Useful Tax Terms To Settle Debt

by LeTonya F. Moore, Esq.
Tax Resolution Expert and Attorney

Working with the IRS is scary for most people.  Trying to understand the process and resolve your debt takes time, effort, and quite frankly, can be very frustrating.  

One of the biggest challenges is simply understanding the IRS jargon...that’s a fancy word for terms, including the regulatory language and how to figure out what’s the best course of action in your situation.  
Here are some definitions to know, to better understand your tax matter. A Tax Resolution Specialist work with you in your unique situation to clean up the muddy waters of your tax problems.

1. Levy

An IRS levy permits the legal seizure of your property to satisfy a tax debt. It can garnish wages, take money in your bank or other financial account, seize and sell your vehicle(s), real estate and other personal property.  To do this, the IRS simply has to serve notice on your financial institution or other property holder, and then they can take steps to seize the property. For example, if the IRS serves notice to your bank.  The bank account is frozen for the total amount owed to the IRS. If you have less in the account than that which is owed in total, you entire account will be frozen for 21 days. This then locks the account. If new money is added to the account, that money is not included in the freeze.  

After the 21 day holding period, those funds are then transferred to the IRS.  The only way to prevent the transfer is to obtain a release from the IRS. Note, the IRS could issue subsequent levies if the debt is not satisfied with just one.  This is not typical, but you need to know that it is possible.

2.        Garnishments

Garnishments are forms of levies that are continuing and ongoing.  The IRS is most successful with wage levies. Wage levies are where the IRS receives a portion of your pay each pay period. Portions of your paycheck may be exempt from the levy, which amounts will be paid out to you.  This exempt amount is based on a specified calculation that takes into account things like the number of dependents and other obligations. Your employer is obligated to comply with the IRS and provided the requested information regarding pay and exemptions.  Once the information is requested, your employer must respond with the information within three days. Failure to meet the three day timeline will result in the IRS not considering any dependents. If you have any other income, the IRS can levy 100% of your pay and allocate your exemptions to your other income sources. 

3.    Offer in Compromise

An offer in compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service that settles a taxpayer's tax liabilities for less than the full amount owed. Taxpayers who can fully pay the liabilities through an installment agreement or other means, generally won't qualify for an OIC in most cases. 

The IRS gives three scenarios for the OIC:

• Is the taxpayer liable for the tax debt?  If there is legitimate doubt as to liability, the IRS may accept a compromise.
• Can the IRS collect?  If the IRS believes there is a small chance of collecting the entire amount, they may accept an offer in compromise.  This is generally a scenario where your assets and income are less than the total tax liability.
• Does collection of the full amount create an economic hardship or would it be inequitable?  The IRS can accept a compromise based on effective tax administration where there is no question as to liability and a chance of collecting the full amount. However, requiring the full amount would be unfair and inequitable.  

4.    Installment Agreement

IRS installment agreements are where you work out a payment arrangement with the IRS to pay off the tax debt within a specified period of time. You may pay a one time full payment, a short term payment plan (up to 120 days) or a long term payment plan that extends beyond the 120 days. You should be aware that some of the plans are free to establish, while others have a nominal charge. 

5.   Release
As it relates to liens, the IRS should release the lien within 30 days after the tax debt is paid.  This date is base don the date the IRS records the payment.  Make sure to mark your calendar to check that the lien has been released. Per the IRS, when conditions are in the best interest of both the government and the taxpayer, other options for reducing the impact of a lien exist.

The IRS can also release a levy if it determines that the levy is causing an immediate economic hardship. Most of the time the levy does create a financial hardship because it impacts your liquid capital.  If you are being faced with a potential levy, you may want to appeal before the IRS places the levy. If you are already impacted by the levy, you may still appeal after the levy has been instituted. 

6.    Fresh Start Initiative

The Fresh Start Initiative was designed to allow taxpayers time to payoff substantial tax debt and protect their assets.   This is typically a monthly payment arrangement that is based on their current income and the value of liquid assets. 

7.       Taxpayer Advocate
The taxpayer advocate service’s job is to make sure that taxpayers are treated fairly and equitably during the process.  They are an independent organization within the IRS created to protect the taxpayer Bill of Rights (yes they do actually exist), assist with resolving problems and making recommendations that will prevent problems in the future.

These are some of the top terms you need to know to protect yourself when dealing with the IRS.  You should have a better understanding of these items and hopefully it will save you time, money, and anxiety when dealing with the IRS. If you need help with paying back taxes, resolving audits or other tax matters, call us for a free 15 minute consultation, at 1-800-945-8120. ​