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Top 4 Reasons Not to Ignore Tax Debt

Tax Debt: A Debt Not to Ignore

Owing taxes may not seem like a big deal. Tax debt is not immediately reported on your credit and the IRS seems to only send collection letters. While it is true, the Internal Revenue Service (IRS) is not usually aggressive the first year you owe traditional income taxes, the IRS can ramp up collection efforts and be very aggressive if they are not satisfied you are trying to pay back the debt and/or get current going forward.

1. The Impact to your Credit Report

While not a direct action against your wages or bank account, a tax lien can have a more lasting impact on your life. They are public record and can be reported to your credit report.  You can see a credit hit of more than 50 points from a federal tax lien.  They attach to all property whether real or personal.  The IRS rarely goes after personal property, unless you are living a lavish lifestyle.  They will go after real property, especially if it is not your primary place of residence.  The lien is the way they have the right to take more aggressive action.

2. IRS Can Levy Wages up to 100%

A wage levy is a headache that nobody wants to deal with. The IRS has a chart that they use to determine how much of your paycheck is exempt from levy.  It is not a favorable chart for the taxpayer.  If you are paid hourly or salary you could see as much as 85% of your pay seized every pay period.  If you are an independent contractor who is paid via 1099 you could lose 100% of your income if a levy is issued to your source of income.  This affects truck drivers more than most.  Also, if you own your own business the IRS can go after accounts receivable with a levy.  Wage levies stay in place for wage earners until the tax debt balance is paid or the taxpayer takes the necessary steps to get it removed, typically agreeing to an installment agreement with the IRS.

3. IRS Can Seize You Bank Accounts or Investment Accounts

Even if the IRS does not go after your wages directly, they can still get your income via a bank levy. The IRS can send notices to any financial institution that you may be banking with.  The institution then will set aside whatever funds are in your accounts at the time the bank receives the levy for 30 days.  After 30 days the bank will release those funds to the IRS if they have not received a levy release directly from the IRS. Even with those funds frozen you can still use your account with any additional money that gets deposited during the 30 day hold.  If you have previously gotten refunds from the IRS and gave them banking information for direct deposit of the refund, the IRS will go after that bank first if you owe debt in the future.

Investment accounts that are levied go through the same 30 day hold on the account before funds are send to the IRS. The major thing to remember here is that when those funds are sent to the IRS that creates a taxable event on most retirement accounts. So the taxpayer who has an investment account levied by the IRS, then gets hit with another tax liability because the IRS does not let you choose to withhold any of the investment funds for tax purposes.

To get your bank account unfrozen and save some of the money in there you have to show an undue hardship with the IRS. In the past I have been able to get funds saved on joint accounts where the other person was a child who was away for college, shown that some of the funds in the account are for an upcoming mortgage payment, and shown that the taxpayer has no ability to pay and the account was placed into Currently Not Collectible status.  However, this does not always work and it is sometimes determined by how nice of a collections agent you get on the phone with the IRS

4. Your Passport Can Be Suspended

The most recent attempt to force people into handling their tax situation is the suspension of passports. Congress passed a law that allows the IRS to tell the Department of State when a taxpayer is seriously delinquent with their tax debt.  Anyone with more than $51,000 in back taxes, who has not taken steps to pay back the debt, could be subject to their passports being suspended.  If you do not have a passport your social security number could still be sent to the Department of State and you will be denied a passport should you apply for one.

The IRS started implementing this in 2018 and some taxpayers are seeing their passports being suspended. There are ways to get your account back in good standing with the IRS.  Two most common ways are: 1) an installment agreement to pay back the debt over time or 2) having an offer in compromise accepted, not just filed.  The IRS will not simply remove the passport hold because a taxpayer pays their debt below the $51,000 threshold.  The taxpayer has to get into an agreement to repay the balances.

 

 

 

Arthur Rosatti, Esq. is a Florida licensed attorney authorized to represent clients with the Internal Revenue Service and the U.S. Tax Court. He has experience negotiating with various taxing agencies on behalf of individuals and companies. His goal with their tax debt and get them into the best plan possible to manage the debt. If you have concerns about your tax liabilities, schedule an appointment with our office.

How to Handle Garnishments: Options to End Creditors Collection Efforts

Garnishments are just one way that a creditor can try to collect on a judgment. If you are facing a garnishment, you should understand your options. Understanding how to handle garnishments can save you time and money.

