You have to pay taxes on your income every year. If you fail to pay what you owe, the Internal Revenue Service will collect it from you. Their last resort is a process known as asset seizure. What is asset seizure? It’s when the IRS shows up at your home or business to collect items that they can sell to cover your debt.
This guide will answer your questions about collecting unpaid taxes, and will show you how to protect yourself, your family, and your business from asset seizure.
When would the IRS seize your assets?
Believe it or not, the IRS does not want to seize your assets. The process is complicated, messy, and emotional for everyone involved. The IRS’ preferred course of action is for you to pay your taxes when they are due. If you’re unable to do so, your best option is to file your tax paperwork and then request a payment plan to repay your debt in installments.
Even if you fail to file your taxes, the IRS will take steps to secure the money without asset seizure. They will send notices informing you about your unpaid debt. If there is no response, the IRS will attach a tax lien to your real estate or other assets. A lien signifies that you owe the IRS money and that it must be paid if the attached property is sold.
At this stage, if you pay your debt (or if you can’t, at least reach out and set up a payment plan), you can avoid asset seizure. However, if you fail to file your taxes and refuse to respond to a written communication from the IRS, the situation will escalate.
Finally, the IRS will levy your assets. A tax levy is a notification that your assets are subject to asset seizure. In other words, the IRS will take your assets of value, sell them, and use the proceeds to cover your debt.
Since 2011, the IRS has drastically reduced the number tax liens and levies it places on taxpayers. Instead, it uses other tax relief tools to encourage taxpayers. The graphs below seem to indicate this tactic has been successful.
Can you go to jail for unpaid taxes?
Generations ago, there was a concept known as Debtor’s Prison when someone owed money and could not pay it back. Fortunately, the United States banned this process in 1833. If you owe money to the IRS and cannot pay, you will not go to jail for it.
However, it is against the law to lie to the IRS, file falsified tax returns, or hide assets. This is known as tax evasion. Popular figures like actor Wesley Snipes, rapper Ja Rule, and professional baseball player Darryl Strawberry have gone to jail for failing to disclose income and filing false tax returns.
How to prevent asset seizure
The IRS will not perform an asset seizure without providing notice. The IRS just wants to get paid for the taxes owed — they don’t really want your personal items.
Before an asset seizure takes place, three criteria must be met:
- The IRS determines what you owe and mails you a Notice for Demand for Payment.
- You either neglect or refuse to pay the amount due.
- At least 30 days before the levy, the IRS sends you a Final Notice of Intent to Levy and Notice of Your Right to a Hearing.
At this stage, you can stop an IRS asset seizure in the following ways:
- Negotiate with the IRS and enter into an installment agreement to chip away at your debt in a series of monthly payments.
- Apply for an offer in compromise, wherein you agree to pay less than the total amount you owe. You can pay in a lump sum or in installments. To qualify for this option, you must prove that paying the full amount would result in a financial hardship.
- Convince the IRS that the targeted asset has little value.
- Provide evidence that the levy will directly create a financial hardship that will make it harder for you to pay your taxes.
- File bankruptcy to stop all creditor collection activity. The IRS cannot proceed with asset seizure without permission from the bankruptcy judge. Be wary of this option, as it will hurt your credit score for up to a decade.
Of course, the most effective way to stop an IRS asset seizure is to pay what you owe. If you don’t have the savings to cover your debts, consider borrowing the money you need.
Own your own home? You can refinance your home or take out a home equity line of credit to get the money you need. If you can qualify, a 0% balance transfer credit card lets you secure the money without paying additional interest. Or you can cover the debt with an unsecured personal loan.
What can the IRS seize?
When performing an asset seizure, the IRS can’t take everything you own. There are rules in place so that you are not left destitute and unable to feed your family.
According to Internal Revenue Code 26 U.S. Code § 6334, the IRS may not seize the following items:
- Clothing and school books that are deemed necessary.
- Personal effects, furniture, firearms, and livestock that do not exceed $6,250 in total value.
- Books and tools of a trade that are necessary for your profession or business (under $3,125 in value).
- Unemployment benefits.
- Undelivered mail.
- Certain annuity and pension payments.
- Worker’s Compensation.
- Judgments for support of minor children entered before the date of levy.
- Minimum exemption for wages, salary, and other income.
- Certain service-connected disability payments.
