, Notice of Levy on Wages, Salary or Other Income, which is the levy form issued to your employee. Also, see Publication 1494.
A bank account levy, unlike a wage levy, can wipe out your entire bank account. However, you have a 21-day waiting period to take defensive action from the time the levy is issued until the time the bank pays the IRS. Those actions will be explained in the next chapter. I suggest you get a tax professional on board who will take immediate defensive action.
TIP The IRS can only levy what is in the bank account the day the levy is issued. For example, if on the tenth of the month the IRS issues a levy and there is $100 in the account, they get $100. If the next day $2000 is deposited in the same account, it is not subject to levy. Even so, banks routinely freeze the entire account, and that is wrong. If this happens to you, sign a release directing the bank to pay only the funds in the account on the levy date. The bank should then un-freeze the account.
You May Receive a Tax Lien. Unlike a tax levy, a tax lien does not transfer ownership to the IRS. A tax lien is similar to a mortgage because the IRS becomes the bank. The IRS charges the federal short term interest rate plus 3%. It damages credit because the lien is reported to the credit bureaus. Like a mortgage, a federal tax lien prevents the sale of real estate until the IRS liability is paid or until other action is taken.
You Can Take Control Even if It's Out of Control
IRS collection can be stoppped or neutralized. Tax liens, wage levies, bank levies, and the IRS summons can all be controlled or stopped. Maybe the most valuable source of information comes straight from the IRS "playbook" called the Internal Revenue Manual ("IRM"). Faith Firm can cite the Internal Revenue Manual chapter and verse.
If you need to solve a tax problem, I would love to help you. Call me day or night at 414 771 9200 or for free at 800 659 0525.