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.