Have you heard those scary radio ads by tax relief companies promising to help taxpayers in distress? The ads warn consumers about unexpected IRS bank levies to recover unpaid or disputed taxes. You are informed that “experts” can help stop the IRS levy and successfully settle your tax dispute for pennies on the dollar, or even obtain total “tax forgiveness.”
But here are the facts: The IRS doesn’t suddenly levy your bank account. They must first determine that you owe back taxes, usually through an audit, and you can contest this determination in IRS Appeals or by seeking audit reconsideration. Levies occur only if you have ignored notices sent by the IRS. (See discussion below.)
Tax relief companies, which also advertise on TV and the internet, will charge thousands of dollars in up-front fees. They will ask you to complete IRS Form 656, “Offer in Compromise” (OIC), without checking to see if you are eligible for the OIC program. The form requires extensive and burdensome financial disclosures. Because of the IRS’s strict guidelines for debt forgiveness, the IRS rejects about 90% of the Offers in Compromise.
Moreover, taxpayers can readily submit Form 656 on their own without help from a tax relief company. A tax attorney or C.P.A. can advise you in advance whether you have a reasonably good chance of prevailing in the OIC program. Filing Form 656 will remove the bank levy or wage garnishment temporarily, but once the offer is rejected, the levy is reinstated.
According to the Federal Trade Commission, many consumers have complained that after paying thousands of dollars in upfront fees, some of the tax relief companies took even more of their money through unauthorized charges to their credit cards or withdrawals from their bank accounts.
An advisory from the California Department of Justice warns: “Soon after collecting up-front fees, these companies typically inform taxpayers that they do not qualify for a relief program or that the IRS has rejected their attempt to reduce or eliminate the back-tax debt. Often these companies never even contact the IRS directly. Rather than reduce or eliminate the amount owed in back taxes to the IRS, these companies increase taxpayers’ debt burden.”
The problem of bank levies or wage garnishment can be avoided early on: Before the levy process, the IRS sends a “Notice and Demand for Payment,” which notifies you that you owe a certain amount of back taxes. This usually occurs after an audit determination and failure to pay the amount assessed.
The IRS will only levy against your bank or employer after issuing a 30-day notice entitled “Final Notice of Intent to Levy and Notice of Your Right to A Hearing.” You can request a Collection Due Process hearing and you may be able to persuade the IRS not to issue a levy for various reasons, such as financial hardship.
There are steps to take immediately to get the levy released if it is causing economic hardship. Also, a bank levy involves a 21-day waiting period for complying with the levy. The waiting period is intended to allow you time to contact the IRS and arrange to pay the tax, enter into an installment agreement or make other arrangements.
There are some legitimate cases in which a taxpayer may not have received any notices, or another family member received them but failed to respond.
It is extremely important to respond to IRS letters requesting an audit of your tax returns. Responding in a timely manner is the best policy. In cases where the audit might focus on deductions reported for horse or other livestock activities, it is important to defend your position by designating a competent C.P.A. or tax attorney experienced in the subject matter, because the issues can be tricky and complex.
Taxpayers should be on high alert and avoid exploitation by these so-called tax defense firms. These companies tend to take a large fee and make big promises without even reviewing your case beforehand, and more often than not they are unable to deliver results. Some do nothing at all.
John Alan Cohan is an attorney representing people in federal and state tax disputes, IRS appeals, and Tax Court litigation, and is a long-standing of a legal advice column published in numberous sporting magazines. In addition, he advises organizations on compliance with newly enacted laws and regulations. John is also author of the book, Turn Your Hobby Into a Business – Tax and Legal Tips. He can be reached at: (310) 278-0203, or email at firstname.lastname@example.org. His website is JohnAlanCohan.com.