Garnishments are a scary thing. A creditor wants to take money out of your paycheck or your bank account. In Virginia, a creditor can perform either a wage garnishment or a bank garnishment. For a wage garnishment, a creditor can garnish 25% of your “disposable income,” which means they get 25% of your paycheck after deducting for requires taxes. If you are very low income, your income may be too low to be garnished; but, this is very low threshold. For a bank garnishment, a creditor can seize all money in a bank account up to the amount of the judgment. Some funds cannot be garnished, such as social security.

If you are being garnished, there is likely a judgment against you. Most creditors can only garnish you  if there is a judgment against you; the most common exceptions to this rule are tax debt and federal student loans.  Since federal student loans and taxes are owed to the government, they are given special rights to collect. A judgment could have been obtained without you ever having appeared in court or being personally presented with documents.

Some individuals come into our office unsure why they are being garnished or believe they can fight the garnishment. In Virginia, the law requires that a creditor served you at your last known address. Service does not have to be in person, like you often see in the movies (i.e., someone handing you papers and saying you were served). The sheriff or process server can post the notice on the front door of your last know address or hand the papers to any adult living in your residence. If you never got the paperwork, it does not matter — it’s still valid.

On occasion we are able to vacate (reverse) a judgement on grounds that you were served somewhere that was not your residence, but this is rare. Additionally, even if you can get the judgment vacated, you will likely be sued again by the creditor after the judgment was vacated. If the judgment was based on a valid debt, this may be a futile effort.

Guaranteed Ways to Stop a Garnishment

Only two guaranteed ways exist to stop a valid garnishment: satisfy the debt in full or file bankruptcy.

Pay the debt

If you can full pay the debt, a garnishment would stop. Creditors cqn only collect up to what they are owed. However, this can include interest and attorney fees, if they judgement allowed for those expenses. Depending on how old a judgment is, it may have increased dramatically due to interest. We have seen some clients with judgments subject to 30% interest!

Filing bankruptcy

Filing bankruptcy stops any and all collection activity; it is the trump card that debtors can play against handle garnishments and stop creditors from collecting. The moment you file a bankruptcy, as long as you haven’t had multiple bankruptcy cases pending within the last year, the federal court issues an order that says all creditors must immediately cease any and all collection activity. To ensure the creditor has knowledge of a bankruptcy, our office sends notice of the bankruptcy to any creditor attempting to garnish you and the court where the creditor obtained the judgment. Sometimes, we are even able to get some of the garnished funds back.

Bankruptcy is often the only guaranteed way to stop a garnishment. Often, we recommend bankruptcy as the only viable way to stop garnishments. Often, our clients often spend less to file bankruptcy than to pay or settle a judgment.

Ways to Attempt to Stop a Garnishment

There are two other ways that can either potentially handle garnishments. We rarely recommend these two other options, but in certain circumstances they may help; these options are negotiate the debt or file a Homestead Deed.

Negotiate the Debt

We occasionally can recommend trying to negotiate a debt; but, creditors are less likely to negotiate after a judgment is obtained. Creditors get certain rights when they obtain a judgment, these rights include garnishments, interrogatories (getting you to answer questions under oath), etc. If the creditor is getting more through the garnishment process than you are offering, it is not very likely they will take the settlement.

File a Homestead Deed

One other option to handle garnishments that we rarely recommend is to file a Homestead Deed, but it can serve a limited purpose. After a garnishment has been filed you will be served with the garnishment summons. On the garnishment summons, there will appear a “return date.” This date is when the judge will determine if the creditor is owed the funds or not. A homestead deed, which is a document particular to Virginia, advises the court that you are using your lifetime exemption under Virginia Code § 34-4 to protect up to $5,000.00 (or $10,000.00 if you are over 65). You must file the document in the land records.

We do not recommend a Homestead Deed because it offers a temporary solution. This protection is a lifetime exemption. This means that if $3,500.00 has been garnished from your wages during the past 6 months and you file a Homestead Deed to protect the funds, then you have used the $3,500.00 to get the funds release. Following the Return Date, the creditor can just file another wage garnishment immediately and start the garnishment all over again. Eventually, you will exhaust the the $5,000.00 protection. Using up this exemption also result in limited protections in any future bankruptcy; debtors must also use a Homestead Deed in bankruptcy to protect cash, or cash like assets.

 

Attorney Ashley F. Morgan is a Virginia licensed attorney. She has been helping clients manage various types of debts for years. Ashley focuses on helping her clients finding the ideals solution to their debt problems. Ashley reviews each person’s personal situation to determine his/her best options. She regularly helps clients handle garnishments and other collection activity.