Tax Help: Property and Assets Protected from an IRS Tax Lien or Tax Levy

After a tax dispute has run its course and the correct tax has been assessed, if the taxpayer does not pay after five letters have been sent by the service center, the debt is referred to an Automated Collections Site (ACS).  If the ACS has enough information on you, notices of tax lien and wage levy may be sent.

If this fails to collect the tax, the case is sent to a Field Revenue Officers (the cowboys of the IRS who create most of the horror stories). These people interview those living near your last known address, your last employer, and anyone else they find in an attempt to determine where you are and what you have.

After the taxpayer is found, the collections proceedings begin.  The IRS can place an federal tax lien against your home, your personal property, and everything you own. They can also levy your bank account and your pay check through a wage garnishment

Definitions

1.    A federal tax lien is placed on property and all rights to property by the federal government for unpaid federal taxes. 

a.   First in Time, First in Line: The lien of the IRS is second to any earlier creditors (such as your mortgage holder(s)).  The IRS has the right to force the sale of your property at auction and then take what’s left after earlier creditors are satisfied.

2.    A wage levy or wage garnishment is where the IRS contacts your employer and forces him to send a portion of your salary directly to the government.

a.   This causes a lot of people to change employers and delay the action until the IRS finds them again.

3.    A bank levy is where the IRS contacts your bank and forces them to send all the money in your account at the time of the levy to the IRS. You have 20 days to appeal and stop this process after the levy is filed.  During this time the funds are frozen in your account.

a.   The levy only operates against the funds in your account at the time the bank received the levy.  For example, if the bank received the levy on Monday and you deposited $1,000 dollars on Tuesday, the IRS has no rights to that $1,000 unless they file a new levy.

Property Exempt from the Lien or Levy

By law, some property cannot be levied or seized. The IRS may not seize any of your property when the expense of selling the property would be more than the tax debt. In addition, the IRS may not seize or levy your property on the day you attend a collection interview because of a summons. (It used to be common practice to set up a meeting at the IRS office and tow away the taxpayers car while the meeting was going on.)

Other items that may not be levied or seized include:

See Exhibit A for the National Standards of allowable expenses. For a more complete list of exempted assets, see Exhibit B.

The above includes money in the bank from these sources, as well as property purchased with these funds.  For example, a automobile purchased only from workman’s compensation funds is exempt from lien.

The list of property protected from the collections division of the Internal Revenue Service, is found in Publication 594 and the worksheet to determine your allowable standard of living is found in Form 433-A (433-B for businesses).

Your Home

There is no homestead exemption when it comes to a Federal Tax debt.  In many states, your primary residence (and sometimes its contents) is protected from creditors and state tax debts.  It is not safe from the IRS and may be liened, foreclosed and sold at auction for failure to pay your taxes.

There are two exceptions to this rule. First, if the tax you owe is less than $5,000, the IRS may not sell your primary residence without judicial approval.  The receive judicial approval, the IRS must notify the taxpayer of the hearing and the demonstrate that 1) the requirements of any applicable law or administrative procedure relevant to the levy have been satisfied, 2) the liability is owed, and 3) no reasonable alternative for collection of the taxpayer’s debt exists. The result of all of this is that it is expensive for the IRS to seize a residence, and if the amount of the debt is less than $5,000 it will not make economic sense to do so.

Second, if it is determined you are an innocent spouse, the IRS may not sell your half or portion of the home. For additional information on Innocent Spouse Relief and Separation of Liability and Equitable Relief, see Publication 971.

The IRS is required to leave you enough income to provide for your housing. The following are areas in Southern California and will give you an idea of how much you was allowed for rent or mortgage in 1999 (this is in addition to the amounts in Exhibit A):

•  San Diego County: $1,372

•  Orange County: $1,568

•  LA County: $1,417

•  Imperial County: $833

•  San Bernardino County: $1,174

This year, there were very few homes sold at auction by the IRS. Because of the recent bad press, and the 1998 Restructuring and Reform Act, the IRS is very conscious of its image and will not make you homeless unless it is an exceptional case.  However, a tax lien is valid for 10 years from the date of assessment and that the political pressure may swing the other way when the IRS needs more money.

Strategy

The following assumes the tax assessed against you is correct and no longer in dispute:

If your assets substantially exceed the debt you owe the IRS, your options are limited. Before the tax is assessed, you may be able to use a qualified trust or other mechanism to provide for members of your family, but once the tax is assessed, the transfer may not be respected.  Your best option is to setup an installment agreement that allows you to keep your residence and other assets in which you have equity.

It is very important that the IRS does not seize and sell your home. If this occurs, price paid will be substantially lower than the one you would have received had the property been sold through regular channels. This loss comes directly out of your pocket!

It is also important to be aware of scams. There are a few companies out there that sell “incorporation kits” promising to protect your assets from the IRS. Unless you have a valid business purpose for transferring the assets before the tax is assessed, the transfer will not be respected. In fact, charges of fraud, both civil and criminal, may be made. Civil fraud carries a 75% penalty and criminal fraud carries up to 5 years in prison and fines for each count. Each tax year generally represents a separate count.

