Tax Levies If the IRS is not able to recover unpaid taxes with a lien, then the next step is to levy the taxpayer's assets. A levy is the actual seizure of taxpayer assets by the IRS. This is the final method of enforcement of taxation when all other attempts to collect taxes have failed. Tax levy notices are usually issued to the employers and financial institutions of delinquent taxpayers. However, not all taxpayers who are issued notices of levy will actually have their assets seized. Various factors, such as the taxpayer's geographic location and history of payments will determine the likelihood that this procedure will occur. The rules and procedures for asset levies are outlined in Section 6330 of the Internal Revenue Code. The IRS must provide the taxpayer with a written notice of intent to levy along with an explanation of the right to appeal at least 30 days before taking action. Exempt Assets Although the IRS has the authority to seize the vast majority of a taxpayer's assets, they cannot take everything. Following is a list of items that are off limits for the IRS (as of 2009):
- Basic clothing
- Up to $7,700 of personal items
- Up to $3,860 of educational, trade or professional textbooks and equipment
- 85% of Unemployment benefits
- Undelivered mail
- Railroad and Congressional Medal of Honor benefits
- Worker's compensation
- Child support
- Minimum exemption for salary or other wages to pay basic living expenses
- Social Security and welfare
Unfortunately, the list of exemptions does not include automobiles. However, taxpayers who depend on their cars to get to work can usually persuade the IRS not to take them, because then they could not get to work and earn money to pay their taxes. The IRS can also seize retirement accounts and residences, but it will only do this as a last resort. As shown in the list, the IRS can also garnish wages, but not all of them. The taxpayer must have enough left to live on from each paycheck. Low-income taxpayers or those with many dependents may be exempt from garnishment. However, once a wage levy has been implemented, it will remain in effect until all back taxes are paid in full. Taxpayers can try to head off this action by negotiating with the IRS and setting up a payment plan or selling off an asset. An Offer in Compromise can work here too, but more drastic measures such as bankruptcy or changing employers may also be necessary. There are also situations where taxpayers can gift or transfer certain assets to other family members in order to prevent them being seized by the IRS. Putting paper assets into safe deposit boxes with their own tax ID number can often keep them out of reach. Taxpayers can also try to show the IRS that an asset being seized has little value. But the most effective strategy when dealing with levies is to convince the IRS that the levy will directly create a financial hardship that will only make it more difficult to pay the tax.
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Once the IRS has taken possession of your assets, it will sell them at IRS auction to the highest bidder. Taxpayers can continue to negotiate with the IRS right up until the actual bidding process begins. Assets sold at auction must be sold for at least their fair market value; for example, a $400,000 house cannot be sold for $100,000. However, an appraisal may be required to enforce this in some cases. The Bottom Line The IRS has considerable power to issue liens and levies against taxpayers who refuse to pay their tax bills. This can be a very effective means of collecting tax in many cases, but taxpayers have rights during these proceedings as well. There are many strategies that can be used to try to prevent or delay the IRS from seizing personal and business assets.