For some of us, it is tempting to ignore the letters and notices from the Internal Revenue Service, but it’s not the wise decision to do so. The IRS has a number of ways to collect and make your life miserable in the process. Since you will end-up having to pay them some amount of back taxes, it makes more sense to be prepared when the IRS comes calling.
In this regard you may wish to consider retaining a private tax advocate to help you through the process. Some of are very good at what they do. Here are some of the ways the IRS Collects:
The Internal Revenue Service may compel your employer to take part of your wages and send it directly to them. This is known as “wage garnishment” or “wage withholding.” If you have not answered IRS letters and you work for someone else, this is the step the IRS often uses to obtain payment.
If your wages have been garnished, you can call the IRS and try to work out another method of payment. It will do no good to tell your employer to ignore the order.
Real Estate Tax Liens
The IRS can file a paper with the County Recorder called a “Tax Lien.” It covers all real property you own in the county where the lien is recorded. If they think you own property in any other counties, they can file there also.
While the lien is on the property, you will find it difficult to sell or refinance the property. At some point, if you don’t pay, the IRS may foreclose on the lien.
How Does The IRS “Foreclose” On Their Lien?
The IRS might “foreclose” on the lien by having the sheriff or marshal sell the property and turn the proceeds directly over to the IRS. They will do this only if they believe there is sufficient “equity” (market value minus your mortgage balance) in your property to pay some or all of the taxes owed.
They rarely foreclose on the family home, but they will do so in extreme cases.
What Happens If I Try To Sell Or Refinance My Property?
If you try to sell your property, the lien becomes a real problem, because the IRS can prevent the sale from going through unless they are paid. They can do this because a lender such as a bank will not lend the buyer any money unless the tax lien is paid. You might try to sell to someone who doesn’t need a bank loan and is willing to take the property even with the lien on it. The IRS, however, may foreclose on the lien and sell the property even after the buyer takes over.
If there is enough equity in the property to pay all the taxes, you can work with the IRS to complete the sale. You will receive what is left over after all the debts are paid.
Capital Gains Risk
If there is not enough equity, you can still work with the internal revenue service to allow the sale to be completed, but they will take whatever equity there is, leaving you with nothing after the sale. To make matters worse, you could still be liable for capital gains taxes on the sale. The same is true for refinancing, except that since there is no sale, there are no capital gains (or losses).