FAQs: Tax and IRS Liens & Levies

What are my options when I receive a tax bill, a Notice of Intent to Lien or Levy or a Notice of Lien filing from the IRS or one of the states such as Maryland or Virginia?

When you are confronted by an impending IRS collection action or when you learn that the IRS has already initiated the collection process, you may do one of the following:

You may contact the IRS and propose an installment agreement. You should remember, however, that entering into an installment agreement may not be your best option. Tax debts like credit card balances accrue interest. Over the life of the installment agreement, the accrued interest may exceed the tax principal. However, an installment agreement sometimes proves to be a viable option if used in conjunction with other options discussed below.
You may propose an offer in compromise to settle your tax debts. Your objective in making such an offer is to propose to pay less than the delinquent amount, on the theory that the account is either not collectible in full or because the alleged liability for taxes is not correctly assessed. Proving to the IRS that your tax debt should be settled for less is no easy matter. Anecdotal evidence suggests that 9 out of 10 offers in compromise are rejected by the IRS. The reason for rejection could be that you either did not qualify under the tax law and the relevant IRS regulations or because the offer amount was not realistic. Preparing an acceptable offer in compromise requires detailed knowledge of the relevant Tax Code provisions and the IRS regulations (i.e. Tax Code §7122 and Regs. §301-7122).
If you learn that the IRS has already filed a lien or has levied on your property, you may bring a civil action against the government for wrongful collection action.
If a lien has been filed, you may seek to show that the process of lien filing was defective. Here, you are not arguing that you do not owe the tax or you owe less than the IRS claims. You are instead attempting to show that the IRS action was procedurally defective. This is basically a due diligence step revealing any potential deficiencies in the procedures that the IRS needed to follow if the lien were to be effective.
You may file an administrative appeal with the IRS Appeals Office and argue that the lien should be released or that the IRS lien should be subordinated to another lien.
If you can show that the IRS has committed abuses in the tax collection process, you may be able to recover damages from the IRS.

Similar but not identical rules apply in Maryland and Virginia. For example, Maryland has a similar procedure for offer in compromise. However, the taxpayer cannot make an offer in compromise until the tax debt is two years old. During this period, Maryland Comptroller's Office will attempt to collect the debt by contacting the taxpayer and initiating the lien and levy processes. If these attempts do not bear fruit, the Maryland Comptroller's Office will then assign the taxpayer's account to a collection agency. When the two-year waiting period expires, the taxpayer may file an offer in compromise application similar to the federal one. Tax authorities in Maryland and Virginia periodically announce tax amnesty programs. Taxpayers who enter into these programs may pay smaller amounts of penalty and interest but the principal sum of tax is not forgiven.

I recently received a Notice of Federal Tax Lien in the mail. What is it and what should I do?

Tax Code Section 6321 contemplates a "statutory lien" which would attach to a taxpayer's property equal to the amount of the tax liability. Section 6322 of the Tax Code states that the statutory lien attaches to the taxpayer's property when the tax assessment is made. Depending on a host of factors such as the amount of the tax debt and the actions that the taxpayer has taken in order to address his tax liabilities, the IRS may then move to file the lien. Filing of the tax lien has severe consequence for the taxpayer such as a sharp drop in credit rating and credit score. A tax lien also harms a taxpayer's business prospects because it makes the transfer of property subject to lien virtually impossible.

If you believe that the IRS had mistakenly filed the tax lien, you may appeal such filing within the IRS. However, you need to prove one of the following:

You had already paid your tax debt before the IRS filed the tax lien.
Deficiency procedures set out in the Tax Code were violated by the IRS.
Bankruptcy Code prevented assessment of the tax liability underlying the tax lien.
The statute of limitations on the collection of the tax debt had expired prior to filing of the tax lien.

What would the IRS do if I ignore the Notice of Federal Tax Lien?

If the IRS does not hear back from you after a reasonable length of time, it would take more drastic actions in order to collect the tax. The next step is usually imposition of tax levy. Section 6331 of the Tax Code defines a tax levy as the power to collect taxes by seizure of the taxpayer's assets. Note the difference between a tax lien and a tax levy: while a filed tax lien announces to the world that your properties are subject to a tax lien, a tax levy actually removes the property from your possession. One of the IRS's favorite methods of tax levy is bank levy. It is a favorite method because it does not involve the sale of property and instead directly removes the funds from your bank account and deposits it with the U.S. Treasury. If you do not happen to have very strong arguments to show the inappropriateness of such action, recovering such funds is virtually impossible.

The IRS may also garnish your wages or salary. Wage garnishment involves informing your employer of your tax delinquency. The IRS then serves notice on the employer that under the law it is obligated to direct a certain portion of your paycheck to the government. A wage levy permits a continuous attachment of the wages or salary due to a taxpayer. If no payment arrangements are made with the IRS, the wage levy continues until all tax debts are satisfied. This can last for years, especially since during the wage levy period, interest and penalties continue to accrue on the principal amount of the tax.

Only certain types of property are exempt from tax levy. These include taxpayer's wearing apparel, schoolbooks, unemployment benefits, undelivered mail, certain pension benefits, payments needed for child support and service-connected disability payments. Most pension distributions are subject to tax levy. For example, if you have a 401(k) account but you are not entitled to distributions from the account because you have not reached the retirement age, the IRS can levy on your present right to such 401(k) distributions in the future. Thus, when you finally reach the retirement age, your pension money will be distributed to the government instead of being paid to you. Social Security retirement checks are regularly subjected to tax levy by the IRS. Your income from state retirement funds is also subject to federal tax levy.

Tax Code Section 6343 sets forth the conditions under which the IRS should lift a tax levy. These conditions include the following:

The tax liability underlying the levy has been paid or the statue of limitations on collection has expired;
Collection of tax would be facilitated by lifting of the tax levy;
The taxpayer has entered into an installment agreement with the IRS in order to satisfy the tax debt;
The IRS has concluded that the tax levy has created economic hardship for the taxpayer.

If you have received a Notice of Lien or Levy, you may request a Collection Due Process Hearing within 30 days. The hearing is conducted by an IRS Appeals Officer. During the hearing you may present evidence as to why you do not owe the tax, or how the IRS violated your due process rights by giving you defective notices.

If you suspect that the IRS or the taxing authorities in Maryland, Virginia or Washington, D.C. are about to file a tax lien against you, or institute a tax levy, you should seek the advice of a tax counsel. The timely intervention of a competent tax attorney can help prevent a tax lien filing. If a tax lien has already been filed, a tax lawyer can assist you in releasing or lifting the tax lien. In addition, a tax attorney can help you release a tax levy against your bank account or your wages and salary. Finally, an IRS tax attorney can represent you during a Collection Due Process Hearing and help you achieve the best results.

Kamyar Mehdiyoun is an IRS tax lawyer who assists clients with IRS tax liens, levies and seizures, back taxes, tax delinquency, Notice of Federal Tax Lien or Levy, IRS tax collections, tax liabilities, tax penalties, IRS tax audits, delinquent tax obligations, tax debt relief, bank account levy, and property seizures. If you need an IRS tax attorney, contact Kamyar
Mehdiyoun’s tax law firm located in Rockville, Maryland and serving Maryland (MD), Virginia (VA) and Washington, DC metro area as well as the rest of the U.S.