Tax Lien vs Levy vs Garnishment: What are the Differences?  

A lien vs. levy? Levy vs. garnishment? Understanding the IRS’ various tax penalties and punishments for late fees can be difficult and disorienting, so let’s try straightening them out. First and foremost: liens and levies (of which a wage garnishment is a levy) are relatively nuclear options from the IRS’ point of view. These are collection actions the IRS resorts to when a taxpayer has proven unresponsive or unwilling to cooperate for months at a time, or when their debt has become unreasonably large.  

In a way, both liens and levies are threats – albeit threats that the IRS can and will act on. When the IRS announces the use of a lien or levy, you will have ample time to respond and even appeal against these judgments – or to organize a payment plan to deal with your debt before either a lien or a levy can be finalized against your tax account.  

Even if you aren’t in any trouble with the IRS, knowing the difference between a lien vs. levy, and a levy vs. garnishment is important for all taxpayers.  

 

Understanding a Tax Lien 

A tax lien is a public notice of the IRS or another state tax authority’s legal interest in your property, and security of their debt. In other words, when issuing a lien, the IRS is telling other current and would-be creditors that their debt and interest in your property supersede any other, and that any movement of your property (such as a sale) would require you to use the proceeds of that sale to first satisfy your debt to the IRS.  

A tax lien does not allow the IRS to simply take what is yours – but it does secure your debt to whatever you own and locks you down financially.  

Tax liens are established publicly – meaning, while you get a letter about your tax lien, it’s also a matter of public record. This is important for creditors looking into your financial status before issuing a loan, for example. Tax liens used to be a black mark on credit reports as well, but this hasn’t been the case since 2017. They can still be a terrible burden to carry – especially over long periods.  

On paper, the IRS will only release a tax lien when your debt has been completely paid off. There are options to modify your tax lien if you can convince the IRS that doing so would be in their best interest, by giving you enough financial flexibility to pay your debts. These modifications include a tax lien discharge (removing the lien from one piece of property), and a tax lien subordination (allowing a single creditor to supersede the IRS’ claim).  

 

Understanding a Levy 

On the topic of a lien vs. levy, a levy is where the IRS comes in and takes what you own, including (potentially) your sole home. Most of the time, however, the IRS won’t be that cruel – they start with your bank accounts, investment properties, or non-primary vehicles.  

If it’s an account, the IRS can seize and drain it. If it is an asset, like a property, the IRS puts it up on the market for its quick sale value and uses the proceeds to pay your debt – the remainder gets sent back to you, if anything remains.  

A tax levy is not a 24-hour process, especially when property is involved. The IRS must send out multiple notices before it can seize any of your property – as a rule, you have 30 days from the date on your final notice of a tax levy before the IRS takes anything. When levying a bank account, funds on the account are held for 21 days before being sent to the IRS.  

The period between the final notice and the levy itself is your last opportunity to work with the IRS to cancel the levy. Once the IRS goes through with the process, undoing it is much harder.  

 

Understanding Wage Garnishment 

A levy vs. garnishment is straightforward – whereas a levy allows the IRS to claim your property, wage garnishment is a wage levy, meaning the IRS claims a portion of your paycheck instead.  

Wage garnishment happens through your employer. When the IRS initiates wage garnishment, they send a notice to your employer to withhold a certain amount of money from each paycheck based on: 

Some taxpayers do not qualify for wage garnishment because they do not earn enough to have anything garnished by the IRS. If the IRS cannot find anything to garnish and cannot levy any assets, it may temporarily classify you as uncollectable, until your financial status improves.  

 

Avoiding and Resolving Tax Debts 

If you want to avoid a lien vs. levy, or a levy vs. garnishment, your best option is to pay and file your taxes on time. If you’re behind schedule, don’t worry – stay up to date on your current tax obligations (including any estimated payments if you’re self-employed), and get in touch with the IRS or a tax professional to resolve your current debt. The faster, the better – the IRS has penalties and charges interest on debts that remain unresolved.  

If you want to resolve an older debt, it’s important to note that the IRS does not accept any payments if you are missing any old tax returns. Be sure you’re up to date on all your returns and send in tax returns for old tax years that you’ve missed.  

