Part II: I have received a collection notice from the IRS: Is it a federal tax lien or tax levy? What is the difference?

by Bryan Miller, Tax Analyst, JK Harris and Company

Lien

As the definition implies, a lien is simply a claim to property by securing payment of tax debt if that asset is sold or liquidated. In essence, the IRS makes themselves your primary creditor to the attached property (as opposed to your mortgage or loan company). A lien will not harm most taxpayers other than their credit report. A taxpayer with a federal lien may not be able to attain a loan or credit; otherwise, the lien simply resides on their credit report to govern equity in the property. If the property is sold with at a gain, the tax lien is paid in whole or in part from the gain. If the property is upside down, the taxpayer may request a discharge of the lien to accommodate the sale. See Publication 783 for the form and instructions on a lien discharge, and Publication 4235 on addresses to send the request by region. Also, a temporary subordination of the Federal Tax Lien can be utilized if you are trying to refinance or restructure a mortgage. For more information and the form, see Publication 784.

In some professions where personal credit affects the business or ability to conduct business (such as partners in law firms, real estate developers) the lien can actually cause unforeseen harm. This is not intentional, and for these reasons, the IRS will consider releasing a lien either temporarily or permanently on a case by case basis. See Publication 1450 for instructions and state by state phone numbers to accommodate this process. (Note: The correct form for withdrawal of a lien is Form 12277.

Remedy

The only remedies for liens are those as described above. For a levy, the answer is to begin working with the IRS in either compliance or resolution. Compliance involves filing all outstanding tax returns, forms, or information for which the IRS may be requesting. A taxpayer must be compliant before seeking a final resolution. The IRS will only resolve the entire scope of the taxpayers’ liability, not just one year or another.

Resolution involves either establishing an installment payment plan, or providing the IRS 3 months of current financial information for qualification purposes. All resolution programs with the IRS have to be qualified for your unique circumstance to determine the ability to pay the back tax debt, provide proof that the debt cannot currently be paid (hardship cases), or determine that the debt can be paid but not in full. The IRS will require Collections Information Statement Form 433-A (for individuals and self-employed individuals), Form 433-B (For businesses), or Form 433-F (short form of 433-A used primarily by those with little income and assets, retirees, etc.).

Seeking professional assistance in divulging financial information to the Internal Revenue Service is highly recommended. The IRS will look at current income, expenses, assets, equity, access to cash-value holdings, retirement accounts, as well as go though bank transactions and the sales or disposition of assets and equity over the past few years. Knowing how the IRS interprets these documents and transactions to render a conclusion is imperative in working out the best tax resolution the IRS will accept under the Internal Revenue Code.

For more information and research on federal tax lien help please click here. For more information on federal tax levy program click here.

I have received a collection notice from the IRS: Is it a federal tax lien or tax levy? What is the difference?

Part one of a two part series

by Bryan Miller, Tax Analyst, JK Harris and Company

Enforced Collections

If you have received notices from the IRS regarding a federal tax lien or notice of intent to levy, you may be familiar with the feelings of panic and frustration that follow. Many taxpayers may be aware that they have a tax problem, but it is usually at this point that JK Harris attains many of our clients.

Most taxpayers perceive any correspondence from the IRS as negative and of equal merit. Not all correspondence from the IRS is negative. These notices happen to be quite negative correspondence in the form of a collection activity effort, however, they are certainly not of equal merit. Some taxpayers may confuse these notices, or may be somewhat familiar with one and not the other. However, most taxpayers are completely unfamiliar with IRS enforced collection activity and therefore do not know what to do or how to handle the situation.

Sound familiar? Understanding what a tax lien and a tax levy is, what it means to you as a taxpayer, and what these two notices affect in real day-to-day practice is essential to understanding one of the most feared collection tactics of the IRS.

To begin in short order, a levy is much more severe than a lien. For a definition from the IRS web site:

A levy is a legal seizure of your property to satisfy a tax debt…A lien is a claim used as security for the tax debt, while a levy actually takes the property to satisfy the tax debt.

