It can be overwhelming when the IRS demands payment, considering the power the IRS has to levy your wages, bank accounts, house, and business. When you have an IRS problem, it is natural – and easy – to feel not only overwhelmed, but desperate.
I like to help my clients better understand their situation and why their perception of having no options may not match reality. After all, there is almost always a better approach than acting out of desperation.
To put things in perspective, let’s take a walk through a better understanding of five desperate situations that do not always necessitate desperate measures.
When negotiating with the IRS, do you need to:
– Liquidate your retirement account?
– Transfer property out of your name to try to keep it away from the IRS?
– Borrow money against your house to pay the IRS?
– Sell your primary vehicle or work vehicle due to IRS demands?
– Borrow money from friends and family members and give it to the IRS?
Let’s take these one at a time.
1. Do you need to liquidate your retirement account?
Before you liquidate your retirement account to pay the IRS, you should know that the IRS does not like to seize retirement accounts. It makes for bad public relations, and is near the very bottom of the IRS list of preferred seizures.
But what if the IRS is demanding that you pay the money for your retirement to them?
The IRS should be taken seriously when they bark, but it is important to know how much bite is behind the demand.
The IRS has guidelines as to when it is okay to take a retirement account. Those guidelines can be found in Internal Revenue Manual 18.104.22.168. And the Internal Revenue Manual – which is the IRS’s internal guidelines – make it clear that it is not always okay.
To begin with, if you are employed, and have a retirement account through your employer, there are restrictions on your withdrawal of the money. These same restrictions apply to the IRS taking your 401k. Most retirement plans prevent an employee from liquidating until separation from service, death or disability. In other words, if you can’t get to it, neither can the IRS.
But what if you do not have restrictions on access to the retirement money?
Following Internal Revenue Manual 22.214.171.124, an IRS collection agent must consider the following three issues before levying a retirement account that you have access to:
> Is there a better way to collect the liability than taking away retirement funds?
Know that the IRS generally wants to collect in the least intrusive manner possible. They may not tell you that – after all, if an IRS Revenue Officer sees a way to collect a liability (i.e., your retirement), he is going to do his job and go after it. That’s fine. But that’s also only half of the story.
The rest of the story is that the IRS will consider alternative collection methods to payment – i.e., better options that are less intrusive than taking your retirement.
Do you qualify for an installment agreement that would make a dent in the liability? Or do you have other assets that can be used to pay the liability? These factors should be used to negotiate the IRS away from an intrusive seizure.
> Has your conduct been flagrant in not paying the taxes?
The IRS’s desire to levy on your retirement account rises and falls based on you. How you act, and how you acted in regard to your tax debt, can make a difference.
The IRS considers good acts/bad acts as factors in taking retirement accounts. The Internal Revenue Manual directs an IRS Revenue Officer to seize retirement accounts only in situations of flagrant conduct.
Flagrant conduct is defined by the IRS to include tax evasion, fraud, assisting others in evading tax, not complying with IRS requests for information, not taking necessary measures to stop accruing new tax debt (known as pyramiding), demonstrating a pattern of uncooperative behavior, and concealing or attempting to transfer assets out of the reach of the IRS.
Honest life mistakes that created a tax problem, whether it be divorce, business failure, poor judgment = IRS having less desire to wipe out your retirement.
Bad acts on your part, and a general disrespect for the obligation to pay taxes = IRS not sympathizing on your retirement.
The IRS needs to know you are a good person that made some bad mistakes, and that you did not act towards the IRS in a manner that necessitates having your retirement taken away.
> Do you – or will you in the near future – depend on the retirement account to pay needed living expenses?
Here, let’s directly quote the Internal Revenue Manual to make our point.
Internal Revenue Manual 126.96.36.199(7) states:
“The final step in deciding whether to levy on retirement assets is to determine whether the taxpayer depends on the money in the retirement account (or will in the near future) for necessary living expenses. If the taxpayer is dependent on the funds in the retirement account (or will be in the near future), do not levy the retirement account.”
Some peace of mind for our negotiations: If losing your retirement account to the IRS will put you in financial distress and unable to pay bills – whether now or in the near future – the IRS guidelines are for them to back off.
Now that you know the rules, you know that liquidating your retirement account in knee-jerk reaction can indeed be a desperate measure that may not be necessary to IRS resolution.
2. Should you transfer property out of your name to try to keep it away from the IRS?
Don’t do it. Unless, of course, you want to anger the IRS, lose credibility, and give them reason to become extremely aggressive and take your property.
Hiding property from the IRS in an effort to keep it away from them is a no-no. It will make any effort to resolve your tax debt even more difficult. After all, when your head is in the mouth of the bear, say nice bear.
And rest assured that the IRS has ways to recover that property that you are trying to hide. They can file tax liens against it, even if it is no longer in your name (these are called nominee liens). They can also go after the person who holds your property up for legal recoveries that include transferee liabilty, successor liability, fraudulent transfers and nominee/alter ego theories.
Do you want to spread your IRS problems to others (and you don’t, by the way)? The transfer your property to them.
