The IRS initiates collection action when taxes are not paid on time or paid in full. The financial condition of the taxpayer does not initially factor in to this process. To recover back taxes, the IRS can go so far as to seize and/or sell the debtor’s property without obtaining a court order.
IRS collection actions are damaging on many fronts because of the power the IRS is granted by law to recover back taxes. They can extract money from a taxpayer’s bank account(s), garnish their wages, or sell property or assets to satisfy the tax debt. The agency is not required to pursue the taxpayer in court to proceed with the collection action.
The collection process typically advances from notices to lien, and finally to a levy. The levy is the most damaging of all collection actions. It allows the IRS to sell property such as a house, vehicle, and other personal assets. They can order a bank to transfer money to them, or demand employers to transfer an employee’s wages. The IRS decides how much funds will be transferred, or which property to seize and sell.
A lien is the government’s claim on a taxpayer’s properties and assets. A lien is placed when a taxpayer owes back taxes that go unpaid after multiple notices. After a lien is placed on a property, the debtor cannot sell the property or take a loan against it.
After placing a lien, the IRS files a public notice that alerts creditors about the claim on the property. If the property is sold, the IRS satisfies the full tax debt before other creditors receive their share of the proceeds. Due to the public notice, which remains on record for years even after a lien is removed, the debtor can find it difficult to get new credit, rent property, or even obtain certain job positions.
Any lien or levy action, be it wage garnishment, bank levy, or the selling of property, can destabilize a taxpayer’s financial condition. The IRS does not consider whether collection action will push the taxpayer into a financial crisis. It falls upon the taxpayer to request a resolution that works within his or her budget.
Due to the impact of IRS collection actions, taxpayers are advised to resolve their tax debt as quickly as possible.