How To Prevent A Tax Levy

Guest Post From Ravinder Sahu

Far too many people underestimate the IRS for its ability to follow through and get that last dime from them. The “IRS” might as well stand for “is really serious,” so the way you handle your taxes should be serious, too.

They won’t pull the rug out from underneath you, though. You will get a notice and demand for payment, a notice of intent to levy, and a notice of a right to a Collection Due Process hearing. These will come in the form of five letters that is often referred to as the “notice stream”. If you don’t pay the balance or arrange to pay the balance by the time you get the last notice, the levy could be issued. The IRS will garnish your wages. Remember that “really serious” part? The IRS issued 3 million in levies in 2012 alone.

What can you do? There are steps you can take to have the levy lifted but we recommend doing one better—don’t get the levy in the first place. Ahhh, the power of prevention. Even if you are in dire straits, there are things you can do to keep this from happening. Read on for more about how to prevent a tax levy.

Get Confirmation; Then Negotiate

The first thing you need to do is make sure the IRS didn’t make a mistake. Hey, it’s rare but it does happen. If you’ve been able to verify your balance, it’s time to negotiate. It is possible to contact the IRS and come up with a payment arrangement. Figure out what you can pay and go from there, securing the help of a tax professional if you need to. Monthly payment installations can be arranged. As long as you make the monthly payments, the levy will be deferred and likely canceled altogether.

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Request an Extension

Another alternative is to get an extension. This is a fairly common route taken by people who are about to have a levy filed against them. Don’t just ignore it, as hiding those letters under your bed isn’t going to help matters. Instead, request the 120 days extension they would give you to pay the balance and avoid a levy. Also, the failure to file penalty can be much steeper than the penalty to pay.

Get Classified as Unable to Pay

Those who don’t see themselves as able to make the payments or pay in 120 days can request that they be classified as unable to pay. You need to prove this to prevent your assets from being levied. The government will likely take a look at your paychecks, any and all bank accounts that you own, and talk to your employer to make their decision. Be aware that the IRS can lift this status if they determine in the future that you are able to pay.

Consider the Offer in Compromise

The IRS has something called the OIC—the offer in compromise—which is a collection alternative that allows the taxpayer to settle his or her tax debt for less than the amount owed. If this is agreed upon, the levy will be suspended. However, it is rare that this is granted, as most of the taxpayers with unpaid balances don’t qualify for this compromise. For instance, a taxpayer with unpaid balances from multiple previous years will undoubtedly be rejected by the IRS for an OIC. In addition, the IRS is usually aware of taxpayers who are trying to stall the process, so be aware that a levy can even be issued while you make arrangements on how to pay.

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In sum, the IRS is really serious. Don’t mess around with unpaid balances and failure to file penalties. Get a jump on paying these before a tax levy is filed. Use one of these many options to arrange something with the IRS and you should be fine. If all of this still feels a bit overwhelming, consider getting help from a tax professional. You’ll pay money up front but their help in avoiding a tax levy or lien will make it worth it.

Thanks to Ravinder Sahu

Gary Christenson

The Deviant Investor