Levy

A levy may take two forms, but the result is the same: 1) a levy may forfeit property in your possession, or 2) forfeit your rights to certain property that is held by others. This forfeited property will be used to pay down or pay off your back tax debt. Property in your possession may include a home, vehicle, boat, or business assets. Property that is rightfully owned by you but held by others includes: wages (often referred to as a wage garnishment), retirement account, certificate of deposit, money market account, bank account, professional licenses rental income, accounts receivables, 1099 income, commissions, and any cash value instruments such as loan value on life insurance.

Scary stuff, no doubt. But from all of the above, the IRS regularly uses some tactics more than others in everyday practice. Unfortunately, businesses are more susceptible to damage than an individual taxpayer. For example, individual taxpayers are much less likely to have a home or vehicle seized than a business owner to have assets seized.

Liquidating certain business assets is not the same as depriving someone of their primary residence. Even so for the business owner in most cases, the IRS would only look to liquidate excess, or non-essential assets that should not impede business operations. Taxpayers’ homes are usually only seized in cases of fraud or criminal activity. In either case, the IRS sees this as a last resort effort for such extreme measures to be taken.

Seizure of rights to property is much more common, the top two being wage garnishments and bank levies. These are not as damaging overall, yet very effective and attention grabbing, which is the point. Important to note here: the IRS notification process, for any reason, is via mail to the last known address; it is deemed a taxpayer’s responsibility to update the IRS with current information. So even if you do not receive the IRS notice by either mishap or misinformation through the mail, you will certainly take notice when money is frozen in your bank account, or your employer advises that the IRS has attached your wages. This can not only be embarrassing, but cause many residual issues on top of the IRS problems as well.

A real problem may arise here again for the business owner. If the IRS attaches account receivables (those who owe you money needed to run your operations), the account will have to pay the IRS in lieu of paying the business. This can particularly be a problem if the IRS attaches a major account of a business with only a few accounts, or a single account. Subcontractors or 1099 employees with a single employer fall into this category. Also, freezing a business bank account is no different to the IRS than a personal bank account until it is proven that the account is needed to run business operations. Even then, the IRS may only issue a partial levy release to pay necessary expenses while they keep the rest.

Tomorrow, part two of Bryan’s blog will discuss what a tax lien is, how to tell it apart from a tax levy and what the remedy for each situation is.

Does the IRS unfairly target minorities for IRS collections?

In an article posted last month on CNNMoney.com from Fortune magazine, TaxLifeBoat CEO Thomas M. Evans claims the disproportionate number of IRS actions against minorities isn’t intentional. Rather, he charges, it’s the result of overly rigid, highly-automated enforcement policies that waste taxpayer money by pursuing low-earners who either can’t pay, or owe virtually nothing.

While the IRS doesn’t publish information on the ethnicity of those taxpayers it takes collective action against, Evans compared tax lien information with Census data to determine the ethnicity of the taxpayers in the 1,000 zip codes the IRS targeted most heavily with tax liens.

To read the article in its entirety, click here.

National Taxpayer Advocate releases annual report to Congress

Last week, National Taxpayer Advocate Nina Olson released her annual report to Congress detailing the need for reform within certain parts of the IRS. Again this year, Ms. Olson has listed the need for tax reform as the number one priority for the IRS. She expressed concern over the IRS’ continued use of tax liens and the lack of alternative collections methods.

Ms. Olson’s report stated more than 1.1 million taxpayers had tax liens filed against them by the IRS in Fiscal Year 2010. Tax liens can be financially devastating to a taxpayer since the lien shows up on their credit report and will linger for seven years after the tax liability is paid. Once a taxpayer has a tax lien on their credit report, it can affect their ability to gain housing (owned or rented), employment, and can affect their ability to get affordable loans and insurance.