- Certain public assistance payments.
- Assistance under the Job Training Partnership Act.
- Personal residences in small deficiency cases where the taxes owed are less than $5,000.
- Personal residences and certain business assets used in the trade or business (unless a judge or magistrate provides approval).
In the exemptions above that include maximums values, note that the value is not based upon the retail value or the amount that you originally paid for these items. The value of those items is based on the fair market value that someone would pay for them today.
If you receive a notice of a pending asset seizure, a tax attorney can help you determine the best course of action to save your items.
Do you have to let the IRS into your home?
IRS agents can’t enter your home without your permission or a legal document authorizing them to. However, if you refuse to allow an IRS agent to enter your home, they will come back with a legal writ from a judge. And when they do, it will be a much less pleasant experience.
If the IRS agent has evidence that you are removing or hiding property to avoid seizure, they can enter without your permission. This is known as exigent circumstances. In exigent circumstances, authorities may enter your home to prevent physical harm, destruction of evidence, or hiding of assets. But the IRS agent must have actual evidence of this happening, not just suspicion.
Can the IRS seize your primary residence?
The Internal Revenue Service cannot seize your primary residence without a judge’s approval. However, they can place a lien on the property to ensure that you pay your taxes due when the property is sold.
Can the IRS seize jointly owned property?
Yes, the IRS can seize jointly owned property. When the IRS seizes co-owned property, the co-owner may receive compensation.
Tenants-in-common each own a specific percentage of the property. The IRS must pay them in accordance with that percentage when the property is sold.
Joint tenants are treated as if they each own the whole property. When the IRS seizes and sells an asset, joint tenants may not receive any money if the unpaid taxes are of higher value than the sale proceeds.
And if you added a co-owner to a property without that person paying fair compensation, the IRS can invalidate their ownership interest.
How can you get your seized property back?
Before the IRS can sell a seized asset, they must calculate a minimum bid price and provide you a copy of this calculation. When you receive this notice, you have an opportunity to challenge the Internal Revenue Service’s fair market value determination. After giving public notice, the IRS will generally wait at least 10 days before selling the seized assets.
Get professional help
During this process, you can plead your case and negotiate with the IRS to try to get your seized property back.
You must contact the IRS immediately if you want your property back. Working with a tax attorney can raise your odds of success.
By making the case that the asset seizure caused an immediate economic hardship, it is possible to get your items back. If the IRS denies your request, you can always appeal. Again, having a competent tax attorney or accountant on your side can greatly increase your chance at a successful appeal.
When must the IRS return seized assets?
The IRS will release your assets if:
- You paid the taxes owed.
- The collection statute of limitations expired before the IRS issued the levy.
- You convince the IRS that the assets will help you repay the taxes you owe.
- You have an installment agreement that specifically halts the levy.
- An economic hardship related to the asset seizure prevents you from affording basic living expenses.
- The value of the asset is greater than the balance owed and releasing the levy will not hinder the IRS’ ability to get paid.
For example, let’s say you own multiple properties and the levy is attached to all of them. The IRS may release the levy from one or more of the properties to let you sell or refinance it to settle your unpaid taxes.
You have two years from the date of the levy to submit your claim if your seized assets have been sold. Unfortunately, levies dated before March 23, 2017, only have nine months.
After the IRS sells your seized assets, what do they do with the funds?
When the IRS performs an asset seizure, the proceeds from the sale reimburse collection costs first, then pay the related taxes due. If there are funds left over after paying those bills, you can request a refund of the remaining balance.
Protect yourself from asset seizure
If you receive a notice of asset seizure, take immediate action. You can prevent the asset seizure if you work proactively with the IRS to resolve your unpaid taxes. The expertise of a competent tax attorney or tax professional is invaluable to this process.
Negotiating with the IRS to settle your unpaid taxes can protect you from asset seizure. Set up an installment plan or negotiate an offer in compromise. Or simply borrow the money through a home refinance, a 0% credit card, or an unsecured personal loan. Paying your debts will save your assets and stop the interest and penalties that the IRS charges.
Andrew is the managing editor for SuperMoney and a certified personal finance counselor. He loves to geek out on financial data and translate it into actionable insights everyone can understand. His work is often cited by major publications and institutions, such as Forbes, U.S. News, Fox Business, SFGate, Realtor, Deloitte, and Business Insider.