When taxes are not paid the IRS usually issues a LIEN against the taxpaying entity. The lien gives the IRS the legal right to collect the taxes from the taxpayers' assets. And what the IRS considers to be your assets is just about everything you have, including your income!
Have a very clear understanding of this statement. THE LIEN IS AGAINST THE TAXPAYING ENTITY. As examples, the most common forms of lien would name; you as an individual, or you and your spouse, or your company, or you and your company, etc. This can be devastating since all the assets of the taxpaying entity are subject to the lien.
If you have an IRS lien, consider your assets to be one step from being the property of the United States Government because THE IRS HAS ACCESS TO ALL OF YOUR ASSETS JUST THE WAY YOU DO. So if they want to tap into your checking account; zap, they'll do it. Savings accounts could go, along with stocks, bonds, the cash value of your life insurance policy, 401Ks, vehicles, even your home if there is no other way for you to pay the taxes. (By the way, your home is usually the last thing they go for since they don't need any more negative publicity. But if "push comes to shove" and you have equity in the home, don't think they won't go after it to satisfy your tax debt!)
Once the lien is in place, the IRS has the legal foundation to actually take an asset. They do this through the LEVY process. You've heard of Bank Levies. As mentioned above, the IRS has the legal right to reach into a taxpayers' bank accounts and take money to pay owed taxes through a BANK LEVY. (As a point of interest; the IRS issues millions of levies per year!)
The IRS can also issue a WAGE LEVY (sometimes called "wage garnishments") and take money from your wages. The IRS simply issues a formal "Notice of Wage Levy" and sends it to your employer. With Notice of Wage Levy in hand, your employer will then have to send a percentage of your income from your paychecks to the IRS. Unfortunately when either of these levies occur, the taxpayer is usually in the worst possible and most vulnerable situation; nothing in the bank and little left in your take home pay.
Levies are also known as "SEIZURES". They can take the form of: HOUSE SEIZURES, AUTO SEIZURES, RETIREMENT SEIZURES, SOCIAL SECURITY SEIZURES: most anything you're receiving can be diverted to the IRS. To say the least, you'll have problems. But there's more to the story.
The IRS bases installment payments or OIC settlement amounts on each individual taxpayers' ABILITY TO PAY. Since no two taxpayers have the same asset base, any payment arrangement a taxpayer could make with the IRS would be based on that taxpayer's unique financial situation. There are numerous types of assets which the REVENUE OFFICER will examine when determining the individual taxpayer's unique ability to pay.
What we're talking about is the bottom line, and here's what it is! The LIEN says, "THE IRS CAN DO IT". The LEVY or SEIZURE, says, "THE IRS JUST DID IT". And it's that straightforward. For instance, you won't even know about a bank levy until your electronic banking system says your account balance is "zero", or your considerate bank manager calls to tell you the IRS has just emptied your bank accounts. So now they've gotten some of "their" money back from you.
But unfortunately that's not where the lien potential stops. Remember, ALL OF YOUR ASSETS, including YOUR PAYCHECK, are at risk. And when you take ALL OF IT into account, it translates into... YOUR ABILITY TO SURVIVE!!! Here's an example which will give you an idea of some of the assets the IRS would consider in discussing any settlement.
In 1990 you had your own business, but it failed in '91. Your accountant said you owed the IRS $12,000 in taxes but you couldn't pay them at that time. Hey, your business failed, and certainly you didn't have the money to pay the tax! "What do they expect?" you may ask.
Since then you've successfully held the IRS Collection Division at bay, but now they're getting very aggressive and demand payment in full within 4 weeks. There is one additional complication though: they're saying the total you owe is no longer $12,000, IT'S NOW $24,000! "What!! $24,000", you state in disbelief. Well obviously you haven't been paying attention to the accumulation of INTEREST and PENALTIES on the original $12,000 during the past 5 years.
Both you and your wife work and last year you had to lease 2 new cars to get you to your separate jobs. You have an 8 year old daughter in private school because you don't feel the public school in your community will provide the quality of education nor the environment you want for her. Tuition at the private school costs you $275 per month. You're frugal but even after you pay your necessary and reasonable bills each month, all you've got left is about $150. Oh, by the way, you do own a classic Harley. It's in the garage and you know you could sell it tomorrow for $12,000.
SO WHAT DO YOU THINK THE IRS WOULD CONSIDER AS LEVYABLE ASSETS and REQUIRED LIFESTYLE CHANGES IN THIS SITUATION?
Well unless you can borrow $24,000 to pay them now, the Revenue Officer will most likely consider them to be as follows:
1. The Harley gets sold to the highest bidder, with the proceeds forfeited to the IRS.
2. Your daughter will have to go to the public school.
3. You'll send the IRS at least $425 per month: ( $275, your daughters' tuition, plus $150 your left over money), until you've paid off the balance of the total tax debt, most likely over the next 3 years.
4. You can't miss a payment or you will DEFAULT on the payment plan.
5. And you'll have to stay current, i.e., IN COMPLIANCE on all your future tax obligations, meaning YOU'LL HAVE TO FILE ALL TAX RETURNS, and if you owe any taxes, you better be able to pay them when due. IN FULL.
Therefore the total cost for you to settle the debt will be somewhere near $30,000; two and a half times the original $12,000!! Sorry 'bout that.