Tuesday, September 2, 2008

How much will the IRS take from you?

The most common mistake I see taxpayers make is to ignore the letters the IRS sends them. The IRS follows a “letter cycle”, giving you multiple chances to pay what you owe, before they move on to levying your wages or bank account. A wage/bank levy can cause real damage, hindering your ability to pay your bills or maintain your lifestyle. If you are a w-2 employee, (meaning your employer withholds money from your paychecks) then the IRS can levy 85% of your income. If you are a contractor, or considered self employed, the IRS can garnish 100% of your income! The IRS can actually contact the people who pay you and require them to send any money currently owed to you directly to them.

Let’s briefly discuss the types of levies that exist. There are 2 that the IRS can attach to your wages. The first is a 668 (a), which is a ONE-TIME levy on your wages from your 1099 income. Therefore, once your company/employer sends the money owed, you should be able to resume earning your income. There is also a 668 (w), which is a continuous levy that remains until the debt is completely satisfied. Recently, I dealt with a client who was self-employed. The ACS (Automated Collection Division) within the IRS mistakenly sent a 668 (w) to his vendor. By law, his contractor was forced to send all his income for WEEKS to the IRS, not realizing that it was the IRS who had made a huge mistake and levied him as if he was a wage earner, instead of a self employed individual.

Okay, so you didn’t respond to the letters sent to you by the IRS threatening to levy your wages/accounts and now it’s been done. What are your options? The most difficult thing I deal with is getting the IRS to release a wage garnishment once the IRS sinks its teeth into someone’s wages. In this case, you will need the assistance of an “Enrolled Agent”. If you hire an “Enrolled Agent” to help you deal with this situation, they will be able to act quickly and request that the IRS release the levy if it is creating a hardship. The “Enrolled Agent” will also be able to assist you in reaching some type of formal resolution with the IRS. Otherwise, you would remain in active collections with them. A professional who deals with the IRS collections divisions on a regular basis will be able to assist you in getting into one of 21 resolutions available to a U.S. taxpayer, but we will cover these more in depth in upcoming blogs!