As the saying goes “The Taxman Cometh.” Step by step he approaches: Hard-soled shoes slapping pavement, a trench-coat spotlighting shadows. Penalties and interest mount as he searches for those who have not filed returns and those who have underpaid their taxes. There are many ways he can find you. Maybe an amount reported on a W2 or 1099 was missing from a tax return. Maybe a cash-paying contractor got audited and had to substantiate his expenses. Maybe a taxpayer consistently pays his mortgage but reports very little income on his tax return. It really doesn’t matter how he finds you. Once he does, you’re pulled into the IRS collection process.
Today, I will discuss the basics of a tax assessment and two of the tools used by the IRS to collect back taxes: tax liens and levies. My goal is to provide those facing “The Taxman” with an idea of what to expect when they enter the IRS collection process.
Assessment: The term “assessment” simply means the IRS has determined that a tax is due. Once an assessment has been made, the IRS generally has ten years to collect the taxes due. An assessment occurs most commonly on the date a tax return is filed. If a return is not filed the IRS may use its financial reporting system to file a return for the taxpayers based on information received from employers (W2s), vendors (1099-misc), banks (1099-Int), and brokers (1099-div and 1099-B). This return is called a Substitute for Return (SFR). An assessment made with an SFR is nearly always to the taxpayer’s disadvantage as it is based primarily on income information that is reported by employers, banks, brokers, etc. and not by the taxpayers. As such, the return will lack most deductions, exemptions, and credits.
Once assessed, the IRS has two basic tools to collect past due taxes: the federal tax lien and the federal tax levy.
Lien: A federal tax lien is a claim to all property a taxpayer owns at the time or after a lien arises. Liens arise automatically when taxes remain unpaid ten days after the IRS sends its first notice of taxes due and demands payment. If the tax due exceeds $10,000 the IRS may file a formal tax lien, notifying the public of its claim to a taxpayer’s property (in February 2011 the IRS announced it was increasing the formal lien threshold from $5,000 to $10,000). A lien that is formally filed will negatively affect the taxpayer’s credit, harming their ability to buy, sell and refinance properties. A tax lien remains in effect until the tax is paid, the collection statute expires, or the IRS removes the lien.
Levy: The second tool the IRS uses to collect past due tax is the federal tax levy. A levy occurs when the IRS physically takes a taxpayer’s property to pay past due taxes. The IRS can levy both income and property including wages, payments from customers, retirement income, social security payments, state and federal tax refunds, savings and checking accounts, vehicles, real estate, or other valuables.
Although the filing of a tax lien may be more-or-less automatic, the IRS must follow certain procedures before it can levy a taxpayer’s property. The IRS will send a 30-day notice that it intends to levy a taxpayer’s assets. When this notice is received, the taxpayer still has the opportunity to make payment, enter into an installment agreement, or appeal the levy if they believe the amount due is incorrect or improperly issued. This appeal must be made within 30 days of receiving the notice of intent to levy. An appeal can still be made after the 30 day deadline has passed, but the taxpayer will be bound by the decision and lose their right to further appeals.
Worried that you may not be in compliance with form 1099-MISC? Check out our 1099-MISC Basics course to get all of your compliance questions answered.
This article has provided a very basic outline of IRS collection process. It has not discussed more specific details including IRS timelines, specific IRS notices regarding past due taxes, the appeal process, or circumstances under which the IRS may remove a lien or forego a levy. As always, if you find yourself caught up in the IRS’s collection process or would like assistance with any tax situation, please feel free to contact our office at (304) 267-2594.
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