Newland's Business Notes

Liens and Levies - The Realities    

Volume 14 Issue 5 -- September/October 2010

Tax Liens and levies could not altogether jokingly be described as the IRS "leaning," rather heavily, on a taxpayer. In an earlier newsletter (September/October 2006) we discussed the basics of liens, levies, and garnishments. In this issue, we will look at how these often come about and why it is important to act quickly.

A tax lien is similar to a court judgment, which authorizes the winner of a lawsuit to collect money from the loser. The IRS and state taxing authorities, however, can collect tax debts without first having to win or even start a lawsuit. Liens and levies are two of the ways taxing authorities collect tax from taxpayers. How does this often come about?

Lets say that Ms. Dee Lay (hereafter Dee), a self-admitted procrastinator, failed to file her tax returns for an extended period of time. The IRS may prepare a "return" for her called a Substitute for Return, "SFR". The term "return" here is somewhat of a misnomer because in reality the IRS does not prepare a Form 1040. Instead, the IRS merely computes a tax due based on the information available to it from various statements, such as W-2s, 1099s, interest income statements etc.

That IRS tax calculation invariably results in a higher tax for Dee, than would be the case if she filed an actual return, because the SFR does not take into consideration items like business deductions, charitable gifts, and other deductions which would lower Dee's tax debt.

After an SFR is entered in the IRS system, an assessment (bill) for the tax is prepared. After a period of time during which various ominous notices are sent to Dee, the IRS may then file a tax lien. If the IRS follows certain procedures, including giving Dee notice of her right to contest the lien, it, unlike a regular creditor, can then, without going to court, file a lien against Dee. Many states have similar provisions for state taxes.

A tax IRS lien is filed in a public office, such as a Clerk of Court or Recorder of Deeds, and that means that the tax debt is a matter of public record. The information is available to anyone who checks such filings. The lien basically gives the taxing authority the legal authority to collect money or other property from Dee to pay her debt. For example, a tax lien will prevent Dee from selling any real property she owns without paying of the tax debt.

Whether dealing with the IRS or a state taxing authority the filing of a lien is of course extremely detrimental to the credit worthiness of an individual. To be blunt, a tax lien will ruin a person's credit rating.

If Dee persists in ignoring the IRS after a lien has been filed, the IRS may then file a levy. A levy is part of the process of actually collecting Dee's property, such as from a bank account.

The IRS, for example, could send a levy to the bank where Dee has an account. The funds in her bank account will be sent to the IRS by the bank after 21 days have elapsed. During this 21-day period, it is sometimes possible to use various procedures to attempt to get the IRS levy released. That topic will be addressed further in our next newsletter.

When the IRS levies on a bank account or other assets, the IRS is entitled to all of the taxpayer's interest in that asset. For example, if it is a bank account with $10,000 in it and a tax debt of $20,000, the $10,000 is sent to the IRS. Similarly, if Dee is working as an independent contractor and has invoices out for her services as a computer analyst, the IRS could levy upon the accounts receivable owed to Dee. In that case, a person obligated to pay Dee would instead have to send the funds to the IRS, not to Dee.

Many people believe that if a bank account is levied upon by the IRS, the account can no longer be used. This is not true. The IRS gets what is in the bank account at the time the levy is served. Should Dee decide to deposit more funds in the same bank account that was levied upon, those later deposited funds will not be paid to the IRS unless the IRS files a subsequent levy against Dee.

Anyone who has received a lien should immediately start proactive approaches to avoid a levy. Unfortunately, there are many people like Dee who ignore all of the warning signs and wait and wait and wait until their bank accounts or other assets are seized.

If you need assistance in dealing with a lien or levy, call Newland & Associates, PLC.

Copyright 2010

Published by the law firm of Newland & Associates, PLC
9835 Business Way
Manassas, VA 20110
Call us at (703) 330-0000 for a full range of business law and tax-related services.

While designed to be accurate, this publication is not intended to constitute the rendering of legal, accounting, or other professional services or to serve as a substitute for such services.

Redistribution or other commercial use of the material contained in Newland's Business Notes is expressly prohibited without the written permission of Newland & Associates, PLC.

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