Tax Terms

After procedural requirements have been fulfilled by the IRS, it may issue a Notice of Levy (Form 668-A) to the accounts receivable of a delinquent taxpayer.  The Notice of Levy requires the receivable to send any payment to which the delinquent taxpayer has a fixed and determinable right directly to the IRS instead of the taxpayer.  The government will then apply the proceeds of the levy to the taxpayer’s tax debt.  Receivables who disobey the Notice of Levy and send the payable to the taxpayer instead of the government can be hit with expensive penalties.  

With some exceptions, this type of levy generally does not attach to payments that are dependent upon the performance of future services.  In other words, this type of levy is usually not continuous.  

Unfortunately, some receivables do not understand that the levy should not be continuous in nature, and will continue sending all future payments to the IRS until the levy is released or the receivable is convinced that the levy is not continuous in nature.  When issuing an accounts receivable levy, the IRS will often issue the levy to all known accounts receivable of a taxpayer, and even customers of the taxpayer from whom no moneys are due.  This type of levy can be extremely damaging to a business taxpayer, as it chokes off cash flow and can damage the relationships that the business has with its customers.  State taxing authorities generally follow similar procedures.  

After procedural requirements have been fulfilled by the government, it may levy (seize) non-exempt assets of a delinquent taxpayer.  The government takes physical possession of the asset and will typically sell the asset at an auction and apply the proceeds to the taxpayer’s tax liability.  State taxing authorities generally follow similar procedures.

For more information, refer to our article Will the IRS Seize Assets or Force the Sale of Them?.

After procedural requirements have been fulfilled by the IRS, it may issue a Notice of Levy (Form 668-A) to a bank that holds funds belonging to a delinquent taxpayer.  The Notice of Levy requires the bank to freeze any funds that are in the taxpayer’s account at the time the levy is served.  The taxpayer should have access to funds deposited into the account after the bank freezes the funds subject to the levy.  Unless the levy is released, the bank is required to turn the frozen funds over to the IRS 21 days after the bank places the freeze on the account.  These funds will be applied to the taxpayer’s tax liability.

For more information, refer to our Will the IRS Garnish/Levy My Wages? article.

Before the IRS may file a Notice of Federal Tax Lien, it must first issue a Notice and Demand for Payment to the taxpayer and wait at least 10 days before filing a Notice of Federal Tax Lien (assuming the taxpayer does not pay off the tax liability within those 10 days).

An Installment Agreement is a written agreement between a delinquent taxpayer and the IRS which requires the taxpayer to make periodic (typically monthly) payments to the IRS.  The IRS will not enforce (levy) against a taxpayer for tax liabilities that are covered by an installment agreement that is in good standing.  Some taxpayers verbally agree to make monthly payments to an IRS collection employee.  If the agreement is not in writing, the taxpayer may be at risk of enforcement.  State taxing authorities follow similar procedures.  

For more information, refer to our article on Installment Agreements.

The IRS may request that a person associated with a business owing trust taxes (usually 941 employment taxes) participate in an Interview Relative to Trust Fund Recovery Penalty, which is also referred to as a “4180 Interview.”  They sometimes send a letter to the person to be interviewed requesting a face to face meeting at a specific place and time.  They may also request this interview verbally.  During the interview, the collection officer will ask questions from Form 4180 which are designed to help the officer determine whether the interviewee and/or other persons associated with the business fit the criteria of “willful and responsible.”  Persons determined to be “willful and responsible” for the business entity’s unpaid trust taxes can be held personally liable for the unpaid trust taxes.  While some states follow a similar procedure, other states have lesser requirements.  For example, some states will simply hold corporate officers personally liable without conducting an interview. 

An Offer in Compromise (OIC) is a formal, written agreement between a taxpayer and the IRS to settle a tax liability for less than the full amount owed.  Many states have a similar program.  An OIC can be based on “Doubt as to Collectability” (the taxpayer proves he or she is not capable of repaying the debt in full), “Doubt as to Liability” (the taxpayer proves that there is some doubt as to whether the taxes should actually be owed) or “Effective Tax Administration” (typically the taxpayer proves some kind of hardship that warrants a settlement).  

For more information, refer to our article on The IRS Fresh Start Initiative.