Before the Internal Revenue Service levies your bank account for nonpayment of taxes, it typically files a tax lien. This lien is a matter of public record and eventually ends up on your credit report. The reporting of the lien causes your credit score to go down and damages your credit standing in the eyes of future creditors. If you don't pay off the tax after the lien is filed, the IRS takes it a step further and levies your bank account. When this occurs, the IRS actually seizes the money from your bank account to cover your outstanding tax bill. This action is not reported to the credit bureau.
Protecting Your Credit Report
If the IRS has already filed a tax lien preceding a bank levy, it should appear on your credit report under the public records section. Unfortunately, this is one of the most negative marks in the eyes of existing creditors and potential creditors, who will view the report before deciding to extend credit to you or to lend you money. Credit reports also rate your creditworthiness by listing your payment history, credit utilization and other details about your payment of loans and credit card bills. It will be hard, if not impossible, to get new credit or loans until you pay off your back taxes.
Dealing With Back Taxes
If you fail to pay your taxes on time, the IRS sends you a collection notice, which is similar to a bill. Once you receive the notice, the clock starts ticking and does not stop until you pay the tax or the IRS' legal right to collect the debt ends. The IRS has 10 years to collect the tax debt, starting from the time you filed the tax return, the IRS assessed the tax after an audit or the IRS completed a proposed assessment.
The first notice the IRS sends includes the amount of the tax and any late or penalty fees and interest charges. The letter will demand payment in full. If you can't make the payment, contact the IRS and try to set up installment payments. If you're able to offer a lump sum of money -- but not the whole amount of the tax payment -- you can do an offer in compromise. This means you offer to pay a reduced amount on the balance, and the IRS ends the collection process. You can also negotiate the suspension of the collection process if you're going through a temporary financial hardship. The IRS does not report this to the credit bureaus, but it continues to charge fees and interest.
If you don't work out payment arrangements or pay the tax within a specified time, the IRS files a notice of federal tax lien. This legal claim to your property goes on your credit report under public records and shows creditors you have a payment obligation to the IRS. This occurs 10 days after you receive the first notice from the IRS, so get in touch with the agency immediately after you receive this. Generally, the IRS does not remove the lien until the taxes, including interest and fees, are paid or until the end of its legal right to collect the tax.
Details of the Levy
The IRS sends you a final notice of intent to levy and notice of your right to a hearing at least 30 days before it starts seizing your assets. You can ask for a hearing within the 30 days to avoid or postpone seizure. This will also be your last chance to work out other payment arrangements. In addition to levying your bank account, the IRS can seize your property, including wages, future tax refunds, Social Security benefits, retirement income, cars or real estate.
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