Each year Americans pay trillions of dollars in taxes to the Internal Revenue Service. Though that is a huge number, there is still a significant amount of taxes that do not get paid—about $600 billion per year, according to the most recent estimates. The IRS refers to these unpaid taxes as the “Tax Gap” since they represent the gap between what should be paid in taxes and what the government actually receives.

That “Tax Gap” sum legally belongs to the IRS and they are not going to let $600 billion go without a fight. With the growth of the federal government’s annual budget deficit in recent years the IRS has been under increasing pressure to collect all of the taxes owed. Because of this the agency has stepped up its efforts to collect delinquent taxes and close the “Tax Gap.” When someone does fail to pay their tax bill in full and on time the IRS initiates its collection process and takes whatever steps are necessary to collect the money.

There are many reasons why individuals or businesses find themselves owing taxes and become entangled in the IRS collection process.

Here are just a few examples:

• A tax return is not filed on time.
• The taxpayer cannot afford to pay the entire tax bill.
• The IRS has added penalties or interest to the tax bill and those additional costs have not been paid.
• An audit determines additional taxes are owed. Tax bills can be increased if the IRS determines some income was not reported, some deductions are not allowable or that there are no receipts for the deductions that were claimed.
• A person is saddled with someone else’s tax debt. For example, the IRS might try to collect a spouse’s tax debt even if that spouse has left the marriage. Or if an individual has worked for a business that has failed and the business owed taxes the IRS can seek to collect those unpaid business taxes from the individual.
• Payment is made but there is an error in processing or recording the payment.
• The IRS miscalculates how much money is owed.
• There is an unresolved issue from a previous tax year.
• The taxpayer receives a notice from the IRS and does not respond. Failing to respond correctly can lead to the collection process regardless of the reason for the lack of response. For instance, sometimes a taxpayer will receive an IRS notice that they believe to be a mistake and will therefore ignore it. Even if it truly is an error by the IRS the taxpayer must respond in order to get the error corrected.
• An IRS notice is sent but never received. This is often due to a change of address but there are many reasons why a taxpayer might not be aware of the problem before it is too late.

After sending a final demand for payment, both through the mail and by telephone, the IRS will start enforcing their legal right to take from you what is owed. The Internal Revenue Service has a huge amount of power and authority and has a wide range of tools available for getting money from delinquent taxpayers. Though they function in different ways the collection methods are similar in that they allow the IRS to take the money owed with or without your approval.

The methods used by the IRS during the collection process are explained below.

Tax Liens

A tax lien is typically the first collection tool used by the IRS. As soon as the deadline for payment passes and the case goes into collection status a statutory tax lien comes into effect.

So, what is a statutory tax lien?

• A lien is a legal claim against your property, with “property” being defined as anything and everything that you own—your home, car, business, bank account, retirement account, etc.
• The legal claim of a tax lien stops short of giving the IRS ownership and control of your assets; they cannot use a tax lien to tow away your car or take possession of your house.
• However, a tax lien does give the IRS ownership of any proceeds that you might get from selling your assets. Sell any property and the money from that sale will go to the IRS; you will not receive any of the proceeds until your tax debt is fully covered.
• The tax lien is statutory because it is written into the legal code and occurs automatically when the payment deadline passes. There is no judge involved and no court hearing where you can challenge the lien. There is not even any paperwork to be filed and the taxpayer does not have to be notified that the lien is in effect. The statutory tax lien simply exists, by definition, when the IRS has past due taxes to collect.

Because there is no paperwork, and no notifications are involved in the creation of a statutory tax lien, it can often go unenforced. When the IRS is serious about enforcing the tax lien it will usually choose to officially file it with the court system. To do so the agency simply provides written notice to your local county court with a document known as a Notice of Federal Tax Lien (NFTL).

This is known as “perfecting” the lien because it provides notice that the tax lien is in effect. It ensures that the government’s legal claim to your money is enforced should you try to sell any assets.

The fact that the tax lien is now public record can cause several difficulties for the taxpayer:

• Credit bureaus can learn about the tax lien through court records and lower your credit score as a result.
• It can make it very difficult to get financing because lenders know that the IRS has first right to any property that you would use as collateral.
• For both of the reasons above any credit you do receive will likely carry a higher interest rate.
• It makes it much more difficult to sell the property because the title must first be cleared of the tax lien.

Despite these problems tax liens are still relatively minor compared to the next step the IRS can take: tax levies.

Tax Levies

With a tax lien the IRS does not actually take ownership or possession of your property. A tax levy, on the other hand, is when the IRS does take ownership of your property. It can legally take almost anything you own, and sell your belongings to pay off the tax debt.

