Bond, Marshall & Pezzano, P.C.

A levy is a legal seizure of your property to satisfy a tax debt. Levies are different from liens. A lien is a claim used as security for the tax debt, while a levy actually takes the property to satisfy the tax debt.

If you do not pay your taxes (or make arrangements to settle your debt), the IRS may seize and sell any type of real or personal property that you own or have an interest in. For instance, the IRS could:

Seize and sell property that you hold (such as your car, boat or house), or
Levy property that is yours but is held by someone else (such as your wages, retirement accounts, dividends, bank accounts, licenses, rental income, accounts receivables, the cash loan value of your life insurance or commissions).

Collection Due Process – Generally, the IRS can levy only after these three requirements are met:

The IRS assessed the tax and sent you a Notice and Demand for Payment;
You neglected or refused to pay the tax; and
The IRS sent you a Final Notice of Intent to Levy and Notice of Your Right to a Hearing (levy notice) at least 30 days before the levy. The IRS may give you this notice in person, leave it at your home or your usual place of business or send it to your last known address by certified or registered mail with a return receipt requested. Caution: The IRS will generally take your state income tax refund first and then provide you with a Notice of Levy on Your State Tax Refund and Notice of Your Right to Hearing after the levy.

You may ask an IRS manager to review your case, or you may request a Collection Due Process hearing with the Office of Appeals by filing a request for a Collection Due Process hearing with the IRS office listed on your notice. You must file your request within 30 days of the date on your notice. Some of the issues that may be discussed include the following:

You paid all that you owed before the IRS sent the levy notice,
The IRS assessed the tax and sent the levy notice when you were in bankruptcy and subject to the automatic stay during bankruptcy,
The IRS made a procedural error in an assessment,
The time to collect the tax (called the statute of limitations) expired before the IRS sent the levy notice,
You did not have an opportunity to dispute the assessed liability,
You wish to discuss the collection options, or
You wish to make a spousal defense.

At the conclusion of your hearing, the Office of Appeals will issue a determination. You will have 30 days after the determination date to bring a suit to contest the determination. Refer to IRS Publication 1660, Collection Appeal Rights, for more information. If your property is levied or seized, contact the employee who took the action. You also may ask the manager to review your case. If the matter is still unresolved, the manager can explain your rights to appeal with the Office of Appeals.

Levying Your Wages, Federal Payments, State Refunds or Your Bank Account

Wage Levies - If the IRS levies your wages, salary or federal payments, the levy will end when: The levy is released, You pay your tax debt, or The time expires for legally collecting the tax. Generally, under IRC §6502, the statute of limitations is within 10 years after the assessment tax. It can be longer in certain circumstances. This is a complicated area where you may need professional assistance.

Bank Account Levies - If the IRS levies your bank account, your bank must hold funds you have on deposit, up to the amount you owe, for 21 days. This holding period allows time to resolve any issues about account ownership. After 21 days, the bank must send the money plus interest, if it applies, to the IRS. To discuss your case, you should call the IRS employee whose name is shown on the Notice of Levy.

Property Liens - Once the due process requirements are met, a lien is created for the amount of your tax debt. By filing notice of this lien, your creditors are publicly notified that the IRS had a claim against all your property, including property you acquire after the lien is filed. This notice is used by courts to establish priority in certain situations, such as bankruptcy proceedings or sales of real estate. The lien attaches to all your property (such as your house or car) and to all your rights to property (such as your accounts receivable, if you are a business). Caution - Once a lien is filed, your credit rating may be harmed. You may not be able to get a loan to buy a house or a car, get a new credit card or sign a lease. Therefore, it is important that you work to resolve your tax liability as quickly as possible, before lien filing becomes necessary.

Property Exempt From Seizure - By law, some properties cannot be levied or seized. The IRS may not seize any of your property unless they have determined that the IRS expects there to be net proceeds to apply to the liability. In addition, they may not seize or levy your property on the day you attend a collection interview because of a summons. Other items that the IRS may not levy or seize include:

School books and certain clothing,
Fuel, provisions, furniture, and personal effects for a household totaling $7,430,*
Books and tools you use in your trade, business, or profession totaling $3,710,*
Unemployment benefits,
Undelivered mail,
Certain annuity and pension benefits,
Certain service-connected disability payments,
Workmen's compensation,
Salary, wages, or income included in a judgment for court-ordered child support payments,
Certain public assistance payments, or
A minimum weekly exemption for wages, salary, and other income. Use Publication 1494 to determine the amount exempt from Levy.

*These amounts are indexed annually for inflation (amounts shown are for calendar year 2006).

