IRS Collections: Part I, Background

[CindyLou]

If you are an assett case it would be better for them to file a claim because they are a priority debt and they may as well get it first!!! The rest of your debts will be discharged if nothing is left!

I think your thinking is right on. But please ask your attorney before contacting them about filing a claim.

[BearChaser303]

Hi HHM, thanks as usual for your response. They have not filed a claim yet. It is actually past the deadline for a creditor to file a claim, but I think the government has more time to file one? Should I call them up and try to persuade them to file a claim, or should I not worry about it for now? Would the trustee be any help to me to get this done?

[HHM]

I owe over $5000 Federal and $1600 State on my 2007 tax returns. My chapter 7 is an ASSET case. I am having trouble understanding whether the IRS and State are entitled to file a claim against my BK estate?

Yes, they can file a claim. Even though a debt is non-dischargeable, they have the same rights to assets of your BK estate as any other creditors. If the assets of the BK estate do not fully pay the debt, then the balance is still collectable.

[HHM]

i need clarification regarding the above.

first query: can a letter from IRS district office detailing the amount of unpaid back taxes from 1993 and demanding payment be considered as having the government put a lien on my property? im asking this because i read somewhere that the lien automatically attaches on the property as soon as debtor received demand from IRS and does not pay.


second query: i understand that the bankruptcy law has the 3-yr/2-yr rule on tax discharge but will this rules eliminate the assessment from 1993 to 2003 if the gov't has had a lien already?

i just want to make sure because i have a 401K the amount of which exceeds my unpaid taxes

i hope my question is clear, thank you

First query, yes. If the govt. made a demand and you don't pay, the lien attaches automatically. However, for anything to come of the lien, the IRS must usually file a Notice of Federal Tax Lien.

Second query, tax liens survive BK just like any other lien. However, if you have taxes that were assessed that are older than 10 years, then the statute of limitations has expired for the collection of that tax debt and the tax lien is void.

[BearChaser303]

I owe over $5000 Federal and $1600 State on my 2007 tax returns. My chapter 7 is an ASSET case. I am having trouble understanding whether the IRS and State are entitled to file a claim against my BK estate?

[jamesch13]

i need clarification regarding the above.

first query: can a letter from IRS district office detailing the amount of unpaid back taxes from 1993 and demanding payment be considered as having the government put a lien on my property? im asking this because i read somewhere that the lien automatically attaches on the property as soon as debtor received demand from IRS and does not pay.


second query: i understand that the bankruptcy law has the 3-yr/2-yr rule on tax discharge but will this rules eliminate the assessment from 1993 to 2003 if the gov't has had a lien already?

i just want to make sure because i have a 401K the amount of which exceeds my unpaid taxes

i hope my question is clear, thank you

[HHM]

So long as you pay that amount due, there should be no tax lien for the 2007 period.

Basically, 2 things have to happen to create a tax lien:

1. The IRS has to make a demand for payment (this will usually include a deadline for payment).
2. You don't pay it.

At that point, the IRS has a Federal Tax Lien. There is no paperwork, or anything that needs to be done by the IRS.

[CindyLou]

You mentioned that tax liens are automatic when you have a tax due. How soon is "automatic?" I filed April 15th and just got my letter of my amount due. I am waiting for bonus and wanting to see if they take my 1200 rebate and apply it. I am paying about 30/month in penalty and interest and plan to pay off in full within 2 months. Will they file a lien for that?

[HHM]

Yes, tax liens can go on your credit report (that assumes, of course, that the tax liability is under your SSN).

Unpaid tax liens can stay on your report for 15 years; and here is the bad news, PAID tax liens can stay on your report for 7 years.

[CindyLou]

Question: Does the lein go on your credit report?

[HHM]

This forum primarily deals with bankruptcy but as most are aware, there are categories of taxes that cannot be discharged in BK. Thus, I will attempt to provide some useful information on how to deal with delinquent taxes. Obviously, I cannot go into great deal (people write books on this stuff) but hopefully this overview will point you in the write direction.