It’s okay to ask for help. If you’re missing documents to help file your taxes from years gone by, you can either contact your employer or ask the IRS for transcript records. Unless you’ve never filed a tax return, you usually only need to be up to date on the last three years of returns, although the IRS can extend that requirement up to six years or longer in certain cases.  

In conclusion – if you’re caught between a lien vs. levy, or dealing with a levy vs. garnishment, it’s important to remember that all of them can be financially devastating and to keep in mind that a lien locks you out of accepting or negotiating other financing options. In contrast, a levy or garnishment allows the IRS to swoop in and claim what’s yours as their own.  

Neither is ever going to be a particularly attractive option – but it’s also worth noting that the oft undersold third option is a criminal charge.  

The IRS doesn’t often persecute taxpayers for falling behind on their payments – it reserves that for serious examples of tax fraud or organized, large-scale tax evasion schemes – but the IRS can theoretically jail people for refusing to pay their tax debt in a timely fashion. If you’re worried about your taxes, it pays to work with professionals. We at Rush Tax Resolutions can help you put any liens or levies behind you and get back on the IRS’ good side.  

 

How Long Can the IRS Collect Back Taxes?

How Long Can the IRS Collect Back Taxes? If you owe the IRS money, then it may help to know that you are far from alone. Every year, millions of taxpayers miss the mark on their tax return, forget to file, or otherwise incur a debt with the Internal Revenue Service. While the IRS does have the ability to claim nearly everything you own, save for the shirt off your back, there are multiple steps and levels of escalation before the federal government resorts to levies and wage garnishment.  

Until then, it’s important to establish where you are on the collection action timeline. Once the IRS assesses a tax debt – based on the assessment date on your first Notice of Due Payment – a timer begins. That timer determines how long the IRS can collect back taxes from you. In general, your tax debt lasts until ten years from the assessment date. However, those ten years are affected by tolling periods, which can stop and extend the clock.  

As the timer ticks down, and as your debt accumulates penalties and interest, the IRS may become more aggressive with its collection actions. It is in your best interest to resolve your back taxes as quickly as possible, rather than wait for the time to run out and risk facing a much larger debt.  

 

How Serious Are IRS Back Taxes? 

Federal tax debt is a non-dischargeable priority debt, save for certain key circumstances. This means that, unless you come to an agreement with the IRS, they can continue to enforce collection actions against you even after bankruptcy.  

The severity with which the IRS pursues your tax account depends on the amount you owe, and the nature of your interactions with the IRS. The closer your debt is to expiring, the harder they push.  

Among the first actions the IRS may take against a taxpayer with an overdue balance is a federal tax lien.  

Whereas a tax levy is a physical claim of your property or accounts, a tax lien is a legal equivalent of calling dibs on an asset. When the IRS issues a tax lien, they are telling other creditors and would-be creditors that, should you liquidate your assets or default on a loan, the IRS’ debt must be paid first.  

In addition to making it difficult to seek financing, and impossible to use your existing assets to secure a loan, a tax lien can complicate your ability to pay off other debts. The IRS only discharges liens once your back taxes are paid, but they may be convinced to subordinate the lien if it helps put you in a position to be better able to pay back your taxes.  

Until recently, a tax lien would also do a number on your credit score, similar to a bankruptcy, while also limiting your financial mobility and access to credit. However, the credit reporting agencies have stopped taking account of existing federal tax liens for credit scores since 2018.  

If a tax lien is not enough to pressure a taxpayer into paying their back taxes or coming to an agreement with the IRS, the next step would be to collect via a levy. A tax levy allows the IRS to claim an asset and sell it at its quick sale value and use the proceeds to pay the debt. If no assets exist, the IRS may empty one of your bank accounts, or attempt to garnish your wages by claiming a portion of every paycheck.  

While a federal tax lien is a public notice applied to the entirety of a taxpayer’s property, a levy is issued per asset or account claimed. If the item claimed did not satisfy the debt, the IRS will issue another levy.  

The IRS can take your home. However, they cannot take every dime of what you earn. There are limits to the IRS’ ability to garnish wages, determined by the number of dependents you support.  

Generally speaking, the IRS must leave you with enough money to pay for your immediate necessities – primarily your taxes. However, if the IRS’ collection actions are driving you to the edge of poverty, you may be able to seek a reprieve by becoming non-collectible due to financial hardship. This will give you time to improve your finances before the IRS resumes its collection actions.  