Releasing a Lien – The IRS will issue a Release of the Notice of Federal Tax Lien:

Within 30 days after you satisfy the tax due (including interest and other additions) by paying the debt or by having it adjusted, or
Within 30 days after they accept a bond that you submit, guaranteeing payment of the debt. In addition, you must pay all fees that a state or other jurisdiction charges to file and release the lien. These fees will be added to the amount you owe. Refer to IRS Publication 1450, Request for Release of Federal Tax Lien. Usually 10 years after a tax is assessed, a lien releases automatically if the IRS has not filed it again. If the IRS knowingly or negligently did not release a Notice of Federal Tax Lien when it should be released, you may sue the federal government, but not IRS employees, for damages.

Applying for a Discharge of a Federal Tax Lien
- If you are giving up ownership of property, such as when you sell your home, you may apply for a Certificate of Discharge. Each application for a discharge of a tax lien releases the effects of the lien against one piece of property. Note that when certain conditions exist, a third party may also request a Certificate of Discharge. If you are selling your primary residence, you may apply for a taxpayer relocation expense allowance. Certain conditions and limitations apply. Refer to Publication 783, Instructions on How to Apply for a Certificate of Discharge of Property from the Federal Tax Lien.

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Offer-in-Compromise

The U.S. tax system is built on the premise that all taxpayers are expected to report their tax liabilities accurately and pay them on time. However, the Internal Revenue Code gives the IRS the authority to “compromise” (i.e., settle based on a taxpayer’s adverse economic circumstances) a tax liability for less than its stated amount.

Do you qualify for an offer-in-compromise? Generally, if you can pay your tax liability in full, even if it takes a few years, you won’t qualify for an offer-in-compromise. On the other hand, if your financial circumstances are such that you will never be able to pay off the debt, there is doubt as to the liability for the tax or there are special circumstances, the IRS is allowed to compromise in these instances:

Doubt exists as to the liability - This means that there is doubt that the assessed tax is correct. If you do not think that you owe the tax liability, then you may submit an OIC for “Doubt as to Liability.” You must submit a detailed written statement explaining why you believe you do not owe the tax that you want to compromise. You are not required to submit a collection information statement if you are submitting an offer based on doubt of liability alone.

Doubt exists as to the liability’s collectibility

It would advance effective tax administration to settle the liability - This means that the taxpayer does not have any doubt that the tax is correct and there is no doubt that the full amount of tax owed could be collected, but an exceptional circumstance exists that would allow the IRS to consider your offer. To be eligible for compromise on this basis, you must demonstrate that the collection of the tax would create an economic hardship or would be unfair and inequitable. If you are requesting an ETA offer, you must submit: a collection information statement with all appropriate attachments and a written narrative explaining your special circumstances and why paying the tax liability in full would create an economic hardship or would be unfair and inequitable.

Note: Although the IRS may compromise any civil or criminal case arising under the Internal Revenue Code, once IRS sends a case to the Department of Justice, the latter gains jurisdiction over its outcome.

Additional limiting factors – Except for offers based solely on “doubt as to liability,” your offer-in-compromise cannot be processed and will be returned by the IRS if:

   1. You currently have an open bankruptcy proceeding. Note: You should consult your Bankruptcy Attorney if you are not certain or if you are contemplating bankruptcy.

   2. If you have any unfiled federal tax returns that you are required to file. All tax returns that you were legally required to file prior to submitting an offer-in-compromise must be filed, including but not limited to: All Income Tax, Employment Tax and Excise Tax returns, along with all required Partnership, Limited Liability Corporations or closely held Sub-Chapter S Corporation returns.

   3. If you are a business with employees, and you failed to timely make any required federal tax deposits for the current quarter and the two immediate preceding quarters.

If you think you qualify for an offer-in-compromise, please give us a call so we can discuss what is needed and set up an appointment.

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What to Do if You Receive an IRS Notice

It’s a moment many taxpayers dread. A letter arrives from the IRS and it’s not a refund check. But don’t panic; many of these letters can be dealt with simply and painlessly.

Each year, the IRS sends millions of letters and notices to taxpayers to request payment of taxes, notify them of a change to their account or request additional information. The notice you receive normally covers a very specific issue about your account or tax return. Each letter and notice offers specific instructions on what you are asked to do to satisfy the inquiry.

What you should do – Is immediately mail or Fax the correspondence to this office so it can be reviewed and timely responded to.
What you should not do – Is to set it aside until later. Notices that are not responded to cause additional notices to be issued and each additional notice brings with it additional complications and make it more difficult to resolve the problem.

Most notices are computer-generated after comparing the income items reported on your return with those reported by the payers. For example, your employer sends you a W-2 every year and also sends a copy to the government so that your wages are on the IRS computer. Your bank sends the 1099INT to the IRS showing how much interest you earned. Your brokerage firm reports your dividends and gross proceeds of sale from security transactions with 1099DIV and 1099B forms. If you are self-employed, those who pay you $600 or more during the year are required to send you a 1099-MISC. If you are retired and collecting a pension or drawing on your own IRA, a 1099R will be sent to you. Lenders report how much interest you paid on your home loan during the year. If you are lucky enough to hit it big in Vegas, you will receive a 1099G for your winnings. The list goes on and on, and if what you reported on your return doesn’t match what is on the IRS computer, you will receive a computer generated notice.

