A bank levy is a severe enforcement action taken by the IRS to collect unpaid tax debts by freezing and seizing funds directly from a taxpayer’s bank account. This can lead to significant financial hardship, as it restricts access to essential funds needed for daily expenses and financial obligations.
Preventing a bank levy is crucial to maintaining your financial stability and avoiding additional stress and complications. In this blog, we will provide five actionable tips to help you prevent a bank levy from affecting your finances. These will ensure that you can manage your tax obligations effectively and protect your financial well-being.
Tip #1: Pay Your Taxes on Time
Paying your taxes on time is the most straightforward way to avoid any enforcement actions from the IRS, including a bank levy. Timely tax payments prevent the accrual of additional interest and penalties, which can significantly increase the amount you owe. Moreover, staying current with your tax obligations demonstrates good financial management and keeps you in good standing with the IRS.
To ensure you pay your taxes on time, it is essential to be aware of all relevant tax deadlines. Here are some strategies to help you stay on top of them:
- Create a Tax Calendar: Mark important dates, such as quarterly estimated tax payments and annual tax return filing deadlines, on a calendar.
- Set Reminders: Use digital reminders on your phone or computer to alert you a few weeks before each tax deadline.
- Stay Informed: Keep up with any changes in tax laws or deadlines that might affect your filing schedule.
Additionally, leveraging technology can make managing tax payments easier. Many financial and tax software programs allow you to set up reminders for tax payments. These can help ensure you do not miss any deadlines.
Tip #2: Set Up an Installment Agreement
An IRS installment agreement is a payment plan that allows taxpayers to pay their tax debt in smaller, more manageable monthly installments rather than in a lump sum. This arrangement can prevent the IRS from taking more severe collection actions, such as a bank levy, as long as the taxpayer adheres to the agreed payment schedule.
To apply for an installment agreement, follow these steps:
- Determine Eligibility: Check if you qualify for an installment agreement by visiting the IRS website or consulting with a tax professional.
- Complete Form 9465: Fill out Form 9465, Installment Agreement Request, which is available on the IRS website.
- Submit the Form: You can submit Form 9465 online using the IRS Online Payment Agreement tool, by mail, or over the phone.
- Await Approval: The IRS will review your application and notify you if your payment plan has been approved. Once approved, you must make your payments as agreed.
By paying your taxes on time and setting up an installment agreement if needed, you can effectively manage your tax obligations and avoid the severe consequences of a bank levy.
Tip #3: Communicate with the IRS
Maintaining open and consistent communication with the IRS is crucial when dealing with tax debt. Ignoring IRS notices or demands can lead to more severe enforcement actions, including bank levies, wage garnishments, and liens. By staying in contact with the IRS, you can better understand your options and demonstrate your willingness to resolve your tax issues.
When you receive a notice or demand from the IRS, it is essential to act promptly and appropriately:
- Read the Notice Carefully: Understand the reason for the notice and the actions required. The notice will provide information about the amount owed, deadlines, and potential consequences.
- Contact the IRS: If you need clarification or more time to respond, contact the IRS using the phone number provided on the notice. Communicating directly can help you negotiate terms or request an extension.
- Provide Requested Information: If the IRS asks for additional documentation or information, ensure you provide it accurately and promptly to avoid delays or misunderstandings.
- Keep Records: Maintain copies of all correspondence with the IRS, including notices received and responses sent, for your records.
If you find yourself struggling to understand your options or to communicate effectively with the IRS, seeking professional help can be highly beneficial. Tax attorneys can provide legal advice, negotiate with the IRS on your behalf, and represent you in hearings or court if necessary.
By maintaining open communication with the IRS and seeking professional help when needed, you can effectively manage your tax debt. This will avoid the severe consequences of enforcement actions like bank levies.
Tip #4: Consider an Offer in Compromise
An Offer in Compromise (OIC) is an agreement between a taxpayer and the IRS that allows the taxpayer to settle their tax debt for less than the full amount owed. This option is available to taxpayers who can demonstrate that they are unable to pay their tax debt in full or that doing so would create a financial hardship.
The IRS considers an OIC when it is unlikely that the tax debt can be collected in full through other means and when the offered amount reflects the taxpayer’s true ability to pay. To qualify for an Offer in Compromise, taxpayers must meet specific eligibility criteria:
- Compliance: The taxpayer must be current with all filing and payment requirements. This includes having filed all required tax returns and making estimated tax payments for the current year.
- Inability to Pay: The taxpayer must demonstrate that they are unable to pay the full tax liability through an installment agreement or other means.
- Reasonable Collection Potential (RCP): The IRS calculates the taxpayer’s RCP based on their income, expenses, asset equity, and overall financial situation. The offered amount must be equal to or greater than the RCP.
Application Process:
- Complete Form 656: Fill out Form 656, Offer in Compromise, and Form 433-A (OIC) or 433-B (OIC), which provide detailed financial information.
- Submit the Application: Send the completed forms, along with the required application fee and initial payment, to the IRS.
- Review and Evaluation: The IRS reviews the application, evaluates the taxpayer’s financial situation, and decides whether to accept or reject the offer. This process can take several months.
- Decision: If accepted, the taxpayer must comply with the terms of the OIC and remain compliant with future tax obligations.
An accepted Offer in Compromise effectively resolves the tax debt, preventing the IRS from pursuing further collection actions, including a bank levy. Once the OIC is in place, the IRS will not levy bank accounts or take other enforcement actions as long as the taxpayer adheres to the agreement terms. This provides relief and a clear path to settling the debt.
Tip #5: Prove Financial Hardship
Proving financial hardship involves demonstrating to the IRS that paying your tax debt in full or through standard installment agreements would create significant financial difficulty. Financial hardship may be considered if you are unable to meet basic living expenses while paying your tax debt.
In order for you to prove financial hardship, you will need to provide comprehensive documentation of your financial situation, including:
- Income: Pay stubs, profit and loss statements, or other evidence of earnings.
- Expenses: Detailed records of monthly living expenses, such as rent or mortgage payments, utilities, groceries, transportation, medical expenses, insurance, and other essential costs.
- Assets: Statements for bank accounts, retirement accounts, real estate, vehicles, and other assets.
- Liabilities: Documentation of debts, loans, and other financial obligations.
- Form 433-A or 433-F: Completing these forms provides the IRS with a detailed financial statement of your income, expenses, assets, and liabilities.
If you can successfully demonstrate financial hardship, the IRS may decide to halt or not initiate a bank levy. Recognizing that collecting the full amount owed would prevent you from meeting basic living expenses.
Conclusion
By proving financial hardship, you can protect yourself from severe collection actions like a bank levy and work towards a more manageable resolution of your tax debt. Seeking professional assistance can enhance your ability to present a compelling case to the IRS. Maintaining financial health requires diligence and foresight. By staying informed about your tax responsibilities and taking timely action to address any issues, you can protect yourself from the stress and hardship of IRS enforcement actions. With the right strategies and support, you can achieve a stable and secure financial future. Learn more at https://www.jdavidtaxlaw.com and book your consultation today!