 

What Are IRS Tolling Periods 

The IRS will pursue your back taxes for ten years from your assessment date, plus the effects of any applicable tolling periods. Tolling periods are periods that stop the clock on your debt or extend the timer. Here are some common tolling periods that you should beware of.   

 

What if I Stop Paying Taxes? 

If you’re behind on taxes for a single year, then your tax assessment date will be tied to that year. But if you continue to ignore your taxes and tax returns for subsequent years, the IRS can tally new debts and extend the timer.  

When the time comes to collect, your debts are consolidated, and you must pay the full sum (and catch up on your missing tax returns).  

Once the IRS determines that you owe them money, the last thing you should do is stop paying taxes. In addition to causing more debt, this also entices the IRS to pursue you criminally for tax evasion.  

 

Resolving Your Back Taxes with the IRS 

Ten years can be a long time, especially with the way the IRS can extend the clock. Seeking swift tax debt resolution is usually your best bet.  

For starters, you will want to file your back taxes to ensure that you are up-to-speed with each of your tax returns for the years you’ve missed. From there, consider working with tax resolution specialists to begin negotiating with the IRS for a payment solution.  Still asking yourself "How Long Can the IRS Collect Back Taxes?" Contact Rush Tax Resolution today to learn more about how we can help you resolve your back taxes!

How Long Are IRS Payment Plans?

How long are IRS payment plans? It may come as a surprise to most people, but tax debt is not uncommon. Americans owed an estimated $114 billion in back taxes in 2020 alone. Among federal employees alone, about 318,000 people are estimated to owe the IRS taxes, to the tune of a total of $3.3 billion. So, if you’re a little behind on your payments to Uncle Sam, don’t worry – you’re definitely not alone.  

However, you shouldn’t take your situation too lightly, either. While the IRS may have seen a recent decline in resources and manpower, it has been rededicating itself to combating the Tax Gap, and IRS agents command a wealth of options for penalizing taxpayers and coercing payment. If you owe the IRS, paying your taxes back as soon as possible minimizes your penalties and estimated interest, thereby reducing your bill. The longer you wait, however, the larger that bill gets – to the point where a one-time payment might no longer be feasible. That’s when your options are limited to IRS payment plans.  

 

Understanding the Different IRS Payment Plans 

The IRS gives taxpayers a myriad of ways to settle their debts. If you cannot make a single lump sum payment, then your payment plan options are generally split between short-term payment plans (repayment period of 180 days or less) and long-term payment plans (any period longer than 180 days).  

Short-term payment plans are self-explanatory. They can be set up through the IRS website, and payments can be made in the form of different cheques, money orders, or via the Electronic Federal Tax Payment System (EFTPS), through the IRS’ web portal. You are given 180 days to make several lumpsum payments to cover your debt.  

Long-term payment plans are much more versatile, and your options depend on the extent of your debt. If you owe the IRS enough money that 6 months simply isn’t enough to repay your debt, then your payment plan options range between the following: 

Before you can consider a payment plan to repay your taxes, you must be completely up to date with your tax returns, for at least the last three years, or longer if you’ve never filed your taxes. Certain payment plans also have other eligibility rules.  

 

Guaranteed Installment Agreements 

Guaranteed installment agreements are offered to taxpayers with the lowest amount of debt – and total debt of $10,000 or less, not including interest and penalties.  

A guaranteed installment agreement is only available to taxpayers who haven’t entered into any other payment plans in the last five years. The length of a guaranteed installment agreement is a maximum of three years. This means that a taxpayer who enters into a guaranteed installment agreement must be able to repay their debt within 36 monthly payments.  

Guaranteed installment agreements can be arranged online, and setup is quick and easy. You do not need to file a physical Installment Agreement Request, nor do you need to fill out a Collection Information Statement. Guaranteed installment agreements do not require a credit check or any other financial information.  

 

Streamlined Installment Agreements 

Streamlined installment agreements are one “tier” up from a guaranteed installment agreement. These installment agreements are available to taxpayers with a debt of $50,000 or less. Like a guaranteed installment agreement, a streamlined installment agreement can be set up online via the IRS’ website. There are no financial requirements, such as a Collection Information Statement.  

