How the IRS Can Make Your Life Very Difficult

With the economy failing and more taxpayers slipping into debt, the IRS is circling around its prey – taxpayers – like never before.

If the IRS is ready to pounce on you, they’ve probably already sent a few warning signs well in advance. These usually come in the form of three certified letters. The first letter outlines what you owe and sets a due date. The second letter is harsher and tells you that they will take action if you do not pay. By the time you get the third letter, they’ve probably already pounced. A third letter will typically be accompanied by a tax lien, a bank levy, or in the worst-case scenario, wage garnishment.

Tax Lien: This is a type of lien placed on a property (real property or personal property) to secure the payment of taxes. A tax lien is a black spot that can create lasting damage to your credit. It will make it extremely difficult to get reasonable loans and interest rates while it shows in your credit file. And to make matters worse, you could lose your home through a forced sale if you don’t pay the taxes. This is called a tax lien sale.

Bank Levy: A bank levy occurs when your bank account is frozen and all or part of the money in your account is seized. The most common causes of a bank levy are unpaid taxes and unpaid debt. While creditors can and have used this method of receiving payment on unpaid debt, the IRS utilizes this method the most.

A bank levy doesn’t happen overnight. In the case of taxes, the IRS will resort to a bank levy if they have already sent you a letter stating you owe taxes and you either refuse to pay the debt or don't respond to their requests (to make a repayment plan or try to work with them towards repayment). The IRS will freeze your accounts and seize any money in your account up to the amount you owe.

If a bank levy is imposed on you, you may not be able to withdraw any money or use your debit card. Worst of all, there’s nothing you or your bank can do about it.

Wage Garnishment: Instead of imposing a tax lien or a bank levy, the IRS may go straight to your paycheck and garnish your wages. Wage garnishment occurs when money is taken from an employee’s paycheck to satisfy unpaid debt (usually this occurs by court order). In this case, the IRS would contact your employer and demand that a percentage – sometimes quite a significant percentage – of your check be applied to your unpaid IRS tax debt.

Several things happen before wage garnishment occurs. First, the debtor goes into default on the debt. If neither the credit card/lending company nor a debt collection company is successful in recovering the debt, a lawsuit may be filed against the debtor in an attempt to receive payment. If the lawsuit is settled against the debtor, a judgment may be issued to garnish property or wages.

The IRS can impose wage garnishment too.

The IRS will try to collect their money using whatever means are necessary. This is why it’s important to stay on top of your filing and make sure that if you owe back taxes, you pay them off as soon as possible.

If you cannot afford to pay, be sure to do your research well in advance and explore what options are available to you. You can start here by reading about what you should do if you can’t afford to pay your taxes. You can also get a free tax consultation to resolve delinquent tax debt today.