If your debt exceeds your assets (especially if you do not own a home), you may file an Offer in Compromise (Form 656 or 656-A).  If the debt is uncollectible, the IRS will compromise your liability under the premise that they are receiving something they could not have otherwise gotten. For example, if you have no assets, and you borrow $10,000 to pay a tax liability of $20,000, your offer would have a good chance of being accepted. However, if you had $30,000 in equity in your home, and a tax liability of $20,000, you could not file an Offer in Compromise because you could not offer the IRS something they could not otherwise get.

Another strategy that works when you do not have equity in a home is to pay off all of your other debts before making an Offer in Compromise to the IRS. When the IRS calculates your monthly payment, they will assume you make minimum payments to your creditors. Of course, this results in high interest on these debts. Therefore, it is preferable to reduce high interest debts before contacting the IRS.  The IRS charges around 8% interest, while most credit cards are substantially higher.

Conclusion

Once a tax dispute has run its course, and the tax assessed, the IRS will not let its bounty get away unless it is clearly uncollectible. Therefore, a taxpayer who is forced to enter into a payment arrangement will find it a painful process and one that is often best handled by a professional. Your entire life will be evaluated and you will be placed on a very strict budget.

If you wish to protect your assets from ordinary creditors and from the IRS, there are a few vehicles available. However, those who form corporations with no valid business purpose other than to avoid tax are sure to increase their problems. The methods that work generally involve trusts and are best handled by estate planners who focuses in these types of situations.

Tax Help

The Law Offices of Chris Rusch can remove your federal tax lien and stop your wage garnishment! Please contact us for a free case review.

Exhibit A : Collection Financial Analysis: Total Monthly National Standards

(Rev. 7-98)

Expenses include: Housekeeping Supplies, Apparel and Services, Personal Care Products and Services, Food, and Miscellaneous.

To find the amount you are allowed, read down the Total Gross Monthly Income column until you find your income, then read across to the column for the number of persons in your family.

If there are more than for persons in your family, multiply the number of additional persons by the amount in the “Over Four” column and add the result to the amount in the “Four” column.

Normally, expenses should be allowed only for persons who can be claimed as exemptions on your income tax return.

Dollar amounts are derived from the Bureau of Labor Statistics (BLS) Consumer Expenditure Survey.

Local Housing Standards

In addition to the above, the following is allowed for rent or mortgage. Generally, the IRS will not force a sale if it does not make economic sense…in other words, you should not be forced to sell if it would cost more money to do so that would be saved by moving into a less expensive house.

These are areas throughout Southern California, and are therefore substantially higher than many areas. Consult your local IRS office for your local housing standards.

San Diego County:                                                   $1,372

Orange County:                                                       $1,568

LA County:                                                             $1,417

Imperial County:                                                         $833

San Bernardino County:                                           $1,174

Exhibit B

Internal Revenue Code

§ 6334 Property exempt from levy.

(a) Enumeration.
There shall be exempt from levy –

(1) Wearing apparel and school books.
Such items of wearing apparel and such school books as are necessary for the taxpayer or for members of his family;

(2) Fuel, provisions, furniture, and personal effects.
So much of the fuel, provisions, furniture, and personal effects in the taxpayer's household, and of the arms for personal use, livestock, and poultry of the taxpayer, as does not exceed $6,250 in value;

(3) Books and tools of a trade, business, or profession.
So many of the books and tools necessary for the trade, business, or profession of the taxpayer as do not exceed in the aggregate $3,125 in value;

(4) Unemployment benefits.
Any amount payable to an individual with respect to his unemployment (including any portion thereof payable with respect to dependents) under an unemployment compensation law of the United States, of any State, or of the District of Columbia or of the Commonwealth of Puerto Rico.

(5) Undelivered mail.
Mail, addressed to any person, which has not been delivered to the addressee.

(6) Certain annuity and pension payments.
Annuity or pension payments under the Railroad Retirement Act, benefits under the Railroad Unemployment Insurance Act, special pension payments received by a person whose name has been entered on the Army, Navy, Air Force, and Coast Guard Medal of Honor roll (38 U.S.C. 562), and annuities based on retired or retainer pay under chapter 73 of title 10 of the United States Code.

(7) Workmen's compensation.
Any amount payable to an individual as workmen's compensation (including any portion thereof payable with respect to dependents) under a workmen's compensation law of the United States, any State, the District of Columbia, or the Commonwealth of Puerto Rico.

(8) Judgments for support of minor children.
If the taxpayer is required by judgment of a court of competent jurisdiction, entered prior to the date of levy, to contribute to the support of his minor children, so much of his salary, wages, or other income as is necessary to comply with such judgment.

(9) Minimum exemption for wages, salary, and other income.
Any amount payable to or received by an individual as wages or salary for personal services, or as income derived from other sources, during any period, to the extent that the total of such amounts payable to or received by him during such period does not exceed the applicable exempt amount determined under subsection (d).

