Should your case go to the IRS Collection Department, it’s probably because the IRS determined you owe them back taxes. This will happen if you file a tax return and underpay or if they insist on performing an audit and you stall their request. This article will cover some of the IRS methods of collection.
The IRS Has Plenary Power And Methods To Collect Taxes
In most cases, the IRS has ten years (statute of limitations) to collect back taxes from the time they “assess” the taxes you owe. Receiving a Notice of Assessment is when the IRS informs you how much you owe them and demands payment.
Receiving an assessment notice can happen when you file your tax return but only pay some none of the taxes they claim you owe. Suppose the IRS has completed an audit and determined you owe them taxes. Should you ignore them, which is definitely not advised, they will commence collection on your bank accounts, property, and other forms of assets.
Statute of Limitations
In most cases, trying to out-wait the IRS until its ten-year statute of limitations won’t work. However, if eight or nine years have passed since your taxes were first assessed, waiting out the rest of the ten years might result in the IRS being barred from collecting the debt by the statute of limitations.
However, there are several ways the time the time in which they must collect can be extended beyond ten years. For instance, a bankruptcy or filing an Offer in Compromise will extend the ten-year statute of limitations.
Your Case Is Assigned To Collection
Once your case is formally assigned to their collection department, you will receive several notices asking for payment. It would be a serious mistake to ignore these notices.
The IRS has an automated system that will begin seizing your assets, including attaching bank accounts and placing liens on your property.
IRS agent is assigned to your case
If the amount you owe is high enough, an IRS Revenue Agent will be assigned to your case. The agent will call you and ask you to visit their office, or the agent will come out to see you personally.
Your best alternative is to have your accountant or a certified tax representative consult directly with the agent on your behalf. Ideally, you will never have to go face-to-face with an IRS agent.
In some ways, the IRS has become a much more efficient and approachable organization in recent years, which means they will work with you if they believe you are making a good-faith effort to pay your tax debt. But this does not mean you should handle the case yourself.
Consider hiring a professional to represent you
Receiving a written Audit Notice can cause untold panic and stress for the typical taxpayer. The chances are the auditor will have audited hundreds of tax returns. Remember, auditing tax returns is all they do.
Auditors understand the tax code in ways you cannot, and most importantly, they know how to distinguish between tax avoidance and tax evasion. You first need to know that tax avoidance is legal and tax evasion is a crime.
The difference between tax avoidance and tax evasion can be tricky if you are audited and is fraught with risk. It is always best to retain an accountant or tax advisor if you are audited.
At this point in the audit process, the taxpayer is not required to attend. It would be best if you didn’t attend since you are neither trained in tax law nor can you tell what the IRS is looking for in their audit.
IRS notices
It is tempting for some to ignore IRS letters and notices, but that is a dangerous path to take. The IRS has many methods for collecting a tax debt; if they believe you are evading them, they can and will make your life miserable.
If you suspect you will have to pay some amount of taxes to settle the dispute, consider retaining a certified public accountant or private tax advocate to negotiate and finalize the process. You don’t want the negotiation to unravel and for collection to suddenly commence.
Methods Of Collection
Wage garnishment
The Internal Revenue Service can compel your employer to deduct part of your wages and send it directly to them. If you have been stonewalling the IRS and ignoring their notices garnishing your wages can be one of their first steps in collecting the debt.
If your wages are being garnished, you can contact the IRS and try to find another payment method. But if you have been stonewalling them, the agent will likely not accommodate your request, and it would be foolhardy to ask your employer to ignore the garnishment order since that would be a crime.
Real estate tax liens
The IRS can file a legal document with the County Recorder called a “Tax Lien.” The tax lien applies to all the real property you own in the county where the lien has been recorded. If they suspect you own property in other counties, they will find these properties and file additional liens.
While the lien is on the property, it will be difficult to sell or refinance the property. At some point, if you don’t pay your tax debt, the IRS may choose to foreclose on the property.
IRS foreclose on real property
The IRS might “foreclose” on the property by having the sheriff or marshal sell the property and turn the proceeds from the sale directly over to the IRS.
The IRS will do this only if they believe there is sufficient “equity” (market value minus your mortgage balance) in your property to pay some or all of the taxes owed to the IRS. However, they will rarely foreclose on the family home unless, for example, you are directly involved in criminal conduct such as trafficing drugs.
Attempting to evade a property lien
If you try to sell your property with the lien, the sale, the IRS has the power to prevent the sale from closing unless they are paid. They can do this because a lender, such as a bank, will normally not lend the buyer any money unless the tax lien has been satisfied.
You might try to sell your property to someone who doesn’t need a bank loan and is willing to take the property even with the lien. The IRS, however, may foreclose on the property and sell it even after the buyer has purchased the property.
If there is sufficient equity in the property to pay all of your taxes, you can work with the IRS to complete the sale. In that case, you will receive what is left over after all the debts and penalties are paid.
Beware of the capital gains risk
If there is not enough equity in the property, you can still work with the IRS to complete the sale. However, the IRS will take whatever equity that is left, leaving you nothing after the sale.
To make matters worse, you could still be liable for capital gains tax on the sale of the property, except for the fact it was not you that received the actual gain, it was the IRS.
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