It can be difficult and frustrating to deal with tax debt. You might be concerned about whether the IRS has the right to seize your assets if you owe taxes to them and haven’t taken steps to address the debt. Understanding which assets the IRS can seize is crucial for taxpayers, particularly those facing financial difficulties. Here’s a comprehensive overview of what the IRS can and cannot seize.
Can the IRS Seize My Assets?
The simple answer to this question is yes. The IRS can legally seize your assets to pay off a tax balance you owe. However, it is crucial to remember that the IRS normally views asset seizure as a last resort. Before initiating asset seizure, it is your taxpayer right to be notified. The IRS will make several attempts to collect the tax debt through IRS notices and other means before resorting to seizures. This is so you can attempt to correct the issue, perhaps with an installment agreement or offer in compromise. If you do not respond to IRS notices, they will impose a tax lien on your property. Only after this and a final warning will the IRS seize any assets.
Which Assets Can the IRS Seize?
Almost any item that has worth or equity and may be sold for cash can be seized by the IRS. Some of these assets can include:
Property
The IRS can place a lien on your property, such as your house or other real estate, establishing their legal claim to it. In some situations, they may seize and sell the property to recover the debt. However, seizing a primary residence is considered a last resort, and the IRS must go through a judicial process before doing so. The sale of the property typically occurs through a public auction, with the proceeds used to satisfy the tax debt.
Vehicles and Other Personal Assets
To satisfy your tax burden, the IRS may confiscate and sell your vehicles, boats, jewels, or other personal assets. However, the IRS typically considers the value of the vehicle and the amount of debt before deciding to seize it, as the cost of seizure and sale may not always justify the action.
Bank Accounts
The IRS can levy funds from your bank accounts to satisfy your tax debt. Bank levies are one-time only. This means the IRS can only take what is in the bank account now. You can deposit and withdraw funds from the account in the future. However, the IRS can always issue more levies in the future. The IRS typically notify you of this action, giving you a short window to contest the levy or arrange payment.
Retirement Accounts
The IRS has the legal authority to seize your 401(k) and other retirement savings, including self-employed plans. Although these accounts are shielded from creditors, the IRS has the legal right to confiscate funds from your retirement savings to recoup back taxes owed. However, certain rules and limitations apply, particularly regarding early withdrawal penalties and the protection of certain types of retirement accounts under federal and state laws.
Life Insurance
In certain cases, the IRS can even seize life insurance benefits, particularly if the policy has a cash surrender value. If you are the beneficiary of a life insurance policy and you owe the IRS, the IRS can seize those proceeds. Additionally, if you have a life insurance policy with no beneficiary named and you owe the IRS, the IRS can seize the policy funds before they are distributed to your next of kin.
Wages
The IRS has the authority to issue a wage garnishment, which means that they can legally order your employer to withdraw a percentage of your salary to pay off your tax debt. This can be a significant financial burden, as the levy continues until the tax debt is fully paid. The IRS also has the authority to seize other forms of income, including rental income, Social Security benefits, and even commissions. However, the IRS typically cannot seize the death benefit itself unless it has already been paid out and is part of the taxpayer’s estate. Additionally, term life insurance policies without a cash value are generally not subject to seizure.
Business Assets
For business owners, the IRS can seize business assets, including equipment, inventory, and accounts receivable. This can be devastating for a business, as it can disrupt operations and lead to financial instability. The IRS may also target the business’s bank accounts and income streams.
Which Assets Can the IRS Not Seize?
In general, any asset not necessary for your well-being and shelter (or the survival and shelter of your family) may be confiscated to pay the IRS what you owe. This can include:
Assistance provided by the Job Training Partnership Act
How Can I Protect My Assets from Being Seized by the IRS?
The good news is that an IRS asset seizure will never come as a surprise. Once you are aware that you owe the IRS, you should get to work on resolving the issue. However, we know that sometimes this isn’t always possible. You may have already received multiple IRS notices, and maybe one was an Intent to Levy. It’s not too late to get help from the nation’s leading tax resolution firm. Optima Tax Relief has over a decade of experience helping taxpayers with tough tax situations.