One big problem that has developed over the years is the IRS willingness to allow payers to use substitute forms that are unrecognizable as income-reporting documents. Many of the brokerage firms are now providing their substitutes in letter size documents printed front and back on multiple sheets that almost takes a financial expert to understand. This results in frequent errors.

There are times when you may receive an income item and it appears to be taxable to the IRS when in fact it is not. Here are some frequently encountered situations:

Sold a security with no profit – Whenever you sell a security, the brokerage house will report the gross proceeds of sale to the IRS. In other words, the IRS has on their computer what you sold it for. They have no clue what you paid for it, which means you must report the sales on Schedule D on your tax return. If you fail to report it, the IRS treats the entire sales price as a profit. Let’s say you sold 200 shares of stock which originally cost you $5,050 for $5,000. You actually have a loss of $50. Unless you report the transaction and show that you paid $5,050 for the shares, the IRS is going to assume you had a $5,000 profit. This frequently occurs when taxpayers overlook a transaction or simply omit it because there was no profit. If this is what caused the notice, you will need to respond to the IRS to explain the mistake and provide verification of the stocks’ original cost.
Rollovers – Another frequent error is when you rollover an IRA, 401(k), etc. from one plan to another or one trustee to another. If you don’t show on the tax return that the distribution was rolled over, the IRS assumes the entire amount to be taxable. If these funds are transferred between trustees, a 1009R is not supposed to be issued but sometimes they still are. It is better to make sure. On the other hand, if you take possession of the funds and then redeposit them into another IRA a 1099R will be issued and the rollover must be accounted for on the return. If this is what caused the notice, you will need to provide a verification of the rollover to the IRS with your response.
Shared accounts – Generally, banks and other financial institutions only have the capability of having one taxpayer ID on an account as the primary owner even though it may be a joint account with others. These financial institutions will issue the 1099 on other reporting documents under the social security number of the primary owner and the total will be reported to the IRS under that social security number. This also will affect married or separated taxpayers who do not file jointly. When responding to the IRS notice, you will need to provide the names, addresses and social security numbers of the other owners and a statement to the fact that they each reported their appropriate share.

The foregoing are just a few of the more common examples of computer mismatches that can cause computer generated notices. Even though the IRS feels the notices are readily understandable, experience has show that taxpayer can become confused and that the experienced eye of a tax professional is usually required to decipher the notices. That is why we highly recommend that this office review them prior to you taking any action or responding.

A Word of Caution – The IRS routinely provides state tax agencies with the results of the correspondence audits. Generally, the results of the correspondence audit will need to be dealt with on the state level through an amended state return or wait to receive the state notice. However, if you wait for the state notice, additional interest and penalties may possibly accrue for the state return.

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When to Amend Your Tax Return

As hard as you and your tax return preparer may try to file a complete and accurate tax return by the due date, circumstances such as the following may work against your efforts:

Investment firms frequently send out corrected 1099 forms and annual statements.
Some 1099s arrive after the filing due date.
You may have rolled over an IRA account or sold a stock at a loss and forgot to have it reported on your tax return.
A significant deduction may have been overlooked, which is easy these days with the added complications of our tax code.
The unexpected K-1 from your aunt’s estate that you were unaware of.

Whatever the reason may be, your returns can be amended to reflect the correct information or amounts.

If you are amending for a refund, then the amended return must be filed before the statute of limitation expires on the return being amended. That is generally three years from the April due date of the return.

Thus, the statute only applies to refund returns and no refunds will be issued for returns filed after the statute has expired.

If tax is owed as a result of amending the return, file it as soon as possible to limit the interest and penalties that can accrue.

If you have unreported income from 1099s, W-2s, K-1s, etc., and wait for the inevitable notice from the IRS, you are taking the risk that they will not consider all the factors that might weigh in your favor since you have allowed the interest and penalties to build up. It may take the IRS one or two years to make the match between you and the missing income.

Does Amending Increase the Audit Liability? The fact that you amend a return does not in itself increase your chances of being selected for an audit. In fact, it might actually reduce your chances, especially if you are fixing something they will find later anyway. What concerns many about amending returns is that an IRS employee must compare the amended return changes with the original. If back-up documentation cannot be provided, the IRS may want to dig deeper.

That is why it is so important to provide proof or back-up documents to justify the changes being made. Let’s say you forgot to claim a $2,000 church donation. In this scenario, you definitely want to include documentation supporting the increased deduction.

If you have questions about amending your returns, please call us to discuss what steps need to be taken.

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