In other words, it it’s to good to be true, think twice. And putting property out of your name, or hiding it from the IRS, is too good to be true. The IRS has plenty of remedies to undo your dirty work, and won’t be happy about having to use them.
In most cases, when you owe money to the IRS, a full financial disclosure of your assets is required. That often is not as bad as you fear – like retirement accounts, the IRS usually does not want to take your stuff, and problems tend to have workable solutions. But hiding your assets from them changes the equation and wakes the bear.
3. Do you need to borrow money against your house?
Okay, so we know that the IRS does not like to take retirement accounts, right? Add taking your house to the top of the list.
Despite your fears, the IRS does not want to put you on the streets.
Let’s use the numbers to demonstrate how likely (or unlikely!) an IRS house seizure is. In 2013, the IRS made 547 seizures of real and personal property – houses, cars, business equipment. This is nationwide – of all the taxpayers who owe the IRS, and it is in the millions – the IRS saw that only 547 cases necessitated drastic measures of seizing real estate, business equipment and personal belongings.
In other words, owing the IRS is serious, and despite all negative publicity to the contrary, the IRS is not a heartless machine. The heart is there, it is just a matter of knowing how to find it.
The IRS does not want to put a family on the streets, or take the home of a retiree.
That changes, however, when, bad acts come into play – hiding assets, not cooperating, pyramiding tax liabilities, outwardly trying to cheat and take advantage of the IRS.
If you are honest but just made some mistakes in paying your taxes, the IRS should consider alternatives to taking your house.
And taking your house is not easy for the IRS. Here are some of the steps they need to go through:
> The IRS needs high-level internal approval to seize a house, and after that, the IRS has to send your case file to the Department of Justice for handling.
The IRS cannot just show up one day an unexpectedly take your house. First, they have to send you a Final Notice of Intent to Levy. And an IRS collection agent has to write-up a recommendation for seizure, and get that approved by IRS management. But that’s only the start of the process. The IRS wanting your house does not mean the IRS gets your house. If the IRS says yes, the case has to be transferred to the Department of Justice for the second step.
The Department of Justice gets your case because the IRS cannot, on its own, take your house. The government has to get an U.S. District Court judge to approve the seizure. That means the Department of Justice has to sue you in court, and get the judge to order your house to be sold. If you get sued by the Department of Justice for a house seizure, you have the right to file an answer in court, just like any other lawsuit, and defend the litigation.
Only a judge can order your house sold; the IRS cannot do it on their own.
The legal citation is Internal Revenue Code 6334(e).
> The IRS cannot take your house unless there is enough equity in it that will result in a payment on your liability.
Internal Revenue Manual 188.8.131.52, which lists prohibited IRS seizures, states “The following types of seizures are prohibited in light of restrictions in the Internal Revenue Code (IRC): Seizures where the taxpayer has insufficient equity in the property – there must be sufficient net proceeds from the sale to provide funds to apply to the taxpayer’s unpaid tax liabilities.
In other words, unless the IRS will get money from the seizure, it won’t happen, and can’t happen.
> The IRS should not take your house without considering better alternatives to get paid.
That’s right – seizure action is usually the last option in the collection process. The. Last. Option.
Let’s do another direct quote here, go straight to the source.
IRS Policy Statement 5-34, Internal Revenue Manual Section 184.108.40.206.8 states: The decision to seize must be satisfied that other efforts have been made to collect the delinquent taxes without seizing. Alternatives to seizure and sale action may include an installment agreement, offer in compromise, notice of levy, or lien foreclosure. Seizure action is usually the last option in the collection process.
Contrary to popular belief, in most situations the IRS really does not want your house. And because of that, alternatives should be considered and negotiated before borrowing against it.
4. Do you have to sell your primary work or business vehicle to pay the IRS?
Hopefully, the picture is developing for you that the IRS treads lightly on property seizures that could put you in a hardship situation.
In the same vein, an IRS Revenue Officer will be hard-pressed to justify taking your primary vehicles and not allowing you to work or transport your family.
If the IRS wants you to sell a car you use for personal or business purposes, respectfully let them know that to do so would create an economic hardship for you and your family. And the Internal Revenue Manual (the IRS guidelines) really is not about creating economic hardship on honest taxpayers.
5. Should you borrow money from friends and family members and give it to the IRS?
Your friends and relatives do not owe the IRS, and the IRS cannot collect from them. So, before you borrow money from them to pay the IRS, make sure that the reason is justified and the money is not taken out of desperation.
If the IRS is threatening to take your property, and you feel you have to borrow money to get them to leave you alone, it is important to separate the threat from the reality. The threat is serious, but you may have options the IRS is not telling you about – like the limitations in the Internal Revenue Manual and Internal Revenue Code on taking retirement accounts, or houses, or any real or personal property.
You may be able to box your way out of it and keep your stuff before having to rely on friends and family members.
To be clear, paying the IRS is a good thing. But it is important to be fully informed and know your rights before borrowing or liquidating in a manner that may not be necessary, or may cause a hardship to you.
To summarize, taking desperate measures to solve an IRS problem should carefully considered and weighed before being implemented. There is often a better alternative that can be found in the IRS collection laws and procedures.
Your fear, and the IRS’s threat, may not be equal the reality of the situation.