Though the term "levy" does apply to the actual taking of assets the IRS "places a levy" by simply serving notice that it intends to take your assets at a future time. The Fifth Amendment of the U.S. Constitution states, “No person shall be…deprived of life, liberty or property without due process of law.”

For tax levies this “due process” requires the IRS to notify the taxpayer at least 30 days in advance. It must also give the option to request a hearing during that time frame to challenge the levy. If no hearing is requested or if the challenge fails then the IRS has fulfilled its “due process” requirement and can seize the assets at the end of the 30 days.

Asset Seizure

Personal property that the IRS can seize and then sell to pay off your tax debt includes but is not limited to:

• Vehicles, including boats, RVs, cars, and motorcycles
• Fine jewelry
• Second and vacation homes
• Certain government benefits

This is by no means an exhaustive list. There are some items that the IRS cannot legally seize, including:

• Car used to get to work or school
• Any necessary clothes, tools, or supplies necessary for work or school
• Furniture under $7,720
• Work tools under $3,520
• Any asset with no equitable value

There are situations in which it is not worthwhile for the agency to seize physical items. The IRS will not seize a piece of property if:

• The owner has less than 20 percent equity in the item.
• The expenses involved in taking and selling the item would exceed the amount the IRS would make from selling it.
• For a primary place of residence the IRS will not seize the house unless the tax debt is more than $5,000.

Bank Levies

Because of the potential difficulties in seizing physical assets the IRS prefers to seize financial assets. Besides being easier and safer to take they provide instant cash without the hassle of finding a buyer. The seizure of a financial asset is often referred to as a "bank levy." In no way should that imply that the IRS is limited only to accounts that reside in a bank though.

There are many types of financial assets the IRS can seize including:

• Checking accounts
• Savings accounts
• Pensions
• Individual Retirement Accounts (IRAs)
• 401(k) accounts
• Stocks
• Bonds
• The cash value of life insurance policies
• Accounts receivable

Wage Garnishment

The ability of the IRS to take your assets is not limited to what you currently own. The agency can also place a levy on your future assets via a wage garnishment.

A wage garnishment is when the IRS takes money out of your paycheck to pay off the tax debt over a period of time. With this collection tool you never even receive the money; your employer is required to pay the IRS each pay period and deduct the amount from your take-home pay. The garnishment continues until the entire debt is paid.

The amount that the government takes out of each paycheck can be significant.

• The IRS will leave you enough income to pay for what it considers to be basic living expenses, but calculates that amount based on charts and tables.
• The agency does not take into account what your living expenses actually amount to and may therefore leave you without enough income to pay the bills.
• At best, a wage garnishment will leave you living a very frugal existence effectively working to support the federal government rather than pursuing your own goals.

Unlike other levies the garnishment of wages is not a one-time event. Though they only have to provide "due process" once, the IRS can then seize money from dozens or even hundreds of your paychecks. The wage garnishment continues for as long as is necessary, until the IRS is satisfied that you have paid in full. Often that requires the wage garnishment to continue for years.

Even though the liens, levies and garnishments used by the IRS to collect back taxes may seem harsh they are not in and of themselves considered penalties. They are merely the methods used to collect what is owed.

However, there are penalties for failing to pay taxes. The penalties are mostly financial in nature and require you to pay more to the IRS than what you actually owe in taxes. Of course, increasing the amount owed makes it more difficult to pay the tax bill, increasing the odds that the IRS will have to seize assets or garnish wages. There are also instances where the tax penalties go beyond simple interest and fines and can result in criminal prosecution and the jail time.

There are several actions (or inactions) that the IRS will penalize you for, including:

• Failing to file a tax return
• Failing to pay taxes or paying less than what is owed
• Filing inaccurate tax returns
• Negligence or a lack of effort in complying with tax rules
• Tax fraud or intentionally underpaying taxes

Below are explanations for the different types of penalties and the amount that is charged for each.

Failure to File Penalty

If you do not file a tax return by the April 15 due date (or by the extended due date, if you file for an extension) the IRS will charge you a “failure to file” penalty. The dollar amount of the penalty depends on the amount of tax owed, the number of months that have passed since the deadline and the reason for the tax return not being filed.

In cases that do not involve negligence or fraud the "failure to file" penalty is calculated as follows:

• For each month that has passed since the deadline 5 percent is added to the total tax amount owed.
• The maximum penalty is 25 percent. This essentially means that the 5 percent penalty only applies for the first 5 months past the deadline.
• However, if at least 60 days have passed since the deadline to file the minimum penalty is $435 or 100 percent of the amount due whichever is smaller.

