The IRS is the most powerful collection agency in the world. The actions they can take without a court order are pretty staggering and the IRS has two huge weapons at their disposal they will use to collect the taxes you owe them: the tax lien and the tax levy.
A tax lien is a claim by the IRS against your property. A lien arises ten days after the IRS sends you a notice and demand for payment. But at that point, only the IRS knows about the lien and they will continue to send you letters reminding you of your tax debt with each letter being more serious than the previous one. If you do not contact the IRS or make any effort to pay your outstanding balance, the IRS can file a Notice of Federal Tax Lien (NFTL) with the registry of deeds in the county you live in. The NFTL serves notice to the world that you have a tax debt. The NFTL is public record and will appear on your credit report. The IRS will file a NFTL if you owe them more than $10,000 and it gives the IRS priority over all other unsecured creditors in your property. So if you attempt to sell or refinance your property, the IRS will be there waiting to collect what you owe them. A lien still exists if you owe less than $10,000, but it will not be a matter of public record.
A tax levy is when the IRS seizes your property. The most common type of levy is a wage garnishment. For those who don’t have a steady income or are self-employed, they can also levy your bank account or accounts receivable. For larger amounts due, they can seize larger assets such as cars and boats. Interestingly enough, while the IRS does not need a court order to place a lien on your property or levy your assets, they do need one if they want to seize your house. Unlike a tax lien, a tax levy is not public record. However, other people might know about a levy depending on what assets are being seized. Your employer will know if the IRS is garnishing your wages, your bank will know if your account is being levied and your customers or clients will know if the IRS levies your accounts receivable.
Although the IRS can be aggressive with liens and levies, there are things that a taxpayer can do to counteract these tactics:
1. Pay the debt in full.
2. Appeal the lien. You will have the show that the lien was filed incorrectly or that the debt doesn’t actually exist.
3. Enter into a payment plan (installment agreement) with the IRS. The tax lien will still be in effect, but the installment agreement will stop collection activities unless you default on your payments.
4, Apply for an Offer-in-Compromise (OIC). These are very difficult to get approved. You essentially have to show you own no assets and no ability to pay. Applying for an OIC will stop collection activities, but a NFTL may still be filed. If an OIC is approved, the tax lien will still be in effect until the OIC amount is fully paid.
5. Get the tax debt classified as Currently Not Collectible (CNC). Like an OIC, you basically have to show that you have no money, no income and no assets to obtain CNC status for your tax debt.
6. Watch the clock. All IRS debts have a Collection Statute Expiration Date (CSED). The CSED is generally ten years after you file your tax return. After ten years, your debt becomes noncollectable. But the IRS will do everything they can to make sure they collect from you in full before the CSED.
The IRS collection process can be complicated and it is always a smart move to hire a professional with experience in dealing with the IRS if you run into tax trouble. And while the IRS won’t be sending Stewie Griffin after you to collect their money, they can make your life miserable and will go to great lengths to collect from you.
You generally will not go to jail if you don’t pay your taxes. Not paying your taxes is not a criminal offense unless you willfully defraud the IRS or are part of a tax evasion scheme. But while not paying your taxes won’t get you sent to the slammer, lying on your tax returns definitely can. More on this in a future blog post.