However, for any debt over $25,000, taxpayers entering a streamlined installment agreement must agree to monthly automated payments. Furthermore, the duration for a streamlined installment agreement is 72 months (six years). This means the debt must be repaid within 72 monthly payments. Taxpayers can opt to reduce the duration of the agreement but must make larger monthly installment payments as a result.  

 

Non-Streamlined Installment Agreements 

Non-streamlined installment agreements are for debts larger than $50,000. In this case, the option to set up a payment plan online is no longer available. Taxpayers with a debt over $50,000 must file a manual Installment Agreement Request, and fill out an extensive Collection Information Statement to provide their financial details to the IRS. Upon evaluation, the IRS will continue to work with you to set up a payment plan depending on your financial means, such as your assets, investments, and current income.  

Taxpayers with just barely above $50,000 in debt may be encouraged to make a one-time payment to the IRS to reduce their debt and gain eligibility for a streamlined installment agreement. The process is much quicker.  

One of the side effects of a more detailed look at your finances is that the IRS might ask you to repay your debt in less than six years because it finds that you have the financial means to do so. This means much higher monthly payments. Additionally, if you have a history of non-compliance, the IRS may shorten your repayment time under the threat of additional collection actions to prevent future non-payment. As such, non-streamlined installment plans have a variable length but are usually no longer than six years.  

 

Offers in Compromise 

An offer in compromise is a rarer payment plan that you must request in detail. Offers in compromise are designed to give indigent taxpayers a chance to settle their debt for less than the full amount owed.  

A special Collection Information Statement is required to ascertain eligibility, and few taxpayers are granted a request for an offer in compromise. If your request is granted, the length of your repayment window may differ from case to case but is usually no longer than five years, or the end of the debt’s lifetime (whichever is shorter). In some cases, if a taxpayer’s debt is low enough, they may be allowed to repay the remainder of a renegotiated debt in just one payment.  

Offers in compromise are carefully calculated by the IRS based on your reasonable collection potential, which amounts to how much you can afford to pay every month, as well as how much you can expect to round up by selling any of your remaining assets. Contact a tax professional to ascertain your chances of a successful offer in compromise.  

 

Partial Payment Installment Agreements 

A partial payment installment agreement is similar to an offer in compromise, yet with a few key differences. While an offer in compromise reduces what you owe, a partial payment installment plan sets a timeframe for your repayment and allows you to pay whatever you can within that period. As such, the IRS reserves the right to raise your monthly installments over the course of a partial payment plan, if your financial situation improves.  

The exact term of a partial payment plan depends on how it is negotiated with the IRS. At most, a partial payment plan will encompass the remainder of the debt’s life, with the understanding that you won’t be able to repay it in its entirety, allowing for a lower monthly installment.

 

How Long Can the IRS Collect on Your Debt?  

Federal tax debt lasts for ten years plus tolling periods. These are periods that either add to the debt’s timer or freeze the debt’s timer for the duration of the period. Examples of common tolling periods include bankruptcy proceedings (including an additional six months after bankruptcy has concluded), being in a foreign country for more than six months, as well as time spent deliberating and entering into a payment plan. As such, a debt with the IRS can eventually last much longer than ten years.  

Time is of the essence when dealing with tax debt. Still asking yourself "how long are IRS payment plans?" While your debt might be collectible for a decade, the IRS may decide to waste no time in collecting your debt via liens and levies. A payment plan can save you a lot of hassle and keep the IRS from pursuing you, but be sure to pick the right one.  

An Overview of Tax Breaks for Homeowners

Owning a home is expensive. From mandatory and nondeductible expenses and fixed costs to the rising costs of home improvements – remodeling a bathroom alone cost an average of $13,400 in 2020 – homeowners win the security and legacy of a home of their own for an enormous annual expense sheet. 

In addition to basic upkeep, homeowners must worry about insurance premiums, depreciation, fire insurance, and mortgage payments. Then, there are the taxes. Aside from income taxes, homeowners face property taxes and potential capital gains taxes.   

Thankfully, there are also a few tax advantages to owning the property you’re living in. There are plenty of different tax breaks for homeowners, potentially minimizing what they owe the IRS and state tax authorities each year. These tax breaks come in the form of itemized deductions, which reduce how much of your income is subject to tax, and special homeowner tax credits, which reduce what you owe in taxes. Let’s take a look at some itemized deductions and tax breaks for homeowners.  