(10) Certain service-connected disability payments.
Any amount payable to an individual as a service-connected (within the meaning of section 101(16) of title 38, United States Code) disability benefit under –

(A) subchapter II, III, IV, V, or VI of chapter 11 of such title 38, or

(B) chapter 13, 21, 23, 31, 32, 34, 35, 37, or 39 of such title 38.

(11) Certain public assistance payments.
Any amount payable to an individual as a recipient of public assistance under –

(A) title IV or title XVI (relating to supplemental security income for the aged, blind, and disabled) of the Social Security Act, or

(B) State or local government public assistance or public welfare programs for which eligibility is determined by a needs or income test.

(12) Assistance under job training partnership act.
Any amount payable to a participant under the Job Training Partnership Act (29 U.S.C. 1501 et seq.) from funds appropriated pursuant to such Act.

(13) Residences exempt in small deficiency cases and principal residences and certain business assets exempt in absence of certain approval or jeopardy.

(A) Residences in small deficiency cases. If the amount of the levy does not exceed $5,000 –

(i) any real property used as a residence by the taxpayer; or

(ii) any real property of the taxpayer (other than real property which is rented) used by any other individual as a residence.

(B) Principal residences and certain business assets. Except to the extent provided in subsection (e) –

(i) the principal residence of the taxpayer (within the meaning of section 121 ); and

(ii) tangible personal property or real property (other than real property which is rented) used in the trade or business of an individual taxpayer.

(b) Appraisal.
The officer seizing property of the type described in subsection (a) shall appraise and set aside to the owner the amount of such property declared to be exempt. If the taxpayer objects at the time of the seizure to the valuation fixed by the officer making the seizure, the Secretary shall summon three disinterested individuals who shall make the valuation.

(c) No other property exempt.
Notwithstanding any other law of the United States (including section 207 of the Social Security Act), no property or rights to property shall be exempt from levy other than the property specifically made exempt by subsection (a).

(d) Exempt amount of wages, salary, or other income.

(1) Individuals on weekly basis.
In the case of an individual who is paid or receives all of his wages, salary, and other income on a weekly basis, the amount of the wages, salary, and other income payable to or received by him during any week which is exempt from levy under subsection (a)(9) shall be the exempt amount.

(2) Exempt amount.
For purposes of paragraph (1), the term “exempt amount” means an amount equal to –

(A) the sum of –

(i) the standard deduction, and

(ii) the aggregate amount of the deductions for personal exemptions allowed the taxpayer under section 151 in the taxable year in which such levy occurs, divided by

(B) 52.

Unless the taxpayer submits to the Secretary a written and properly verified statement specifying the facts necessary to determine the proper amount under subparagraph (A), subparagraph (A) shall be applied as if the taxpayer were a married individual filing a separate return with only 1 personal exemption.

(3) Individuals on basis other than weekly.
In the case of any individual not described in paragraph (1), the amount of the wages, salary, and other income payable to or received by him during any applicable pay period or other fiscal period (as determined under regulations prescribed by the Secretary) which is exempt from levy under subsection (a)(9) shall be an amount (determined under such regulations) which as nearly as possible will result in the same total exemption from levy for such individual over a period of time as he would have under paragraph (1) if (during such period of time) he were paid or received such wages, salary, and other income on a regular weekly basis.

(e) Levy allowed on principal residences and certain business assets in certain circumstances.

(1) Principal residences.

(A) Approval required. A principal residence shall not be exempt from levy if a judge or magistrate of a district court of the United States approves (in writing) the levy of such residence.

(B) Jurisdiction. The district courts of the United States shall have exclusive jurisdiction to approve a levy under subparagraph (A).

(2) Certain business assets.
Property (other than a principal residence) described in subsection (a)(13)(B) shall not be exempt from levy if –

(A) a district director or assistant district director of the Internal Revenue Service personally approves (in writing) the levy of such property; or

(B) the Secretary finds that the collection of tax is in jeopardy.

An official may not approve a levy under subparagraph (A) unless the official determines that the taxpayer's other assets subject to collection are insufficient to pay the amount due, together with expenses of the proceedings.

(f) Levy allowed on certain specified payments.
Any payment described in subparagraph (B) or (C) of section 6331(h)(2) shall not be exempt from levy if the Secretary approves the levy thereon under section 6331(h).

(g) Inflation adjustment.

(1) In general.
In the case of any calendar year beginning after 1999, each dollar amount referred to in paragraphs (2) and (3) of subsection (a) shall be increased by an amount equal to –

(A) such dollar amount, multiplied by

(B) the cost-of-living adjustment determined undersection 1(f)(3) for such calendar year, by substituting “calendar year 1998” for “calendar year 1992” in subparagraph (B) thereof.

(2) Rounding.
If any dollar amount after being increased under paragraph (1) is not a multiple of $10, such dollar amount shall be rounded to the nearest multiple of $10.

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