How Can Self-Employed Individuals Resolve an IRS Levy?

Navigating tax obligations is complex for any taxpayer, but it is particularly challenging for self-employed individuals. One of the most severe actions the IRS can take against taxpayers is imposing a levy, which can have devastating financial implications. For self-employed individuals, an IRS levy can disrupt business operations, strain client relationships, and create significant stress.

This guide delves into what an IRS levy entails, how it impacts self-employed individuals, and the detailed steps for resolving it. By understanding the process and implementing effective accounting and financial strategies, self-employed individuals can manage and overcome the challenges posed by an IRS levy.

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Failure to Pay Taxes

  • Income Tax

    Neglecting to pay your annual income taxes can have severe consequences. This includes both federal and state income taxes that must be filed and paid each year. Failing to do so not only results in penalties and interest accruing on the unpaid amount but also attracts IRS attention, increasing the likelihood of a levy.

  • Self-Employment Tax

    Self-employed individuals are responsible for paying the full amount of Social Security and Medicare taxes, known collectively as self-employment tax. Unlike traditional employees, who share these costs with their employer, self-employed individuals must cover the entire amount. Failure to pay these taxes can result in significant penalties and interest, as well as potential enforcement actions like an IRS levy.

  • Quarterly Payments

    The IRS requires self-employed individuals to make estimated quarterly tax payments. Missing these deadlines can lead to penalties and interest on the unpaid amounts, quickly escalating your tax debt. This not only increases the amount you owe but also raises your risk of enforcement actions such as an IRS levy.

Steps to Resolve an IRS Levy

  • Step 1: Understand Your Rights

Notice of Intent to Levy:

Before the IRS can seize your property or assets, they must send a Final Notice of Intent to Levy and Notice of Your Right to a Hearing at least 30 days in advance. This notice is crucial because it gives you a window of time to address and resolve the tax issue before any enforcement action takes place. During this period, you have the right to request a hearing with the IRS Office of Appeals. This hearing can be a valuable opportunity to dispute the levy, negotiate payment arrangements, or explore other options for resolving your tax debt. Understanding this right and taking timely action is the first step in preventing an IRS levy.
  • Step 2: Verify the Levy

Confirm the Levy

When you receive a levy notice, it’s essential to ensure its legitimacy and accuracy. Carefully compare the details in the IRS notice with your personal tax records and returns. Verify the amount claimed by the IRS and check for any discrepancies. Sometimes errors can occur, and you may find that the IRS has incorrect information. If you believe there is a mistake, gather supporting documents that can help you prove your case. Verifying the levy not only helps you understand your situation better but also prepares you for any discussions or negotiations with the IRS. Accurate information is critical for resolving the issue efficiently.
  • Step 3: Contact the IRS

Immediate Communication

Upon receiving a levy notice, contact the IRS immediately. Open lines of communication can be highly beneficial in negotiating a resolution. Explain your situation, and be ready to discuss your financial circumstances and why you might be unable to pay the full amount immediately. The IRS is more likely to work with you if you are proactive and communicative. Early contact can also provide you with more options for resolving your tax debt, such as setting up payment plans or negotiating settlements. The key is to act quickly and show a willingness to resolve the issue, which can sometimes prevent the levy from being executed.
  • Step 4: Explore Payment Options

Full Payment: If you have the means, paying the full amount owed is the quickest way to have the levy released. The IRS will lift the levy once your debt is paid in full. While this may not be feasible for everyone, it’s worth considering if you can secure funds through savings, loans, or selling assets. Paying in full immediately stops the accumulation of additional interest and penalties, ultimately saving you money.

Installment Agreement: For many, an installment agreement is a more practical solution. This option allows you to pay your tax debt in manageable monthly payments. Setting up an installment agreement can stop the levy process or release an existing levy. You can apply for an installment agreement online through the IRS website or by submitting Form 9465. The agreement can make the debt more manageable by spreading payments over time, which can also help reduce financial stress.

Offer in Compromise (OIC): An Offer in Compromise allows you to settle your tax debt for less than the full amount owed if paying in full would cause financial hardship. To apply for an OIC, submit Form 656 along with Form 433-A (OIC) or Form 433-B (OIC), depending on your situation. This process involves a detailed review of your financial situation by the IRS, and acceptance of an offer is not guaranteed. However, if accepted, it can significantly reduce your tax burden.

Requesting a Levy Release: If the levy is causing immediate economic hardship, you can request the IRS release it. You must demonstrate that the levy prevents you from meeting basic living expenses. Provide detailed financial information to support your claim. The IRS considers economic hardship as a legitimate reason to release a levy, but you will need to show that the levy is severely impacting your ability to afford necessities like food, housing, and medical care.
  • Step 5: Appeal the Levy

File an Appeal

If you believe the levy is unjustified or incorrect, you can file an appeal through the IRS Office of Appeals. Submit a written protest explaining why the levy should be released and provide supporting documentation. This appeal process allows you to present your case to an independent office within the IRS that reviews disputes impartially. Preparing a strong, well-documented case can increase your chances of a successful appeal. Ensure that you follow the correct procedures and timelines when filing your appeal to avoid missing this critical opportunity for relief.
  • Step 6: Seek Professional Help

Hire a Tax Professional

Dealing with the IRS can be complex and intimidating, especially when facing a levy. Hiring a tax professional, such as a tax attorney, certified public accountant (CPA), or enrolled agent, can provide expert guidance and representation. A tax professional can help you understand your rights, navigate the appeal process, and negotiate with the IRS on your behalf. They have the knowledge and experience to develop a strategy tailored to your specific situation, which can significantly improve your chances of resolving the issue favorably. Additionally, having a professional advocate can reduce the stress and burden of dealing with the IRS, allowing you to focus on your other responsibilities.

Example Scenarios: Resolving an IRS Levy

Case Study 1: Freelance Graphic Designer

Scenario: Jane, a freelance graphic designer, failed to pay her estimated quarterly taxes, resulting in a significant tax debt and an IRS levy on her bank account.

Action: Jane contacted the IRS immediately upon receiving the levy notice. She verified the amount owed, set up an installment agreement, and started making monthly payments.

Outcome: The IRS released the levy on her bank account, allowing her to access funds needed for her business. Jane also began working with a CPA to ensure timely tax payments and accurate accounting going forward.

Case Study 2: Independent Consultant

Scenario: Tom, an independent consultant, received an IRS levy on his accounts receivable. His clients were instructed to send payments directly to the IRS.

Action: Tom appealed the levy, arguing that it caused economic hardship and disrupted his business operations. He provided documentation to support his claim and proposed an installment agreement.

Outcome: The IRS accepted the installment agreement and released the levy on his accounts receivable. Tom’s clients resumed payments to him, and he continued to pay his tax debt monthly.

Case Study 3: Small Business Owner

Scenario: Mike, the owner of a small construction business, faced a property levy on his business equipment due to unpaid taxes.

Action: Mike hired a tax attorney to negotiate with the IRS. They filed an Offer in Compromise, demonstrating that paying the full amount would cause severe financial hardship.

Outcome: The IRS accepted the Offer in Compromise, allowing Mike to settle his tax debt for less than the full amount. The property levy was released, and Mike retained his business equipment.

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