Failure to Pay Penalty

If you do not pay your taxes on time or pay only part of the amount owed you will be subject to a “failure to pay” or “underpayment” penalty.

• Payment of taxes is due on April 15 each year; at the same time tax returns are filed.
• Though you can get an extension on filing your taxes there is no extension on paying your taxes. So a filing extension can lead to a “failure to pay” penalty even if you file and pay within the allowed extension period.
• If you cannot pay the full amount on time and the IRS agrees to let you set up an installment plan you will still have to pay at least a portion of this penalty.

The amount of the penalty depends on the circumstances:

• The standard penalty is 0.5 percent of the unpaid amount per month. Over time the penalty can add up but is capped at 25 percent of the original amount owed.
• If you are paying with an installment plan the fee is lowered to 0.25 percent per month.
• If a levy is involved the penalty may be increased to 1 percent per month.
• If you both fail to file and fail to pay the combined penalty will be 5 percent per month—the same as the “failure to file” penalty by itself.

In addition to the penalty, the IRS will also charge interest on any amount that is not paid on time.

Accuracy-Related Penalty

Even if you file and pay your taxes on time you can still be charged a penalty if an audit finds your tax return to contain inaccurate information. Errors on a tax return can lead to a person paying either too much or too little in taxes; the IRS is primarily concerned with those who pay too little. There are two main inaccuracies that can cause a tax return to show a lower tax amount than what is actually owed:

• Listing less income than was actually earned.
• Taking more in deductions than what should actually apply.

When inaccuracies on your tax return lead to you paying less in taxes than you should have the IRS will charge you for the extra taxes you owe plus a penalty for filing an inaccurate return. Generally, the accuracy-related penalty will be 20 percent of the amount by which the taxes were understated.

Negligence Penalty

The penalty amounts listed so far are for cases in which the taxpayer is not accused of negligence or fraud. If you are found to be negligent or guilty of fraud the penalties can increase dramatically.

What constitutes "negligence" can be a bit hard to define because it depends on what would be considered a "reasonable" effort to comply with tax rules and regulations. If someone does not make at least a "reasonable" attempt to understand and follow IRS rules they can be found negligent and face stiffer tax penalties.

Some examples of actions that could constitute negligence:

• Not keeping receipts or records of items claimed as deductions.
• Not reporting income you were notified about on a tax information return (such as a W-2 or a 1099 form).
• Not checking the accuracy of a number or calculation that seems unusually high or lower than expected.
• Making the same mistake multiple times even though you have been notified and told how to do it correctly.

If you are found to be negligent, the IRS will charge you for 20 percent of the underpaid amount.

Tax Fraud Penalties

If you intentionally do not file or pay taxes or intentionally report inaccurate numbers in an effort to lower your tax bill, it is tax fraud. Any intentional effort to avoid paying what you owe in taxes constitutes tax fraud. Tax fraud is illegal and carries the most severe penalties that the IRS can dish out.

The most basic tax fraud penalties mirror those charged for negligence and are considered “civil” tax fraud penalties. The IRS can also charge taxpayers with “criminal” tax fraud in which case the criminal justice system determines the punishment. Criminal tax fraud penalties can involve hefty fines and significant jail time.

Criminal tax fraud can be classified as a misdemeanor or a felony depending on the charges.

• Failure to file a tax return is a misdemeanor and can carry penalties of up to $25,000 in fines and 1 year in prison for each year.
• Failure to pay estimated taxes is also a misdemeanor with a maximum fine of $25,000 and a maximum prison sentence of 1 year.
• Filing a fraudulent tax return is a felony and can be punished with up to $100,000 in fines and 3 years in prison.
• Tax evasion or using illegal activities to circumvent tax laws and avoid paying taxes is the most serious tax-related charge you can face. It is a felony punishable by up to $100,000 in fines and 5 years in prison.

Criminal prosecution is usually reserved for the most serious tax fraud cases; minor charges are generally handled with the “civil” penalties used for cases of negligence. That being said, more than 2,000 people were convicted of criminal tax fraud last year and the vast majority of those convictions included a prison sentence.

The consequences of not fully paying your taxes can be severe. So how can you avoid these tax problems or at least minimize the damage?

If you find yourself facing the IRS collections process and the related penalties and consequences, there are ways you can fix the problem and get back on good standing.

Removing Tax Penalties

If you are facing penalties for not filing or paying your taxes on time you may be able to get those penalties removed (or even get past penalties and interest refunded) if you can show that there was a “reasonable cause” for why you were late. “Reasonable cause” can include:

• Mailing the tax return or payment on time but writing the wrong address on the envelope or using the wrong amount of postage.
• A death or illness in the family.
• An error caused by an IRS employee.
• The destruction of records by a fire, flood or other catastrophe.

