If you're a real estate investor, you may be wondering if you can invest in tax levies the same way you might invest in tax liens. While this isn't possible, it's still important to know what a tax levy is and how it can affect your finances. Here's a guide to the levy process. Take a look at this information to familiarize yourself with levies and what to do if you find one filed against you.
What is a tax levy?
A tax levy is a collection process used by the IRS and certain local governments to help satisfy any unpaid tax debt. A levy generally comes into play after a lien has already been placed on your assets. It gives the taxing authority the right to seize your assets as repayment. While asset seizure is certainly a possibility, tax levies are most often used as a last resort.
How does a tax levy work?
Overall, there are four separate ways the tax levy process can work. Read them over so you can have a better understanding of how you'll be affected if you ever find a tax levy against you.
Reduced tax refund
The IRS can hold back money due to you in a tax return in order to pay your outstanding tax debt. In addition to being able to hold on to your federal tax return, the IRS can also hold on to your state tax refund or local tax refund.
An IRS levy can also come in the form of wage garnishment. When your wage is garnished, it means your employer must hold back a portion of your pay and send it to the IRS on your behalf every payday. Of all the means the IRS has to resolve a tax issue, this one is probably the most commonly used.
The next option is a bank levy. Here, the IRS can tell your bank to freeze your accounts for up to 21 days. During that time, they can work with your bank to liquidate your accounts for repayment.
If all else fails, the IRS can take assets you own, such as a house or a car, and liquidate them to satisfy your tax debt. However, there are some assets even the IRS cannot touch. They include unemployment benefits, certain disability benefits, workers compensation, public assistance payments, and child support payments.
In this case, the IRS has more weight behind it than other lenders. If you have a federal tax bill, the IRS can essentially jump the line to get ahead of your other creditors. In essence, if you owe money to multiple sources, the IRS has the best chance of getting paid.
How to know if there's a levy against you
As stated above, a levy is usually used as a last resort. However, they do occur when necessary. So if you think there might be a levy against you, you'll likely receive communication about it via the mail. Specifically, the IRS always uses mail as its preferred method for contacting a taxpayer.
To that end, if you ever receive a document in the mail that says, "Final Notice of Intent to Levy and Notice of Your Right to a Hearing," that's a good sign a levy might soon affect your bank account or other assets.
How to get rid of a tax levy
Obviously, if there's a levy against you, you'll want to do all you can to get rid of it. Fortunately, there are several ways to do so. While they may not all be ideal options, they will help you get rid of your tax liability. Read each one to see which might be the best fit for you.
Pay your tax bill
In truth, the best way to get rid of a tax levy is to pay your creditor. As long as the taxing authority receives compensation, they will release the levy, and you won't have to worry about your assets being frozen or property getting seized.
Set up a payment plan
If your tax bill is too much to pay at once, you can work with the IRS to set up a payment plan that works for your budget. While your tax debt will still continue to accrue interest and penalties until it has been paid off in full, if you ask the IRS start a direct-debit installment agreement, where they take at least three consecutive payments out of your bank account, you may be able to get them to withdraw any liens from public record.
Structure a settlement
With a structured settlement, the IRS agrees to help you reach a tax resolution by accepting less money than you currently owe. However, this option is rarely approved. If you think you might want to go this route, the IRS has a tool on their website to see if you qualify.
File an appeal
On the other hand, if you think you may have received your notice of levy in error, you can file for an appeal. In this case, you can ask for a collection due process from the IRS Office of Appeals, where your case will be reviewed.
File for bankruptcy
As a last resort, you can also file for bankruptcy. That said, filing for bankruptcy does not always wipe out all tax debt. Making this decision will also have a negative effect on your credit score and make it harder to qualify for other types of financing in the future. Before you choose bankruptcy, talk to a tax expert about your options.
Understand the difference between a tax levy and a tax lien
Many investors wonder whether it's possible to invest in tax levies. The truth is that it's not. However, it's possible to invest in tax liens. The difference: A tax lien gives a creditor a financial interest in your assets and signifies the possibility a levy could occur in the future. In contrast, a levy is a process by which the taxing authority actually follows through on freezing your assets or seizing your property.
If you'd like to invest in property tax liens, you should know they're often sold at auction, similar to foreclosed properties. When you buy a tax lien, you're required to pay any amount the homeowner owes upfront. Then the homeowner is required to pay you back with interest.
Be aware that this form of investing does come with some risk. Often, property tax liens come with expiration dates, after which it's impossible to collect any unpaid debts. Lien holders are also required to do a certain amount of due diligence, so be aware of your responsibilities before investing.
The Millionacres bottom line
While being on the receiving end of an IRS tax levy or another type of tax levy is never fun, there are options to resolve your debts. If you receive notice of a levy against you, your best option is to talk to a tax attorney or another tax expert about your financial situation. They can give you individualized advice to help you deal with this financial hardship and come out on the other side.