 

Mortgage Interest Deduction 

Mortgage interest deductions allow a homeowner to deduct the amount of interest paid in a year from their income taxes.  

A homeowner’s annual mortgage interest payments are dictated by the terms of their loan. For example, a home loan of $200,000 with a 4 percent interest rate would result in a monthly interest of $666.67, or an annual interest of $8000.04.  

There are limits on how much mortgage debt a homeowner can deduct from their taxes. For mortgages taken out before December 15, 2017, the limit is a total of $1 million across the debt’s lifetime (for joint filers, half for single filers). For mortgages taken out after December 15, 2017, the limit is $750,000 (half for single filers).  

 

Mortgage Discount Points  

Depending on your means when negotiating a home loan, you can score “points” with a lender by paying additional fees at the closing of your loan. Every “point” is equivalent to about 1 percent of the total loan. These points help reduce the interest rate on your mortgage and lower your monthly payments – and they’re also tax deductible. It’s important to note that mortgage payments themselves are not tax deductible.  

 

Property Tax Deduction 

Homeowners can deduct a portion of their property taxes (as well as state and local income taxes) each year. In 2022, the annual limit for joint filers is $10,000 (half for single filers).  

 

Home Office Deduction 

Home offices have become incredibly popular in recent years, and even as people return to the office, more and more are considering staying home at least part-time for work. Home office deductions allow homeowners to recoup some of the costs of setting up a workspace at home, at a limit of $5 per square foot, for a maximum deduction of $1,500.  

 

Home Equity Loan Interest Deduction 

Home equity loans allow homeowners to take out a loan based on the value (equity) of their home. So long as the money from that loan is poured back into the home, the interest paid is tax deductible; if the loan is used for other purposes, whether it’s tuition money or a nice vacation, the interest is no longer deductible.  

 

Qualifying Home Improvements 

Most home improvements are not tax-deductible. Aside from the home office example provided earlier, most exceptions to this rule are either based on medical necessity (such as installing accessibility ramps to the front porch due to your medical condition, or a stairlift). Certain home improvements are not tax deductible but may warrant a tax credit (more on this later).  

 

Homeowner Association Fees 

Homeowner’s Association fees are not tax-deductible either, unless you have a home office, at which point a portion of your HOA fees are effectively a business expense. This is a minor deduction at best but may be worth it if a substantial portion of your home is used for business.  

 

Theft and Other Losses 

Theft and other financial casualties may be tax deductible if they aren’t covered by insurance, and if you filed a police report (for stolen items) in a timely manner.  

In addition to certain limitations, stolen items can only be deducted if they’re at a value of at least 10 percent of your adjusted gross income for the same year.  

 

Should Homeowners Itemize?  

Tax preparation can be a complicated task, and itemized deductions are a huge part of that process. If you choose to itemize, you may stand to save thousands and thousands of dollars in taxes, especially if you file jointly. However, it should be noted that the standard deduction was massively overhauled in 2017 as part of the Tax Cuts and Jobs Act, while certain itemized deductions (such as moving expenses) are no longer eligible.  

Consider going over your annual homeowner expenses carefully with a tax professional to identify all eligible tax-deductible expenses, and determine if going itemized might eclipse the standard deduction of $25,900 for couples filing jointly in 2022.  

 

Homeowner Tax Credits 

While deductions reduce your taxable income, tax credits can be used to reduce what you owe. Some tax credits are refundable, meaning if they exceed what you owe – or if your taxes are completely paid off – the IRS sends the excess to you as a cash payment. However, most homeowner-specific tax credits are not refundable. In addition to refundable and partially-refundable tax credits such as the Earned Income Tax Credit (EITC) and the Additional Child Tax Credit (ACTC), homeowners may be eligible for:  

 

Solar Investment Tax Credit 

The Solar Investment Tax Credit allows homeowners to receive a portion of the total cost of installing a solar panel system on their home as a tax credit, or a tax break. In 2023, the credit is equal to 22 percent of the project’s total cost.  

