IRS Tax Levy Explored
While the Internal Revenue Service has many different tools and weapons available to facilitate the enforcement of tax debts and liabilities, one of the most powerful tools the IRS has is something referred to as a tax levy. With a tax levy, the US government has the ability to essentially reach directly into your bank account or paycheck so that they can directly collect previously assessed taxes and penalties that they allege is due and owing. Before receiving an IRS tax levy, the IRS is required to submit various warning letters to the taxpayer. Instead of boring you with all the technical jargon, let’s go through a common example using a Form 3520 penalty and what you can do about it.
First, What Is an IRS Tax Levy?
One way to think about an IRS levy is that it is an opportunity for the IRS to satisfy any tax debt or other penalties you may owe to them by directly inserting themselves into some form of account or payment that you receive. So, for example, the IRS can contact your bank directly to withdraw the money reflecting the amount of the tax or penalty you owe — or they can reach out to your employer and garnish your paycheck to make sure they receive a portion of that money first before it goes to you. While the IRS can also directly seize assets (less common) or issue a lien (Notice of Federal Tax Lien), the focus for today is the levy.
Here is an example we see often: Melena inadvertently failed to file a Form 3520 to report the foreign gift she received from her sweet grandma who lives overseas and was so proud of her granddaughter for graduating from college (Grandmas are the best!). Melena learns about the 3520 requirements a year after filing her prior return, so she contacts her CPA (who was also unaware of the requirement) and they decide to send a late form 3520 to the IRS. Two years later, after Melena completely forgot about this issue, she receives a letter in the mail showing a six-figure penalty based on a 25% value of the gift (since more than five months have passed and the IRS did not believe Melena had reasonable cause). The CP15 notice is not an IRS Tax Levy, but instead a Notice of Penalty — and the first rung of the IRS tax levy ladder.
CP504 Penalty Notice and Tax Levy Warning
Quite frankly, the CP504 Notice should probably be outlawed. That is because the Internal Revenue Service uses such harsh and strong language which misrepresents the status of the levy. By reading the language of the CP504, a taxpayer could believe that the IRS is going to immediately levy their account, but that is incorrect. This is the first in a series of letters the taxpayer will usually receive after the penalty has been assessed, letting them know that the IRS could very well issue a Tax Levy. But, receiving a CP504 does not allow the IRS to issue the levy yet.
*Usually, the taxpayer will receive several of these 503/504 letters.
Can You Put Enforcement on Hold?
While the taxpayer is preparing a protest letter (or waiting on the response of their prior protest letter) or deciding if they want to appeal, the IRS continues enforcement action. To try to slow down enforcement, taxpayers have the opportunity to reach out to the IRS and request that the service place the enforcement on hold (usually up to nine weeks at a time) while the protest or appeal plays out. Technically once the appeal has been submitted, enforcement is supposed to stop, but the IRS is sometimes slow to react.
CP92 Notice for State Tax Refund Levies
While waiting for an appeal or protest to play out and usually before the LT11 or Letter 1058 (see below), the taxpayer may have been due a refund from their state tax return, which the IRS may snatch and grab (aka “levy”). Taxpayers may receive a CP92 letting them know that the IRS has already seized their state tax return refund. There is a silver lining though, in that this letter allows the taxpayer to pursue a Collection Due Process Hearing (CDP), which is often times the best chance to eliminate the penalty and/or reduce the tax debt.
LT11 or Letter 1058
When the taxpayer receives the LT 11 or letter 1058 – this is the Final Notice of Intent to Levy and something that taxpayers must be diligent in responding to in order to avoid an improper levy. With the LT11/Letter 1058, the IRS puts the taxpayer on notice that they have 30-days to submit payment (or otherwise resolve the matter), or else the IRS will place a levy on the account, wages, etc. At this point, the taxpayer has the opportunity to request a Collection Due Process Hearing, which puts the matter on hold — and gives the taxpayer an opportunity to discuss the case with a Settlement Officer (SO).
IRS Tax Levies Can Be Serious
When a taxpayer has been assessed a tax and/or penalty and Internal Revenue Service seeks enforcement, it can be a very stressful time for the taxpayer. While some enforcement procedures are less invasive than others, the tax levy can be a serious infringement on both a taxpayer’s mental health and finances, so taxpayers should stay aware of the different timelines and take whatever action is necessary to try to eliminate the IRS tax levy.
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Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
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