Dealing With Unpaid Tax Debt
Information for senior citizens and legally disabled persons with state or federal tax liability.
The IRS Can Offset Most Federal Benefits for Unpaid Income Tax Debt
The IRS can garnish (offset) 15 percent of most federal benefits for unpaid income tax debt. The very strong laws protecting these benefits from garnishments do not apply to the federal government. The benefits that are vulnerable to offset for unpaid tax debt are Social Security Retirement and Social Security Disability (SSDI), Federal Civil Service Retirement (CSRS/FERS), Military Retirement Pay, and Federal Vendor / Contractor Payments (up to 100%)
Under the Internal Revenue Code (IRC § 6334) and the Treasury Financial Manual governing the Federal Payment Levy Program (FPLP), the IRS cannot offset or levy payments that are needs-based, state-administered, or tied to specific disability/survival statutes. These payments are Supplemental Security Income (SSI), SNAP, WIC, TANF, LiHEAP, VA Disability and Compensation benefits, Medal of Honor Special Pensions, and Workers' Compensation and Unemployment.
It is less common for the IRS to garnish pensions and other private retirement income.
Garnishment of benefits for unpaid federal income tax debt should not happen without notice. If you owe federal taxes, the IRS will send you a notice before the offset occurs.
Can the IRS garnish or levy a bank account for past due income taxes?
The IRS can levy bank accounts for unpaid tax debt. If your bank account is levied by the IRS for unpaid tax debt, do not give up hope. You can contact the IRS (see below) and ask to be put on Currently Not Collectible Status. If the IRS agrees that you qualify for this status, it is very likely they will release your levied funds.
How to Obtain Currently Not Collectible (CNC) Status
Lower income persons can often be placed on currently not collectible status (CNC) with the IRS. Once an account is placed in CNC status, the IRS will cease collection action, which includes any levy or garnishment actions that are currently taking place. When a taxpayer is placed in CNC status, this status typically lasts for a year. If the taxpayer’s financial situation does not change or improve, CNC status will continue.
Persons with especially lower income can often obtain CNC status by simply phoning the IRS. You will not need to file detailed financial paper work.
For more information on Currently Not Collectible status and how you can be placed in this status, visit the IRS Taxpayer Advocate Service website at: Currently Not Collectible.
IRS Taxpayer Advocate Service
There are websites that offer additional general information by searching the internet for “IRS uncollectible status.” If you have difficulty you can also contact the IRS Taxpayer Advocate Service for help. The Taxpayer Advocate Service is an independent organization within the IRS. The Taxpayer Advocate Service (TAS) is available to individuals for free to ensure that every taxpayer is treated fairly and understands their rights. The national Taxpayer Advocate Service phone number is 1-877-777-4778, and you can find the office for your own state at taxpayeradvocate.irs.gov/contact-us.
What can be done about taxes owed to a State Tax/Revenue Agency?
State tax collectors cannot garnish federal benefits. States also cannot garnish ERISA protected pensions or other forms of retirement protected by state law. State tax collectors do not often communicate legal protections for retirement incomes to senior citziens who owe state tax debt. Perhaps some are ignorant about the law protecting the incomes of retired and legally disabled persons. Others may know the legal protections of retirement income and not consider what frequent debt collection efforts may do to the taxpayer with very limited income.
If a state tax collector calls you about an unpaid state tax debt, and you only receive legally protected income, you can advise the tax collectors of this fact. You can communicate you can’t afford to pay the alleged tax debt, and your income is not vulnerable to the same. If you receive a collection notice from a state taxing agency, you can call and let them know you only receive legally protected income.
A bank account where federal benefits are deposited is protected from state tax collectors in the same way it is protected from other creditors. How that protection works, and how much of your account it covers, is explained here.
Some credit unions and a few banks are not fully informed about the federal laws protecting a bank account where federal benefits are deposited. If you have a bank account where federal benefits are deposited, and your funds have been levied out of the specific account where your federal benefits are deposited and your balance was below two times the amount of your federal benefits, your bank or credit union has made a mistake. Many states have relief available if an account where protected funds are directly deposited is placed on hold.
What Can a State Tax/Revenue Agency Do To Collect Unpaid State Income Tax Debt?
A state can take your state tax refund to offset previous tax debts. It can also intercept a federal tax refund to offset unpaid state tax debts. A few states can suspend your drivers license for unpaid tax debt, although these states usually have high ceilings on the amount owed before a license is suspended. For example, California will only suspend a driver’s license if a taxpayer owes over 100,000 dollars in tax debt. Some states will also suspend professional licenses if enough state tax debt is owed.
What is a Tax Lien?
Receiving a notice of a “tax lien” can be frightening. A tax lien from the IRS or state taxing agency is a “lien” on a taxpayer’s property. Language in the written lien notice sometimes causes people to worry that they might lose their home, car and other possessions. Income tax collectors are not in the business of selling peoples homes. This practice is exceptionally uncommon. Many people have little or no equity in a home for a lien to attach anyway. The taxing agency files the lien and hopes the tax gets paid if and when the home is sold. Tax collectors also do not go after personal possessions, especially from taxpayers with lower incomes.
Tax Relief Agencies
Perhaps you’ve seen advertisements for tax relief on television or social media. These agencies promise enticing solutions. While there are many honest, ethical tax attorneys, CPAs and accountants in the United States, it’s wise to view tax relief agencies with a lot of scrutiny.
The United States Federal Trade Commission, FTC, is an independent government agency whose primary function is consumer protection. This is a quote from the first paragraph on their website describing tax relief companies:
What About An Offer in Compromise?
An Offer in Compromise is where the taxpayer pays the IRS a discounted amount in settlement of past due taxes where a person cannot pay past taxes in an installment agreement with the IRS. There may be a better solution for lower income seniors who normally do not have access to funds to offer to settle back taxes. Some CPA’s and local tax attorneys are able to answer questions and help you determine if this would be a practical solution. Here is the IRS page that describes offers in compromise.
Can I Eliminate Taxes through Bankruptcy?
Some older income taxes can be eliminated through bankruptcy, but the rules are particular and there are several tests a tax has to meet. Seniors can contact an experienced bankruptcy attorney for more information.