Episode 437: What Can IRS Collectors Do and How to React

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One of the most common issues taxpayers face is knowing what can IRS collectors do and how to react. For instance, if an individual receives word that the Internal Revenue Service is coming after them for an amount owed, there are revenue officers who will then try to collect that assessment. But what happens next? Do you have to pay the assessment, or do you have options? What do you tell the IRS and how much do you tell them to obtain those options?

The best way to navigate this type of situation is to consult with a reputable tax attorney with experience in dealing with the IRS.

I Owe the IRS, What Can They Do?

If an assessment has already been made and revenue collectors are actively trying to collect, the individual has a couple of options:

1. This is generally not a recommended course of action. If the IRS knows where the taxpayer is living and the person is not planning to move, it is best to just face the agency.
2. Face the IRS. This government agency has power and will pursue the individual to get some sort of payment in return, though the exact amount depends on many different factors.

The Internal Revenue Service can get the information they need and choose to pursue the individual in one or more of the following ways:

1. Summons account information from banks
2. Put a lien on a person’s house and/or property
3. Foreclose on a person’s house and/or property

It is a common misconception to think that the IRS cannot get to bank or other financial account information. If a person refuses to give the IRS the information they are requesting, the agency can still get it through the bank or other institutions. The IRS may also use summons enforcement, in which case someone in the justice department can take the case and advise you in writing to hand over the information or they will take you to federal court.

 

Understanding How the IRS Views Property and Equity

After an assessment, the IRS will want to know how much the individual can pay. This is where it is helpful to know what IRS collectors can do and how to react.

There may be some debts the person will have to pay, even though it may be painful and take an extensive amount of time. In this case, installment agreements may be negotiated. If installment payments are the route the IRS agrees to and the individual takes, part of the value the IRS will ask for monthly is the value of the house and equity.

For example, if a person owes the IRS $5 million dollars and they make $80,000 a year and have $300,000 equity in the house, they probably can’t pay the $5 million. However, they could still afford to pay some. It is possible the IRS might declare the individual owes $20,000 a year for 5 years and must pay the $300,000. In total, that amount comes to $400,000. The value of a house is an important element in this case.

It is worth noting that although Texas is a community property state which sees husband and wife as joint owners of the whole property, meaning there would be a 50/50 split in equity, that is not how the IRS sees it. There is no division unless a previous legal document is in place stating such.

It is possible for a person to be close to retirement and have no income coming in. However, the IRS will still see value in the personal residence or homestead. In this instance, the property is viewed as the person’s main asset, so they must disclose the value of the property. The IRS will then likely put a lien on the property, and it will have the same effect as a judgement. The house cannot be sold with a title policy that says the house is free and clear of liens without first paying the amount owed to the IRS or getting the IRS to release it.

Before the IRS files a lien against their property, the individual could choose to work with the IRS to avoid it by making installment payments. As a general rule, the IRS is reluctant to enter into such agreements because it can compromise their position in regard to whatever equity is in the property. For instance, if the property is sold, it may diminish the IRS’ equity position. For this reason, the taxpayer is not typically able to enter into a compromise or installment plan without putting a lien on the house.

Many people faced with IRS assessments are already settled in their homes. Despite the IRS seeing value in the house, the owners cannot just sell it, or they would be homeless without anywhere to go. It is for this reason that the IRS can be negotiated with. An individual who can’t pay the IRS should not expect to compromise the amount owed or to be left alone by the IRS if they have some serious equity in their home. But the IRS must go through an extra process to foreclose upon someone’s principal residence. It doesn’t happen very often, although it can. If a home is worth $500,000 and has a $400,000 mortgage, the IRS will probably not take the home, but will instead say if the individual comes up with $400,000 in payments, they will likely release the lien because it is eighty percent of the equity.

Should a person die while in their home, and the IRS has an active lien on that property, the decedent’s probated estate is still obligated to pay what is owed to the IRS. There is no getting out of paying taxes, even after death. It is even possible that the children of the deceased could move into the house, and the IRS may still try to foreclose on the house and collect the lien.

There is light at the end of the tunnel regarding tax liens, and that is that they only have a 10-year life. Once a tax lien hits ten years, the IRS has to renew the lien to continue it. Sometimes they will not do this for people who have only modest houses and modest amounts of taxes due. If an individual falls into this category and is not in a hurry to sell/relocate and their debt is not big enough for the IRS to go after, they could try outlasting the 10-year lien. Yet, this will not keep the IRS from evaluating bank accounts and using other collection techniques to obtain assets of value.

 

The IRS Is Coming After Me. How Should I React?

If the IRS has assessed you for taxes owed and is actively pursuing payment, before deciding how to react, do not think you can get out of your debt. The goal shifts to figuring out how little you can pay without getting into serious trouble, and how long you can stay out of trouble with this arrangement.

The more money you owe, the more likely the IRS will persist. The more times you have been in the hole, so to speak, the IRS will persist and offer less flexibility.

When it comes to how you should react when the IRS pursues you, take the following into consideration:

• React proactively
• Do not ignore them
• Give the IRS information, but don’t be in too big of a hurry to do it and give them only the information they ask for (the exception to this rule is if you have a child with special needs or yourself or your spouse has some sort of excessive medical needs, in which case you should consult an attorney for proper timing in releasing that information)
• Get solid professional advice and heed it

If the above still leaves you feeling unsure of how to proceed, it is a wise idea to seek legal counsel. You are allowed to tell the IRS you need to consult with your attorney before responding to their questions. This enables lawyers to interact with the IRS on your behalf.

Hiring a professional and reputable tax attorney is highly recommended if an individual is being pursued by the IRS and is not sure of what to say or is afraid they might say something wrong. The best option may be to say nothing at all and let your legal representation speak for you.

 

Knowing what IRS collectors can do and how to react can be immensely helpful. However, there are situations in which enlisting the help of a professional tax attorney with IRS experience may still be advised to advocate for and protect a person’s rights.

By Harold "Hap" May, P.C. on June 14, 2024   /   The Legal Play Podcast   /   Leave a comment