You got behind on your taxes. It can happen to the best of us. The IRS sent you letters looking into the matter, but either you would not or could not pay what you owed, so you threw those letters in the trash, hoping the whole thing might blow over. But the IRS did not give up (they never do). More letters came, and these letters threatened first a tax lien and then, finally, a tax levy. You’re in hot water now, and you know it. Now the question is this: what do you do?
First, some clarification on terminology. Not to be confused with a tax lien, which is already a serious matter, a tax levy filed against you by the IRS is far worse. Essentially, a tax levy means the government stands on the brink of seizing your property to pay off any back tax you owe, including interest and penalties. Cars, boats, houses, your children’s computers: when it comes to getting what’s owed to them, the IRS does not discriminate. They will take what they must to balance their ledgers.
The pain and devastation that goes along with a tax levy can be tremendous. We’ve seen it more times than we’d like, and we hope to do whatever we can to help families avoid facing one if at all possible. Towards that end, we’ve compiled a list of five guidelines regarding how to stop a tax levy. We hope you put them into practice to protect you and your family from facing such a terrible event.
1. 120 day extension. Obviously, the best way to avoid a tax levy is pay the IRS what you owe. If you can demonstrate a reasonable assurance of payment within 120 days, the IRS will generally grant an extension. Once payment in full has been made, the levy will be cancelled.
2. Work out an installment agreement. The IRS allows communication with tax agents and encourages attempts to put together an installment payment plan. Depending on the total owed, you’ll have a maximum of six years to pay back the sum, though often less than that. You’ll have to put a payment plan in motion before the levy takes effect, so jump on this method right away if you plan to use it.
3. Offer in compromise. If you can demonstrate to the IRS that collection in full on what you owe would result in severe financial hardship or produce unjust circumstances, you might qualify for an offer in compromise. Essentially, this means you would reach an agreement to pay less than the total amount owed. Understandably, the IRS doesn’t like to lose money, which means few actually do qualify, and those that do usually have sought out professional help in making their case. You’ll want such help, too, if you plan to pursue this path.
4. Bankruptcy (Chapter 7 or 13). No, it’s not a fun thing to do. And yes, it will destroy your credit score. However, filing chapter 7 or 13 bankruptcy will put an immediate stop to any levy the IRS has placed against you (as well as any other collections against you). Having said that, When all is said and done, you will likely still have to give up some of your personal assets in the process, which means this option is of debatable worth when it comes to dealing with a tax levy. Consult with a professional before following this path.
5. File an appeal. You have a legal right to an appeal. If you believe you have been wrongly accused of wrongdoing relating to your taxes, then filing an appeal stands as the obvious recourse. However, a word of warning. The IRS, just like the rest of us, does not enjoy having their time wasted. Don’t file an appeal to buy time or based upon some wild hope that the IRS will admit error on their part when you full well know the problem lies with you.
There you have it. Our five best tips for responding to the possibility of a tax levy. What you’re going through is one of the most stressful financial situations possible, but we hope our words here have offered some small degree of comfort and guidance. Good luck. And best wishes on your financial future!