The Treasury Department has a well-earned reputation for being serious about collecting its due. The mere mention of its taxation arm – the IRS, is sufficient to invoke fear into the most honest of taxpayers. One reason for the trepidation generated by the IRS is that it has a potent arsenal of weapons at its disposal to pursue taxpayers who are in arrears, including tax liens and tax levies.
Many people confuse tax liens and tax levies. While neither is desirable, a tax lien poses much less financial danger to taxpayers than a tax levy does. A tax lien represents an initial attempt by the IRS to collect revenues from taxpayers who have failed to either pay their taxes in full or to contact the agency to discuss viable repayment options. By contrast, by the time the IRS gets around to filing a Final Notice of Intent to Levy and Notice of Your Right to A Hearing, otherwise known as a tax levy, taxpayers are in imminent danger of losing valuable assets such as cars or homes to seizure.
It goes without saying that avoiding the dire consequences of a tax levy is desirable whenever possible. Fortunately, taxpayers who take expedient measures can frequently avoid the hammer of the IRS tax levy. Depending on the personal circumstances involved, it may be possible to dodge a tax levy long enough to contact the IRS with alternative arrangements – or even long term.
1. Request a 120-Day Extension
One of the few absolutely guaranteed ways to avoid a tax levy is to repay what you owe to the IRS in full. If you have a reasonable expectation of being able to repay your tax arrears within 120 days, request an extension from the IRS. Once you have made payment, the lien should be released within 30 days, which will automatically cancel the tax levy.
2. Negotiate an Installment Agreement
Back in the day, the IRS was much less flexible about allowing taxpayers to extend payments over time. In recent years, however, the IRS has changed its stance and actively encourages collaboration between agents and taxpayers. So, if you can pay what you owe within a reasonable time frame, generally six years or less, depending on your total balance in arrears, you may be able to avoid a tax levy by negotiating an installment agreement. If so, act quickly to prevent the actual levy from going through.
3. Extend an Offer in Compromise
An Offer in Compromise is a formal arrangement that allows taxpayers to settle their tax obligations by paying less than the full amount due. The Offer in Compromise process requires taxpayers to demonstrate that attempts to collect the full amount owed would present an undue financial burden or would otherwise be unjust. As might be expected, the standard for qualifying for an Offer in Compromise are strict, and taxpayers would be well advised to seek professional advice before pursuing this path.
4. Demonstrate Non-collectible Status
If paying your back taxes – or the execution of a tax levy – would create severe financial hardship, you can seek what the IRS categorizes as “non-collectible status.” Once your tax debt has been designated as non-collectible, all attempts to process tax levies cease. But the tax lien remains on your record, and you must re-apply for “noncollectable status” on an annual basis.
5. File Chapter 7 or 13 Bankruptcy
Under most circumstances, filing either Chapter 7 or Chapter 13 bankruptcy places an immediate halt on all creditor collection actions, including tax levies. But filing a bankruptcy petition only stops a tax levy for as long as the petition is active. And especially if you file Chapter 7 bankruptcy, you may be required to relinquish personal assets anyway to obtain a discharge.
6. Petition for Innocent Spouse Relief
If you filed a joint tax return with your spouse, you are generally jointly liable for any and all tax obligations. But under limited circumstances, it may be possible to escape a tax levy if you can demonstrate that your spouse is individually responsible for being in arrears with the IRS. Qualifying for Innocent Spouse Relief is tough, with strict requirements in place. If you believe you qualify, you would be well advised to seek the services of a professional in preparing your petition.
7. Appeal the Notice of Levy
If you legitimately believe that the IRS has mistakenly imposed a tax levy against you, it is imperative to contact the agency by phone immediately to request an appeal. You must also follow up the phone call with a written petition to appeal the tax levy. It is your legal right to appeal a tax levy, and doing so will stop the process while your appeal is being processed.
8. Allow the Statute of Limitations to Run
The IRS is limited by statute on the amount of time that a tax lien is allowed to stand. If the statute of limitations expires before the IRS imposes a tax levy, you are officially off the hook. But this is a very risky strategy, especially since the IRS may simply impose a new tax lien against your account. On the other hand, if you can demonstrate that the statute of limitations has ALREADY expired, your odds of escaping a tax levy improve significantly. Do not attempt this approach without expert legal advice.
9. Claim IRS Procedural Error
In most cases, taxpayers receive multiple warnings before the IRS executes a tax levy. But sometimes mistakes are made. If you can demonstrate that you did not receive sufficient notice of a tax levy, or that the IRS committed some other procedural error in assessing your account, you can request a Collection Due Process hearing, which will halt a tax levy for 30 days after the date of the hearing.
10. File a Request through the Collection Appeals Program
If you are not satisfied by the results of an appeal or a Collection Due Process hearing, you may file a petition for under the Collection Appeals Program before a tax levy has been executed. You may also file a petition to recover assets such as bank accounts or wages that were wrongfully seized by tax liens under the Collection Appeals Program. But if seized assets such as a home or a car have already been sold, you are pretty much out of luck.