Our readers come to us with all kinds of ideas about what the IRS can do with levies and wage garnishments to delinquent taxpayers. These ideas often stem from what they’ve heard from friends, media outlets, and in some cases, the IRS. Although the IRS is not an agency you want to underestimate, its reputation often exceeds its actual capabilities.
This guide will explain what the IRS can and cannot do when it comes to levies. Although the guide is by no means comprehensive, it should help bust some of the myths that have developed around the IRS.
You are probably bored of IRS statistics, but here are two that explain the collective fear surrounding the Internal Revenue Service so much.
Two reasons to take the IRS seriously
As of 2015, the U.S. Tax Code has over 10 million words in length, and that doesn’t include tax-related case law, which is vital to understand how the tax code should be interpreted (Source). That’s crazy. A diligent taxpayer would need to spend eight hours a day for three and a half months just to skim through the tax code at 200 words a minute. What’s even more depressing is the tax code grows every year. If the current pace holds, it will have 100,000 pages by 2050.
However, based on those rules, the IRS can arrest you and put you in prison for tax evasion. In 2015, the IRS sentenced 3,092 taxpayers out of 3,208 indicted. That is a 96% conviction rate for those keeping score (source).
So it is no wonder the IRS has become the nation’s bogeyman, a quasi-mythical monster that can snatch you away for the slightest misstep.
Many of our readers express concern about the IRS showing up one day and seizing their home; placing a levy on their income, or shutting down their business.
Debt, particularly tax debt, generates so much fear and stress it has serious effects on health. According to a 2014 report published by the BMC Public Health journal, being seriously behind on debt repayments is a predictor of mental and physical health problems (source).
Is the fear warranted?
The reality of the IRS collections machine is that it is not as agile or aggressive as you think. The IRS has checks and balances that limit the actions it can take. Taxpayers have rights that ensure due process is followed. Even if you are facing the threat of levy, there are ways to resolve the situation.
IRS Collections Process: The Five Final Notices
The IRS must follow due process before it can initiate a levy on your property. According to the Internal Revenue Code (Sections 6330 and 6331) this includes sending a final notice to taxpayers. The IRS likes to keep taxpayers guessing so it sends a series of five collection notices that, to the layman, all look like a final notice.
- CP 14: This is the first “final” tax levy notice you’ll get. It simply tells you your balance is due
- CP 501: Just in case you missed the first letter, here’s a reminder that your balance is due.
- CP 503: Anyone home? 2nd notice that your balance is due.
- CP 504: Final notice of balance due. Except it isn’t really the final notice.
- CP 90: “The” final notice of intent to levy and notice of your right to a hearing. This is the real deal. It is the only notice that enables the IRS to garnish your wages, levy your banks, and take possession of your properties.
Going through this correspondence cycle can take six months to complete. The IRS typically sends a follow-up letter every five weeks. Notice the IRS is not required to send all those letters. The first four are courtesy notices.
Why is this important? If you still haven’t received the CP 90, any negotiations with the IRS will be without the direct threat of a levy.
Even after you receive a CP 90, the IRS still has to wait 30 days to give you time to file an appeal.
Notice: In cases where there is a large balance due, the IRS will sometimes send the CP 90 right off the bat.
What can the IRS actually seize?
This is an important question, right? The answer may surprise you.
But first, let’s clarify something you need to understand when dealing with the IRS. The IRS does not want to seize your property. Why do we say this? In 2015, the IRS sent out 1.46 million notices of the levy but only made 426 seizures. (https://www.irs.gov/pub/irs-soi/15databk.pdf)
Now, we are not claiming the IRS is bluffing. The threat of losing your assets if you don’t pay your taxes is real. But the IRS wants your cash, not your property, and IRS officers are willing to give you plenty of breaks as long as you show a willingness to negotiate.
Why does the IRS prefer cash to personal property?
The answer lies in Section 6331(f) of the Internal Revenue Code, which stops the IRS from levying when “the taxpayer has insufficient equity in the property.” To illustrate, if you own a $20k car and you owe $20k on it, the IRS will not seize it. The same applies if you’re upside down on your mortgage. Even if own an asset outright, such as jewelry or an expensive painting, agents need to request managerial approval and send the request to an IRS liquidation expert. Needless to say, IRS agents prefer to avoid the additional time and expense and look for ways to get taxpayers to pay in cash.
What property is exempt from IRS levies?
The existence of equity is not the only limitation the IRS faces. Section 6334 of the Internal Revenue Code specifically lists types of property that are excluded from IRS collection procedures.
These exemptions include:
- “Necessary clothing.” Unfortunately, your Gucci handbag and your Louis Vuitton loafers don’t qualify as necessary.
- Fuel, provisions, furniture, and personal effects are exempt as long as they don’t exceed $6,250 in value.
- Unemployment benefits and workmen’s compensation
- Investment real estate. Your home and your rental properties are exempt as long as the amount you owe is $5,000 or less. For larger amounts, real estate can be seized.
- Principal residences are exempt unless a judge or magistrate of a district court of the United States approves the levy in writing.
This is by no means an exhaustive list, but it gives you an idea of the restrictions IRS agents must follow when seizing property.
Regardless of what IRS agents may tell you, it is extremely unlikely the IRS will levy on a home, car, furniture, or other types of equipment, which tend the be the stuff taxpayers are more concerned about losing. Although you shouldn’t be complacent, there are options available for those who want to resolve their tax debt problems.
Why you need to hire a tax relief company
As you can see, the truth about IRS collections is very different to what many people think. This guide only mentioned a few of the facts about tax debt that tax attorneys use to fight the IRS and negotiate a reasonable settlement. Although you can represent yourself before the IRS, retaining representation is your right: right #9 of the IRS Taxpayer Bill of Rights to be precise.
If you owe a lot of money to the IRS, it can help to have a tax relief company on your side. The best tax relief companies have tax lawyers and enrolled agents on staff, provide a money-back guarantee, and charge competitive rates.
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.