Dealing with the IRS is very different than dealing with regular, private creditors. The IRS comes at you from a position of strength in that they need not resort to the judicial process to get at your assets; the IRS can directly lien your property and levy against your property once you become delinquent in paying taxes. Also, you have very limited exemptions, aside from Child Support, Unemployment Compensation, and Workers Compensation, any other asset or income is fair game. The IRS can garnish wages, levy accounts receivable, levy bank accounts, foreclose a tax lien against your home, etc etc.

However, the IRS is also, in some sense, easier to deal with because the collection process is heavily regulated, there are procedures and notice requirements that must be satisfied, and at almost every stage of the process, you have appeal rights. (you can thank the 1998 Tax Payer Bill of Rights). So, even though the bureaucracy can be intimidating, that same bureaucracy can be turned in your favor.

Important Terms

Lien: A tax lien is like any other lien. The IRS files these as appropriate, and the tax lien takes priority over most other types of liens or security interests. Thus, you cannot sell the property unless the lien is satisfied or removed. Strictly speaking, a lien is created by operation of law (i.e. automatically) as soon as a tax is owed, the Govt. makes a demand for payment, and you do not pay. However, for the IRS to take a priority position over other potential creditor or lienors, the IRS must file a Notice of Federal Tax Lien.

Levy: A levy is the mechanism by which the IRS actually takes property. So, if the IRS wants to get the money in your bank account, they will issue a levy.

CSED: Collection Statute Expiration Date. CSED is the statute of limitations for delinquent taxes. The IRS has 10 years from the date the tax was assessed to collect the delinquent amount.

ACS: Automated Collection Service: This is the IRS's internal collection agency (so to speak), and they operate much like any other collection agency, ACS is a call center and their job is to send letters and receive the phone calls.

Collection Process Overview

The main problem with IRS back taxes, is that you can go a fair amount of time before they really get aggressive; but during this time, you are accumulating interest and penalties. You will receive the occasional letter, but nothing will seem very serious.

Inside tip: All IRS letters and forms have a designation...when you receive a letter and the form number is preceded by "CP", that means the form was computer generated, but by the same token, the CP letters are usually not that serious (except for CP 90, see below). The form that "scares" many tax debtors is CP 504 which states "Urgent, we intend to levy..." This letter is no different than any strongly worded collection letter, it is designed to scare the tax debtor into action.

The letter you want to look out for is CP 90 or Letter 1058...Final Notice--Notice of Intent to Levy. These are the true "last straw" notices. When you receive these letters, certain tax debtor rights are triggered; you have 30 days from the date of the notice to request a Collection Due Process hearing. If you do not request that hearing, then after 30 days, you are open to enforced collection, i.e. the IRS can levy your assets and income.

The usual first stop for delinquent taxes is the ACS Unit (Automated Collection Service). ACS is essentially a giant call center that operates much like a collection agency. If the account meets certain criteria, eventually, the account will be assigned a local Revenue Officer ("RO"). However, between the time between ACS and assignment to an RO, an account is placed "in que." When an account is "in que", nothing can happen, the account is waiting to be assigned a revenue officer. Once assigned a local RO, the account is in active collection. You will receive numerous letters, phone calls, and even visits from this person. (Note, I have seen businesses and individual be "in que" for over a year).

Liens and Levies

Liens: I have already defined liens, so all you really need to know is that, for the most part, tax liens are unimportant. Granted, if you are trying to sell your home, and there is a tax lien, that will cause a headache, but the sole purpose of the IRS filing a Notice of Tax Lien is to simply place them self at the head of the collection line. Thus, do not freak out if you receive a notice of tax lien.

Levies are the bad mojo. Levies are how the IRS seize money and assets. However, there are exemptions you can claim, and in some circumstances, you can undue the levy. You will want to follow the directions on the levy document. For example, if you are a business and the money that was levied in your bank account was for payroll, you can get that levy removed. Further, if you are individual, and if you can prove that the money in your account is for the health and well-being of your family, you can get that levy removed and the money back.

In any event, that is a VERY general overview of IRS collection. Note, this process can go on for years.