Tax season can be a stressful beast. You have to gather all your financial records, acquire income statements, file, and wait for the state and federal governments to inform you if you owe or not. If you owe, the stress just keeps piling on, especially if you do not have the funds to pay what you owe.
If you can’t pay the taxes—federal, state, or property—just know that you are not alone. Millions of Americans find themselves in situations every year on where they need additional help to make the payments.
So, what happens if you cannot pay your tax obligations?
Well, the IRS may issue a tax lien or levy to claim and/or seize your assets to guarantee payment. If you do receive an IRS notification of a tax lien or levy, what do you do? The best course of action is to pay the amount owed in full, but obviously if you could have done that, you already would have. In addition to a full payment, there are a few other options available to you to mitigate the effects of the claims.
While we will discuss your options below, you should speak to a CPA to help you navigate the entire process.
Difference Between a Tax Lien and Levy
Receiving a tax lien or levy can seem scary, and it is, so it is important to understand the difference between them. A tax lien is a claim the government places against your assets in the case that you cannot fulfill your tax obligations. These assets can include vehicles, personal property, and business property as well as intangibles such as business account receivables, investments, paychecks, bank accounts, and retirement accounts.
A lien does not mean that the assets will be sold. It means that the government receives first claim of the assets above other creditors. It is a guarantee that the debt will be paid in one form or another.
Liens affect you in that they go on your credit report, making it difficult to obtain new lines of credit and they can also affect any business that you own. They also include any assets you currently own and the assets you acquire in the future until the taxes are paid. Even if you file for bankruptcy, the lien will continue.
A tax levy, on the other hand, is the legal seizure of the asset to pay the debt. While a lien guarantees the government first stake in your assets, a levy is their way of paying the outstanding debt. Legally, they can seize and sell your property to settle the debt, and this applies to all assets listed above with the lien. Often times, a lien is issued prior to a levy so the debt can be settled or a payment plan put in place before the seizure of assets.
How to Mitigate the Effects of a Lien or Levy
Don’t Ignore IRS Notifications
The IRS does not issue liens or levies lightly. It costs them money and effort to do so. The first document on the subject you receive will be a Notice and Demand for Payment letter that informs you that you have unpaid taxes. If you do not take steps to rectify this by contacting the IRS and discussing payment options, a lien will be placed on your assets.
Pay in Full
Your best option to remove a lien is to pay the full amount of the taxes owed. Once all debt is cleared, the IRS will clear the lien within 30 days. However, if you received a lien, this option is probably not feasible.
IRS Programs Available
There are a number of IRS programs available to you to help you in the repayment process. Remember, it is not the federal government’s intent to force you into bankruptcy or take away your assets, so they offer options to help you repay while maintaining your property. Below are some of these programs:
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- Offer in Compromise – Allows you to reduce the amount of taxes owed. The IRS may even waive interest and penalties.
- Withdrawal – Removes the public notice of the tax lien. You are still liable for the taxes, but the IRS will not compete for your assets with other creditors.
- Subordination – Makes it easier to obtain a loan or mortgage by allowing other creditors ahead of the federal government in the legal right to your property.
- Discharge of Property – Removes a specific asset from the lien. You can then sell this property to help pay off the debt if necessary.
Work with a CPA
CPAs are trained in effective negotiation with the IRS. They offer expert advice on the options available to you and speak to the federal government on your behalf, working towards preventing liens as well as getting them released. With a qualified tax accountant, you are more able to keep ahold of your hard-earned assets and property.
Recap
Tax liens and levies are no joke. They are serious government legal actions that require immediate and appropriate steps on your part to resolve. Be sure to respond to each tax notification sent your way and work with the IRS to set up payment plans and take the necessary steps. If you do find yourself with a lien or levy, talk with a CPA to understand the options available to you.
Tax Avenger in Canton is an experienced tax and accounting firm that can address and resolve your tax issues. Drawing from our extensive background and years of interaction with the IRS, we possess the expertise and knowledge necessary to substantially diminish your tax obligations and will also craft a personalized tax strategy to safeguard you against any potential future IRS challenges.
Our tax and accounting firm has been helping businesses and individuals throughout the area for more than 2 decades! Call to schedule a Free consultation today.