In the industry, we have seen an increased number of tax liens being filed and Ms. Olson’s report confirmed it. The NTA report states that tax lien filings have increased 550 percent in the past ten years.

You can view the JK Harris official press release on this issue at Expert Click.

What is the difference between a tax lien and a tax levy?

Recently, I found out that many clients who come to JK Harris are not aware of the difference between a tax lien and a tax levy. Since there is a significant difference between the two, I thought it would be a good topic to discuss on our blog.

A tax lien gives either the federal or state government (depending on who is filing the tax lien) a legal claim to your property as security of payment for your back tax debt. According to the IRS’ website, the IRS will issue you a Notice of Federal Tax Lien after the following requirements have been met: the IRS has assessed your back tax debt, they have sent you a Notice and Demand for Payment and you have still neglected to fully repay your tax debt within ten days of receipt of the notice.

If those requirements are met, a tax lien is created and filed against your property. This publicly notifies any creditors that the government (be it state or federal) has a legal claim in your property – and this includes any property you purchase after the lien is filed.

A lien attaches to all of your property (land, home, car, etc.) and to all rights to your property (accounts receivable, if you own a business). Tax liens can harm your credit – they can prevent you from obtaining credit, or buying a car or a home. In some cases, future employers may check your credit and see this information on your credit report.

It is very important to note – a tax lien is only released when you repay the tax debt or submit a bond, guaranteeing payment of the debt. In addition, you are responsible for any fees assessed in association with filing and releasing the tax lien.

See the tax lien page on http://www.irs.gov for more information on tax liens or visit your state department of revenue website.

A tax levy is a legal seizure of your property to repay a tax liability. A levy is different from a lien since a lien is only a legal claim to your property. A levy actually takes your money or your property to satisfy your back tax debt.

Typically, the IRS levies your wages, federal payments, state refunds or your bank account. It is rare for the IRS to actually levy your property, although it does happen. For a levy, the IRS will issue a Notice and Demand for Payment. If you do not pay, you will receive a Final Notice of Intent to Levy and Notice of Your Right to A Hearing at least 30 days before the levy is due to start. If you still do not pay your tax debt, you will be levied.

It is possible to get a tax levy lifted if they will cause a severe hardship, but a tax lien stays in place until the tax debt has been paid. If you get a Notice and Demand for Payment from the IRS, it is important for you to deal with it right away. IRS problems do not go away if you avoid dealing with them.

For more information on tax levies, visit the Levy page on the IRS website.

Why you should choose JK Harris to represent you with your back tax problem

As JK Harris nears its 13th anniversary in business, I look back at our history and it has been an interesting one. As one of the pioneers in the industry, we have navigated a long path to get to where we are today, but it has been well worth the journey. After 13 years, we are still the largest tax representation firm in the country. I realize largest doesn’t necessarily equate to being the best – but if you want to know why you should choose JK Harris to represent you with your back tax problem, I can give you several reasons why we are the best choice in tax representation.

* You can meet with one of our consultants face-to-face – We have offices in 325 cities where you can meet one of our consultants face to face. Many of our competitors can only assist you over the phone, which isn’t always comforting, particularly when you are dealing with something as stressful as a tax problem. However, if you cannot make it to one of our office locations, we do have staff available to assist you over the phone.

* JK Harris revolutionized the tax representation industry by changing the way we do business. JK Harris does not sell you a resolution service before we analyze your tax situation. Many firms will continue to sell you a particular type of tax resolution up front – such as an Offer in Compromise – without knowing what your financial details are. JK Harris will obtain all of your documents and financial information. We will then analyze what your tax debt is and if you qualify for one of the IRS’ programs that allow you to settle your debt for less than the amount that you owe. After we analyze your personal situation, we give you a report detailing what options you qualify for. With this report, you can hire JK Harris to assist you in resolving your tax issue – or you can use it to resolve your tax problems on your own. You can even take it to one of our competitors, if you like. The choice is yours.