About one-third of tax penalties are eventually removed by the IRS. To request that a tax penalty be removed or refunded you need to fill out IRS Form 843, “Claim for Refund and Request for Abatement.”

Removing Tax Liens

Tax liens are usually only removed when the underlying debt to the IRS is paid in full. However, because tax liens negatively impact your credit situation, make it more difficult to do business and limit your ability to sell assets it can sometimes be in the best interest of both you and the IRS for the liens to be removed before the debt is paid. If you can convince the IRS that removing a lien will allow you to pay them back sooner, the IRS will likely be happy to have the lien removed.

You can also get the IRS to remove a lien that has been filed in court if you appeal and can show that the IRS was in error or did not have the right to file a lien. A lien can be removed on appeal if:

• The tax debt has already been paid in full.
• The IRS did not follow proper procedures.
• You were in bankruptcy when the lien was filed.
• The statute of limitations on collecting the tax debt has already passed.

Removing Tax Levies

When the IRS issues a notice that it intends to levy and seize your assets you have 30 days to challenge the levy or pay the amount due.

If you cannot pay the tax debt in full before the IRS is scheduled to seize your assets you may be able to remove the tax levy anyway by setting up an installment plan with the IRS or making other arrangements. If you need more time you can file for a "Stay of Collections" which allows you an additional 90 days before the IRS would be able to seize any assets.

Stopping Wage Garnishments

Wage garnishments are likewise a form of tax levy, though the seizure of assets from your paycheck is an ongoing process. If the levy on your wages is removed, the wage garnishments will be stopped.

Since wage garnishments function as a sort of forced, involuntary installment plan they can sometimes be removed by setting up a regular installment plan. Besides removing the burden from your employer and giving you the power to handle the payments yourself an installment plan can often be set up with payments that are considerably less than the wage garnishment amounts.

Innocent Spouse Relief

The IRS can sometimes saddle you with a tax debt that is actually the responsibility of your spouse or ex-spouse. If the actions of your spouse caused the tax problem and you were unaware of or had no part in those actions you can use IRS Form 8857 to request "innocent spouse relief" and have the tax debt and penalties removed.

Installment Plans

If you cannot pay your tax debt all at once the IRS may agree to let you pay it off gradually in monthly installments.

The IRS may be a tough and impersonal entity but it is also highly logical and practical. The agency does understand that it cannot take money that does not exist and allowing taxpayers to pay down a debt over time can often be the easiest and best way for the agency to collect all of the money owed. And since the IRS does collect interest on past due amounts it does not actually hurt the agency financially to allow someone to pay slowly.

Installment plans are often viable options that work well for both the IRS and the taxpayer. Though you will usually still have to pay penalties and interest setting up a payment plan can get you on a track towards being free of your tax debt and put an end to the stresses and pitfalls of the IRS collection process.

Offer in Compromise

In some cases, your financial situation may make it nearly impossible for you to pay off all of your tax debt even over the long term of an installment plan. In such situations the IRS may be willing to accept an "Offer in Compromise" and significantly lower your tax bill.

Here is how an Offer in Compromise works:

• Both you and the IRS acknowledge that there is no feasible way to pay off all of your tax debt. This means that you do not have enough income to pay it all and do not have enough valuable assets that the IRS could seize.
• You offer to pay the IRS the maximum amount that you can afford even though that amount may fall far short of the actual tax debt.
• If the IRS accepts that the amount you offered is the most that it could reasonably expect to collect from you it will agree to compromise and essentially lower your tax debt to match the amount you can pay.
• Once you have finished paying that amount the tax debt is considered "paid in full." This is true even if the agreed-upon Offer in Compromise is only a small percentage of what you originally owed.

The Offer in Compromise can be a life-saving tool for those who truly need it. On average people who settle their debt using an Offer in Compromise end up paying less than 20 percent of the actual amount they owed to the IRS.

“Currently Not Collectible” Status

If there is absolutely no way for you to pay your tax debt, and no way for the IRS to collect the money owed you can file for "currently not collectible" status.

"Currently not collectible" means exactly what it sounds like. The IRS will not be able to collect any owed taxes or penalty charges if:

• Your wages cover no more than your necessary living expenses so there is no amount the IRS can garnish.
• You have no assets worth levying. Remember that the IRS cannot seize an asset if you have less than 20 percent equity in the item or if the expenses involved in seizing and selling it are more than the equity is worth.