 

Residential Energy Efficient Property Credit 

Similar to the SITC, the Residential Energy Efficient Property Credit reimburses homeowners for 26 percent of the cost of installing eligible energy-efficient home improvements, such as geothermal heat pumps, hydrogen fuel cells, and wind turbines.  

 

Non-Business Energy Property Tax Credit 

Installing a heat pump or a solar-powered water heater is a major investment. Homeowners who make smaller improvements to their home for energy efficiencies – such as windows with better insulation, or roofing upgrades – are eligible for a tax credit of up to 10 percent of the project’s cost, for a maximum of $500 per year.

 

E-Vehicle Tax Credit 

Homeowners owning or leasing a plug-in electric vehicle may be eligible or an additional tax credit based on the battery capacity of the EV and the date of its purchase. The tax credit ranges between $2,500 and $7,500. In addition to a federal tax break, certain local and state tax authorities provide additional incentives for the purchase of EVs.  

While there are many different potential tax breaks for homeowners, eligibility differs from case to case. Filing your taxes as a homeowner can be just as complicated as filing taxes as a business, and it’s important to weigh the pros and cons of any given tax breaks for homeowners before finalizing your returns.  

Be sure to review your options with a tax professional each year – tax laws change, as does the market, and several factors can drastically alter which way the wind blows. Contact Rush Tax Resolution today to learn more.

2 New Great Reviews on Yelp!

IRS Letters: Tax Scam or Something You Need to Address?

Your taxes contain an array of sensitive information, from financial data to your Social Security number or tax ID number. Because of this, there are many scams that unsavory characters attempt to perpetrate by impersonating the IRS or another tax authority. It can be difficult to tell when the IRS is really seeking information versus when you may be the target of a scam.

To help you determine whether the letter you received is a scam or something you need to address, consider the following tips and information.

What Are the Next Steps If You Receive an IRS Letter?

If you receive a legitimate letter from the IRS, you need to take action to address whatever the IRS needs. There are many situations where the IRS is simply sending you a notice, and you may not have to do anything. However, if the IRS is requesting additional information, it is important to completely understand what they need and act quickly to address the letter.

Tax letters can be confusing because it may not be clear what the IRS needs or how you should get the information to them. As your tax professional, we will be able to help you decipher the tax letter and share the right information with the IRS. We are also better able to tell a legitimate letter from a scam as well.

It is of the utmost importance that you get in touch with your tax professional to determine the legitimacy of the IRS contact before any other steps.

Why Would You Receive a Tax Letter?

The IRS almost always initiates a conversation with a taxpayer by sending a letter first. That means that if the IRS needs to speak with you for any reason, you will receive an IRS letter in the mail. Keep in mind that phone calls or emails from the IRS without a corresponding letter are probably part of a scam, rather than a legitimate contact from the IRS.

Some of the most common reasons that the IRS sends letters are:

Read the letter carefully to determine what the IRS needs and how you should respond to any tax problems. Some IRS letters do not require that you take any action.

How Often Does the IRS Send a Tax Letter?

The IRS sends literally millions of letters to taxpayers every year for various reasons. In most cases, the letters do not deal with audits. In fact, the IRS audits just 0.5% of all returns submitted, which amounts to approximately one million tax returns.

What Are the Methods of Communication That the IRS Uses to Contact Taxpayers?

In most cases, communication with the IRS will start with a letter. However, there are a few more time-sensitive situations where the IRS will use a different method of communication to initiate contact. Delinquent tax returns and overdue tax bills are the most common reason. The IRS can occasionally show up to your home or business unannounced to conduct an audit or as part of a criminal investigation. Note that these circumstances are rare; most contact starts with an IRS letter.

Keep in mind that the IRS will never ask for a specific type of payment method, and they do not request payment for overdue taxes over the phone.

How to Avoid a Tax Scam

IRS letters that are actually scams can seem legitimate, but they will generally have a few errors or omissions that signify that the letter is not official. For example, IRS letters will have an identifying number in the upper right-hand corner that matches a file with the IRS. If you call an official IRS number, you should be able to use that identifying number to talk with the right person. Double-check the number on your notice with phone numbers used for the IRS online.

Other things you can do to avoid scam include:

Being careful and not acting too quickly can help you avoid scams and further tax problems.

Remember: contact our office right away so we can put our tax and IRS expertise to work ensuring the contact you’ve received is legitimate.