* Let our experienced tax team assist you in ridding yourself of the burden of tax problems. Whether you need audit representation, help with back payroll taxes or your own personal back tax issues, JK Harris’ tax team has the power of attorneys, CPAs and Enrolled Agents who know the IRS’ rules and will work with the IRS on your behalf. Put the power of our professionals and paraprofessional staff to work for you.

Join the ranks of our satisfied customers. Call JK Harris today and let us help you put your tax issues behind you.

Sometimes truth is stranger than fiction…

The following column is reposted with permission from Ed Loughrey, EA, CFE, LPA in Bluffton, SC. Mr. Loughrey writes a tax column and today’s column was a collection of entertaining IRS related tax stories. Mr. Loughrey can be reached at ejltaxes@yahoo.com.

Man drives SUV to IRS – literally

A Maryland man had a problem he was trying to discuss and settle with an IRS employee on a telephone. He got quite frustrated during the call, hung up and proceeded to drive to the IRS office near his hometown. He drove his SUV up and down the parking lot a few times before deciding to crash it into the building. He jumped over the curb, across the grass and spun his SUV in circles before crashing into a first floor office. He did this twice before he was apprehended. His protest regarding his long-standing tax debt resulted in him getting sentenced to four years in prison, three years on supervised release, a fine and he had to pay restitution payments to the employees in the attack.

Liens filed on IRS employees

A citizen of California has been indicted for filing retaliatory tax liens against employees of the Internal Revenue Service, the Secret Service, and the U.S. Attorney’s office. The total of 22 false liens also included four federal judges. The amount of the tax liens ranged from $25 million to $300 million. He was also indicted for filing fictitious tax documents, claims for refunds totaling $20 billion and tax returns for third parties seeking refunds of over $1 million. No trial has been set, but he faces 223 years in prison and $5.75 million in fines.

Car wash owner owes four cents…plus

Can you imagine a pair of IRS officers coming to your business to collect overdue taxes of four cents, dating back to 2006? Send two men out to collect that amount? Oh – did I forget to mention that the penalties and interest on the tax debt amounted to an additional $201.31? The owner of the car wash believes the IRS has their priorities out of line. Especially when he showed them a letter dated from October 2009 stating all of his taxes were filed and paid to date. He really was irked that they didn’t bother to get their cars washed while they were there.

Two men file returns for dead people

Two California men plead guilty to filing more than 250 tax returns for deceased people. The fraudulent returns dated back to 2002 and 2003 and amounted to over $2 million in tax refunds. Many of the returns were rejected by the IRS but a number of checks were issued were delivered to addresses controlled by the preparers. Many of the checks were delivered overseas to banks in Armenia and Pakistan. The co-conspirators secured the Social Security numbers of the deceased individuals from the Internet. It was then easy for them to prepare phony W-2s and complete the returns. They have not yet been sentenced.

Taxpayers should know the consequences of a federal tax lien

Troy Sholl, Licensed Taxpayer Representative

According to National Taxpayer Advocate Nina Olsen, the filing of federal tax liens by the Internal Revenue Service has risen by 475% since 1999.

What is a federal tax lien? The IRS files a tax lien against your property when you have failed to pay your back tax debt. The IRS must first send out a Notice and Demand for Payment. If you still do not pay your tax liability in full within ten days of receiving the notice, the IRS is allowed to file a tax lien against certain property or assets (and any property you purchase after the lien is already in place) belonging to you. This allows the IRS to protect the interests of the government.

A tax lien is also a public notification that the IRS has a claim on your property. The tax lien protects the IRS as a creditor and allows the IRS to collect its due. Tax liens also give the IRS the right to seize property, and this may happen if you do not take action to begin repaying your tax liability.

Generally, there is little that can be done to prevent the IRS from filing a tax lien against you if you do not pay your tax liability in full. If you can borrow the money and pay off your tax debt, do it. Chances are good you will pay less in interest to the source you borrow from than you will pay to the IRS. Paying your tax debt down below the $25,000 level may help as well, but there are no guarantees.

