What You Need to Know About the IRS and Dealing with a Tax Levy.
A tax levy can be a terrifying prospect. The IRS will levy to collect unpaid taxes, and it also could seriously damage your personal and professional reputation, or even cause loss of employment. But, there are ways to reduce the impact of a tax levy.
If you have tax problems and are in danger of being issued a tax levy, an Offer in Compromise might be able to help you avoid it. An Offer in Compromise is an agreement between an individual taxpayer and the Internal Revenue Service (IRS) that settles their outstanding liabilities for less than is owed, blocking IRS enforcement action, including tax levies. This means that if you apply for an Offer in Compromise and are awarded one, you will pay a reduced amount rather than the full amount that you owe.
One large benefit of filing an Offer In Compromise is that it puts an immediate halt to IRS enforcement and collection efforts, including a tax levy.
What Is a Tax Levy?
A tax levy is a legal order that allows the government to take money from your bank accounts and seize your assets. Often, it is a tool the IRS uses to collect unpaid taxes, but it can also be used to offset money that has been awarded to you by the government. The IRS will typically issue a tax levy when you fail to pay taxes that you owe, and fail to respond to their correspondence.
This could be due to a number of reasons. It may be because you are unable to pay, you are trying to avoid paying, or you are unaware that you owe taxes. If you fail to respond to letters, phone calls, and emails from the IRS, they may issue a tax levy against you. A tax levy can freeze your accounts and assets and leave you unable to pay your bills or deal with your everyday expenses.
What is an Offer in Compromise?
An Offer in Compromise, or OIC, is an agreement between an individual taxpayer and the IRS that settles their outstanding liabilities for less than they owe. It can apply to both income taxes and payroll taxes. If you have been issued a tax levy, you can use an Offer in Compromise to pay a reduced amount rather than the full amount that you owe.
This means if you qualify for an Offer in Compromise and are awarded one, you will pay a reduced amount rather than the full amount owed.
Who Can Apply for an Offer in Compromise?
To qualify for an OIC, you must be able to prove that you cannot pay the full tax debt within the remaining statute of limitation. If you have insufficient cash flow and equity assets to pay the full tax debt over 10 years (or less based on statute of limitations for collection) then the IRS will generally accept an OIC.
How to Stop a Tax Levy with an Offer in Compromise
A notice of intent to levy is the first step in the IRS process to aggressively collect a tax debt. This is the letter that will inform you that a tax levy might be issued against you, either IRS letter 1058 or LT11. An actual tax levy will be issued next. This will be sent to your employer and your banks. Once the tax levy has been issued, it will be very difficult to stop it. You must act quickly to find out if you qualify for an OIC and, if so, immediately apply for one.
To qualify for an OIC, you must:
- File all required tax returns
- Be current on all tax filings and payments
- Have made all required estimated tax payments for the current year (if self employed)
- Have had no prior OICs accepted in the last two years
If you’re not up to date on your filings and payments, the IRS won’t consider your offer. You must also be current on all estimated tax payments for the current year.
The IRS uses a two-step process to evaluate OICs:
Step 1: They evaluate your ability to pay by looking at your monthly income, expenses, and assets.
Step 2: They evaluate your offer based on your ability to pay, the amount you owe, the remaining time to collect.
The IRS will usually only accept your OIC if they believe the amount you’ve offered is the most they can expect to collect from you within a reasonable period of time.
If your OIC is accepted, you’ll need to make a non-refundable deposit of 20% of the total offer amount. You’ll then have up to five months to pay the remaining balance after receiving the acceptance letter.
Once the OIC is accepted, as a further condition of acceptance, the IRS will require a five (5) year strict compliance period. All tax returns must be filed on time and paid in full at filing.
If you default on your OIC, the IRS will reinstate the full debt you owe. However, if you maintain the terms of your OIC and make all required payments, the IRS will forgive the remaining balance of your tax debt.
An OIC can be a great way to resolve your tax debt, but it’s not always easy to qualify. If you think you might be eligible, talk to a tax professional at Franskoviak Tax Solutions to see if an OIC is right for you.
At Franskoviak Tax Solutions, we have helped our clients with tax problems for over 30 years. We take pride in handling the details of an Offer in Compromise, including working directly with the IRS to secure financial relief for our clients. Set up a free consultation.