The fact that you have nothing worth taking is not exactly an enviable position but it can help in dealing with the IRS. If your account is deemed to be uncollectible the IRS will stop the collection process until your financial situation improves. Interest and penalties will continue to build up against you and you will have to provide financial statements each year to show whether you are still "currently" unable to pay.

If the financial statements show that your situation has improved enough the IRS collection process will resume. But if the 10-year statute of limitations for back taxes expires while you have "currently not collectible" status the tax debt itself will become permanently not collectible.

Criminal Tax Defense

If the IRS Criminal Investigation Division starts investigating your case due to suspicions of tax fraud you need to hire a criminal tax defense professional to represent you. The stakes are simply too high to risk facing a criminal investigation by yourself.

Whether a case constitutes tax fraud depends just as much on your intentions as on your actions. A specialist in criminal tax defense can guide you through the investigation process and give you the best possible chance to avoid any criminal charges.

Help With Tax Preparation and Planning

Of course prevention is the best medicine. The easiest way to deal with tax problems is to prevent them from happening in the first place.

This is one reason why it often pays to have a tax professional prepare your tax returns. Besides eliminating errors or misstatements that may simply be due to a lack of experience or a misunderstanding of the tax process having professionals do your taxes places much of the responsibility for any problems on their shoulders.

Seeking out a professional for customized tax planning can also help you avoid getting into a tax debt situation. Proper tax planning can keep you from getting personally saddled with tax debt from your business. Estate tax planning can also help out after you are gone; ensuring that your family is not left with a heavy tax burden due to your passing.

Dealing With the IRS

When you do have tax problems and are dealing with the IRS and its employees your odds of success will be heavily influenced by how well you communicate.

There are a few things you can do to help things go smoothly when dealing with IRS agents:

• Remain friendly. Being confrontational will make the IRS agent less likely to work with you or try to be helpful. Remember that the IRS holds all the power in this situation; you cannot scare or coerce them into taking your side.
• Be patient. The IRS can be very repetitive and detail-oriented which can become tiresome and frustrating to many people. But it is a necessary part of the process and complaining will not help your case.
• If you have moved notify the IRS by filling out their change-of-address form (IRS Form 8822). This will ensure that you get important notices on time and help keep you from missing deadlines.
• Always respond to notices or letters from the IRS. Respond promptly but only after you are certain you understand what the letter means and what is being asked for. Ask for the name and ID number of any IRS employee who calls you. To be safe it is best to check and make sure that you are actually dealing with a real IRS employee and not give any detailed information until you confirm that the call is legitimate.
• Stay calm. It is understandable that you might be fearful or nervous when facing the IRS even if you have done nothing wrong. However, such nervousness may give the impression that you actually do have something to hide.

Of course, considering the stakes involved, this is much easier said than done. No matter what you do you will always be at a disadvantage when dealing with the IRS. Most taxpayers have little or no experience in handling tax problems and the IRS collection process.

However, the IRS agents you will be facing are the absolute experts when it comes to dealing with taxpayers like yourself. It is their job. It is what they do every single day of their working lives. And while most people know very little about the myriad details and nuances of the tax code the IRS knows every rule and every tool they can use against you. The IRS literally knows every trick in the book because it is their book, they wrote it.

If you are facing the possibility of IRS collections Top Tax Defenders stands ready to help. We can provide the expert advice, guidance and representation needed to get you through the IRS collection process as quickly, cheaply and painlessly as possible.

Our team of tax specialists and attorneys has a proven track record of helping people in situations just like your own. There are several reasons for our success in dealing with the IRS:

• We specialize in resolving IRS tax problems. It's all we do. Just as IRS agents are experts at getting what they want from taxpayers we are experts at dealing with the IRS.
• We understand the IRS better than anyone because we have worked for the IRS in the past. That insider knowledge enables us to know exactly what the IRS will try to do and how to best handle every situation.
• We have over 27 years of experience working in the tax industry.
• In that time, we have developed our own system of methods and procedures that allow us to work quickly and efficiently; that means we are able to give your case the personal attention needed while resolving your problems in the shortest amount of time possible.
• By representing you before the IRS we are able to save you stress and time. We know what to say and what not to say and can help you face the IRS without fear.

At Top Tax Defenders we offer services including:

• Removing tax liens
• Removing tax levies
• Preventing the seizure of assets
• Stopping wage garnishments
• Setting up installment plans
• Negotiating Offers in Compromise
• Help with tax preparation
• Filing overdue tax returns
• Customized tax planning
• Criminal tax defense Representation before IRS auditors and revenue collectors

If you have any questions about the IRS collection process or would like more information about how we can help with your IRS tax problems, contact us today.