If you are unable to do this, the IRS will issue a tax lien against you – and once that lien is issued, the impact is long lasting. The tax lien lasts until you pay your tax liability in full or until the statute of limitations runs out, typically ten years.

The filing of a tax lien will appear on your credit report and hurt your credit rating. In fact, according to Olsen’s report the filing of a lien may cause an immediate 100-point drop to your credit score. When a tax lien appears on your credit history, it may prevent you from buying a home or a car, signing a lease, or getting a credit card. Another problem is that many employers now check your credit report. A tax lien could ultimately affect you getting – or keeping – a job you want.

To prevent being hit with a tax lien, the best defense is a good offense. Pay your tax debts off quickly. If you find that you cannot, consult a tax professional to help you resolve your back tax issues. They can help analyze your situation and figure out how to get you back on track with the IRS.

Posted by JK Harris

IRS Examination Letters, Collection Letters and Notices

Continuing our series of blogs on IRS forms, Licensed Taxpayer Representative, Kelly Scott briefly details some of the commonly seen examination letters, collection letters and notices taxpayers may come across when dealing with the IRS.

6 Red Flags that Lead to an IRS Audit

Receiving an IRS audit notice is typically a troubling time for a taxpayer. Largely, this is due to the belief an audit will show you owe the IRS. If you receive an IRS audit notice or you are sent a tax bill from the IRS, you may need to prove that you don’t owe back taxes. Dealing with an audit can mean gathering up the proof and showing the IRS that you were 100% honest on your tax return. As for what triggered the audit, there are certain red flags that can appear on a tax return that makes the IRS take another look. The red flags say, “This person may owe more money than what their return says.”

What are the red flags that trigger an audit?

• Math errors – Math errors happen. Errors are actually the most common mistakes the IRS finds on a tax return. It is true the IRS will correct math mistakes in order to ensure the proper amount is paid or refunded, but math errors can trigger an audit. The good news, however, is that math errors don’t always lead to an audit. Sometimes, it is possible an IRS employee who looked at your return looked at a number wrong. Be sure to double check your numbers if you receive a letter from the IRS that says you owe.

• Dividends and interest don’t match – If the amount of dividends and interest on your tax return do not match the supporting documents, then you can just about count on getting a audit notice. One way to rectify this issue is to get a letter from the bank or mail a copy of the 1099 form that was sent by the payer. Sometimes the IRS may enter the information for the wrong taxpayer and this can cause the amounts to be off.

• Talking too much – There are some taxpayers who do a little bit of bragging about how they pulled a fast one on the IRS. If you are turned into the IRS for cheating on your taxes, the IRS rewards whistleblowers with 15% to 30% of the amount of additional tax that is collected. This is great motivation to someone who hear you bragging about not paying or underpaying on your income taxes.

• Your income is mostly cash – The IRS tends to put small business owners and the self-employed on their hit list. The IRS is looking for the almost $350 billion in uncollected taxes each year. They are looking for unreported and under-reported income and these two groups are typically the source.

• Your deductions – The IRS uses a computer program that compares your deductions to other taxpayers within your income bracket. This system will select tax returns that show a potential to collect more tax. If you fall at or under the average deductions for your bracket, then you do not have to worry about a red flag being raised.

• A crooked preparer – If you have someone prepare your taxes for you, don’t let them promise you a refund before going over all of your paperwork. This is because they are going to blow your deductions out of proportion to create that refund and to possibly even put some money in their own pockets. These individuals cause many red flags to be raised on tax returns.

This article is not meant to scare you. There are plenty of taxpayers who honestly file their tax returns but get flagged for one of these things or for something else. Just remember that the IRS does make mistakes too. If you can provide proof of your deductions, income, dividends and interest, you will be able to successfully navigate your IRS audit.

Posted by JK Harris & Company