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Jim Buttonow
How to help clients avoid IRS liens and levies

Many taxpayers can avoid these collection actions by arranging to pay their unpaid balances or using collection alternatives.

October 28, 2013
By Jim Buttonow, CPA/CITP

It’s that time of year again for financially distressed taxpayers who haven’t made arrangements with the IRS to pay their tax balances. Every summer, the IRS sends a series of notices to try to collect unpaid taxes. The IRS then starts collection activity against taxpayers who haven’t paid or made arrangements to pay. These activities include the use of federal tax liens and levies to collect unpaid taxes. This type of collection activity usually spikes in September, October, and November.

During the government shutdown, the IRS temporarily halted issuing liens and levies, but IRS computer systems were still sending automatically generated notices warning taxpayers about potential future collection action. With the end of the government shutdown, the IRS collection process will again be fully operational.

Many taxpayers can avoid these collection actions by arranging to pay their unpaid balances or using collection alternatives. 

How the IRS issues levies

To satisfy unpaid taxes, the IRS can issue a levy to seize a taxpayer’s income and assets. The process follows several steps. First, the IRS is required by law to provide the taxpayer with:

  • Notice and demand for payment; 
  • Notice of intent to levy; and 
  • Notice of a right to a Collection Due Process hearing.   

For most taxpayers, the IRS accomplishes these requirements by sending five letters, starting about six weeks after the taxpayer files a return. The five letters are often referred to as the automated collection “notice stream” (notice numbers CP14, CP501, CP503, CP504, and L1058/LT11). If the taxpayer receives the last notice and doesn’t pay the balance or make other arrangements to pay, the IRS can levy the taxpayer’s income and assets, including garnishing wages and seizing funds in bank accounts. In fiscal year 2012, the IRS issued almost 3 million levies.

How to help clients avoid a levy

If a client owes the taxes, one way to avoid a levy—or remove one—is to reach an agreement with the IRS to pay the balance. This means the practitioner needs to analyze the client’s financial situation and ability to pay the IRS. 

One common solution is an extension of time to pay the balance in full. Extensions can give the client up to 120 days to pay the balance and avoid a levy.

If a client can’t pay with an extension, an installment agreement allows the client to make monthly payments. If the client is unable to pay anything, the proper strategy is to request to have the client placed in currently not collectible status, which classifies the client as temporarily unable to pay. Requests for both of these agreements suspend levy actions.

Once an installment agreement is accepted, the IRS will not issue a levy unless the client defaults on the agreement. If the IRS places a client in currently not collectible status, the client’s assets will not be levied, however, the IRS can remove the currently not collectible status in the future if it determines that the client can pay the tax balance.

How the IRS issues liens

When a taxpayer owes federal taxes that he or she has neglected or refused to pay, a federal tax lien arises for the amount owed. This gives the IRS a legal claim to the taxpayer’s property. A Notice of Federal Tax Lien may be filed at a local courthouse and is a public record. A recorded federal tax lien establishes the government’s right of priority to the taxpayer’s assets as against third parties (to protect its interests).

The IRS could formally file a Notice of Federal Tax Lien when the IRS meets its legal requirement to send the taxpayer a notice and demand for payment and doesn’t receive payment within 10 days. In practice, the IRS waits to record most tax liens until after it has sent all five notices in the notice stream and hasn’t received payment.

Taxpayers want to avoid a Notice of Federal Tax Lien because it can reduce their credit score by an average of 100 points, according to the IRS Taxpayer Advocate. Liens can also affect a taxpayer’s ability to attract new business clients, secure and maintain credit, and obtain employment. Because a Notice of Federal Tax Lien is public record, taxpayers want to avoid the potential harm to their reputation, as well.    

How to help a client avoid a lien

Avoiding a tax lien filing is more complicated than avoiding a levy. The IRS can file a tax lien even if the client has an agreement to pay the back taxes. IRS business rules dictate that a tax lien won’t be filed if a taxpayer owes less than $10,000. However, the IRS reserves the right to file a lien to protect its interests. For example, the IRS might file a lien in the case of a pending bankruptcy or if it thinks the taxpayer is dissipating assets to avoid payment.

A client who owes more than $10,000 can still avoid a federal tax lien filing. If the client can’t pay the tax immediately, the most effective ways to avoid a federal tax lien filing are to request an extension of time to pay of up to 120 days or enter into a streamlined installment agreement to pay the full balance.

Streamlined installment agreements require the client to pay the full balance within six years or before the collection statute of limitation expires, whichever is sooner. If the unpaid balance is less than $50,000, or if the balance can be paid down to less than $50,000 before the streamlined installment agreement is established, a tax lien filing can be avoided. For an individual taxpayer client, if the unpaid balance is between $25,000 and $50,000, the IRS will not file a tax lien if the client allows the IRS to take installment agreement payments directly from a bank account.

When financially distressed clients can’t pay their back taxes, tax professionals with an understanding of IRS rules for liens and levies can help their clients avoid enforced collection action. The key is to be proactive in securing an agreement with the IRS that avoids liens and levies.

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Jim Buttonow, CPA/CITP, is co-founder of Beyond415. He has more than 26 years of experience in IRS practice and procedure.