The Senate recently approved nearly $80 billion in IRS funding, with $45.6 billion specifically for enforcement. This new funding is expected to result in more tax audits. There is no sure way to avoid an IRS audit. However, there are some things that the IRS has generally viewed as “red flags.” These could increase the chances of an audit for taxpayers. Here are our top five tips to avoid an IRS audit.
File Your Tax Return
Currently, you must file a tax return if your gross income meets certain thresholds based on your age and filing status. If you meet the minimum income requirement and you do not file a federal income tax return, or file late. In 2024, you can be penalized 5% of your unpaid tax liability for each month your return is late. However, the penalty will not exceed 25% for your total tax balance. Additionally, you will incur a 0.5% per month for failure to pay penalty, up to 25%.
While both penalties have a cap, interest will continue to accrue until the balance is paid off. It is compounded daily at the federal short-term rate, plus an additional 3% for individuals. In 2024, the underpayment penalty is 8% for individual taxpayers. In addition, the IRS may prepare a substitute for return (SFR) on your behalf. They do this by using your W2 and 1099 forms for that tax year and even your bank account records. The SFR will likely result in a larger tax bill, since tax credits and deductions will not be claimed. In short, choosing to not file a return each year will not excuse you from paying taxes.
Report All Income
Underreporting income is one of the most common reasons taxpayers get audited. Remember, the IRS receives copies of all your W-2 and 1099 forms for the year. If incomes do not match up, they will investigate your tax situation. The IRS could then give you the IRS negligence penalty. This can cost you an additional 20% of the underpaid amount in penalties. That said, it’s always best to report all earnings the first time around.
Use Common Sense with Business Expenses
The IRS reminds taxpayers that business expenses should be “ordinary and necessary” to produce income for your specific trade or business. In other words, items like office equipment and advertising costs are fine, but you should not try to deduct your daily lunch expenses. You should always avoid comingling personal and business expenses.
Keep Good Records
Keeping good records that support your reported income is critical. This can include invoices, canceled checks, mileage logs, and other documents. The IRS recommends keeping records for three years after filing. Bookkeeping can be a tedious process, so it may be best to hire a professional if you are not up to the task.
Know How to Report Losses
The IRS will likely audit individuals and businesses that report multiple or consecutive losses. If your business claims a loss for several years, the IRS may classify it as a hobby instead of a for-profit business. Once this happens, you will not be allowed to claim a loss related to the business and you will have to prove that your “business” has an acceptable motive to earn a profit.
Tax Relief for Taxpayers
Odds of an audit increase when the IRS notices any red flags. The audit process can be tedious and taxing. Failing an audit can result in a huge, unforeseen tax bill. It’s best to seek assistance from experts who can help you avoid an IRS audit. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
Today, Optima Tax Relief’s Lead Tax Attorney, Phil Hwang, discusses IRS enforcement, including the statute of limitations and how it might affect your credit report.
Did you know the IRS has a certain amount of time to collect your tax debt before it expires? How long? Well, the simple answer is 10 years, but several factors can pause this timeline. For example, filing for bankruptcy, living abroad, applying for an installment agreement, submitting an offer in compromise, applying for innocent spouse relief, applying for a taxpayer assistance order, requesting a collection due process hearing, serving in the military, or being sued by the IRS can all pause the 10-year collections period.
Many also wonder if IRS enforcement can affect your credit. The IRS can file a Notice of Federal Tax Lien, or a priority claim over all of your assets. While this notice does not show up on your credit report directly, it does become public information that creditors can access through supplemental reports. This can affect your access to credit, business opportunities, and even employment.
Join us next Friday as Phil will answer your questions about levies and wage garnishments!
If You Are Being Hit with IRS Enforcement, Contact Us Today for a Free Consultation
The Inflation Reduction Act of 2022 has equipped the IRS with more than $80 billion in funding. That means more audits and more enforcement. CEO David King and Lead Tax Attorney Philip Hwang provide helpful tips on what you can expect from the IRS moving forward and how you can resolve your tax burden.
Owing taxes is more expensive than ever before. Filing an accurate return on time is the best way to avoid penalties, interest, and IRS collections. CEO David King and Lead Tax Attorney Philip Hwang list three things to watch out for after the tax deadline.
