April 30, 2015
By Dan Gibson, CPA
When taxpayers find themselves deep in the woods and being hunted down by the most effective collection agency in the world, the Internal Revenue Service, the threats of liens and levies are always menacing weapons that must be dealt with. However, there are strategies for avoiding these IRS actions. Keep in mind that these IRS enforcement actions can have a devastating effect on one’s credit rating.
Quite frankly, this is not a trait found in most delinquent taxpayers, but dealing with the situation up front can go a long way in avoiding the IRS’ lien and levy action. If upon filing a return, the complete amount of tax cannot be paid, file a Form 1127 – Extension of Time for Payment of Tax. When asked, the IRS will state that there is no such form; but it’s there. The extension is not automatic; you’ll need to provide information demonstrating that you do not have the means to pay the entire amount and that paying that amount would cause a financial hardship. However, it is a means to go on the offensive to buy yourself six months to sort things out.
Normally, if your balance is under $10,000, the IRS, as a practical matter, will not file a lien. So if you have a balance slightly over this amount, you may want to consider paying down enough balance to get it under the $10,000.
If you have a balance up to $50,000 or can pay down the balance to get it under $50,000, the streamlined installment agreement is available as long as the balance can be paid down within six years (72 months) or before the expiration of the statute of limitation on collection expires, whichever is shorter. In most case, installment agreements for amounts under $25,000 are automatic, with very little administrative fuss. For balances between $25,000 and $50,000, you’ll likely have to make payments by direct debit from your bank account. However, in any event, you should be able to avoid having a lien filed against your property by the IRS.
Once a lien has been filed and a balance remains outstanding, it is nearly impossible to release or withdraw it. Once the lien is in place, the next step for the IRS is to levy (or take away) your property.
The IRS starts this process by issuing five letters, starting with a CP14 and then ending with a L1058/LT11. It’s a letter campaign that gradually turns up the pressure on the taxpayer, with the final letter basically stating: “This is the final notice. The next time you hear from us will be after we clear out your bank account!” However, in this final letter, the IRS does offer one final olive branch known as the Collection Due Process Hearing. From the date of the final letter, you have 30 days to request this hearing by way of a Form 12153. If filed in a timely fashion, this will cause all collection actions to cease and allow you time to discuss your situation with a settlement officer within the Appeals Division of the IRS.
If you find yourself needing someone to assist you with balances owed to the IRS or have specific questions on the above, please do not hesitate to contact your tax professional.