IRS Collection Process
"In order to collect a tax, the IRS has to assess (assessment of the tax). The IRS can levy on the taxpayer’s assets to enforce the tax lien."
Federal TAX Lien
A federal tax lien is the government’s legal claim against your property when you neglect or fail to pay a tax debt. The lien protects the government’s interest in all your property, including real estate, personal property and financial assets.
Generally, the IRS issues a Notice of Federal Tax Lien when they are assessing a tax against you and you failed to pay. The Notice of Federal Tax Lien is public document that the IRS files to inform other creditors that the government has asserted a secured claim against your property. The Notice of Federal Tax Lien may be included in your credit report. However, you have the right to appeal the notice.
How a Lien Affects You:
- Assets - A lien attaches to all of your assets (such as property, securities, vehicles) and to future assets acquired during the duration of the lien.
- Credit - Once the IRS files a Notice of Federal Tax Lien, it may limit your ability to get credit.
- Business - The lien attaches to all business property and to all rights to business property, including accounts receivable.
- Bankruptcy - If you file for bankruptcy, your tax debt, lien, and Notice of Federal Tax Lien may continue after the bankruptcy.
An IRS levy permits the legal seizure of your property to satisfy a tax debt. It can garnish wages, take money in your bank or other financial account, seize and sell your vehicle(s), real estate and other personal property.
How to Comply with the Levy
- Pay off the amount due
- Set up a payment plan
- Settle your tax debt for less than the full amount
Property the IRS Can Levy:
- Garnish wages from employer
- Social Security Benefits
- Bank Accounts Commissions
- Real Property
- Rights to Property
- Retirement benefits
- Personal property
The IRS can seize your wages to satisfy the tax debt. Generally, the IRS will send a notice to levy wages to your employer. Your employer will withhold a portion of your pay each period and provide that portion to the IRS rather than to you. Sometimes leaving the taxpayer with little for living expenses. However, portion of your wages may be exempt from the levy. The amount of exemption is based on the standard deduction and personal exemptions you are allowed.
If the IRS garnish your wage, your employer will provide you with a statement of exemption and filling status that must be completed and return within three days. Failure to comply, the exemption amount will be calculated as if you are married filing separately with one exemption.
If you have multiple income source, the IRS may allocate the exemption to one income source and levy 100% of the income on another income source.
Trust Fund Recovery penalty
If a company does not pay withheld income and employment taxes, the IRS can hold an individual who is involved in business operation or making business and financial decision personally liable for the penalty.
The IRS can do this by what is called “piercing the corporate veil.” Piercing the corporate veil means that the IRS can hold the owners, shareholders, or members of a corporation or limited liability company liable for corporate tax debts and obligations. Piercing a company’s corporate veil allows the IRS to go after the owner’s home, bank accounts, investments, vehicles, real property, personal property and other assets to satisfy the corporate tax debt.
A trustee or an agent who has authority, rights, or power over the business funds can also be held personally liable for the penalties and interests that arise from the tax debt.
Constructive dividend is an undeclared dividend issued by the Corporation as a payment to a shareholder. These payments are considered dividends that are not deductible by the corporation and must be reported as income by the shareholder.
The IRS can reclassify the corporation dividends as constructive dividends, the corporate distributions is taxed as regular dividend and the shareholder will have to report the constructive dividends as income.
Failure to report constructive dividends can result in penalties and criminal prosecution for the corporation and the shareholder.