By Shawn Spaulding, Esq., LL.M on Oct 13, 2017 2:57:32 AM
The Internal Revenue Service (IRS) is widely regarded as the most powerful creditor in the United States. Congress has given the IRS vast collection powers while limiting the due process rights of taxpayers (comparatively speaking). As a result, the IRS uses wage garnishments in almost a semi-automated fashion. In other words, taxpayers are commonly identified and targeted first by IRS computers and the process can occur fairly quickly. Luckily there are several ways to stop the IRS from garnishing your wages (before and after the fact). Here is a quick look at what will be covered in this article.
How to stop an IRS wage garnishment BEFORE it is issued
- Act Quickly
- Request a Hearing
How to stop an IRS wage garnishment AFTER it is issued
- Negotiate a Collection Alternative
- Hardship Status / Currently Non-Collectible (CNC)
- File Bankruptcy
- IMPORTANT: Quitting or Changing Employment Considerations—Tax Evasion?
What is an IRS Wage Garnishment and Why Should I Care?
Before we look at how to stop or prevent an IRS wage garnishment, you should have an understanding of what it is. A wage garnishment is a collection tool used by creditors, which forces employers to withhold and pay-over wages otherwise payable to you. Typically, a creditor is required to secure a court order before garnishing your wages. Additionally, most wage garnishments are limited by state law to 25% (including California). HOWEVER, these rules and limitations are not imposed on the IRS. Therefore, the IRS can garnish the majority of your paycheck without getting a court order.
Importance of Avoiding or Getting an IRS Wage Garnishment Released
- The IRS does not need a court order; and
- You will likely lose the majority of your paycheck
Now that you understand what is at stake let’s look at a few ways to prevent and/release an IRS wage garnishment.
How to Avoid an IRS Wage Garnishment
Where possible, you should always try to avoid IRS enforced collections. One of the most overlooked components to acting quickly is your compliance level. The IRS will not deal with you if you are not tax compliant (filed all required tax returns). However, if you recently filed your tax return(s) with an amount owed to the IRS you should expect the following:
- Your case will generally be transferred to the IRS Automated Collection System (ACS).
- ACS is going to send you a notice demanding payment (usually within a couple of weeks).
Depending on the amount you owe, it may be a good idea to reach out to a local tax attorney to see what your options are:
- Can you avoid a Notice of Federal Tax Lien?
- Can you settle with the IRS?
- Are there penalty abatement opportunities?
- What type of payment plan is available?
Nevertheless, responding early in the process leaves you with the most options. Even if you have received several notices, you can still avoid a wage garnishment. However, you need to be on the lookout for a “Final Notice of Intent to Levy” (usually an LT11, CP91, or 1058 notice). This notice will come certified mail and gives you IMPORTANT rights. Specifically, this is your Collection Due Process (CDP) notice. Here are some key components:
Request a hearing…
- This is extremely time sensitive.
- CDP rights typically arise after a “Final Notice of Intent to Levy” (LT11, CP91, 1058, etc.) has been issued.
- You have 30 days to file the request.
- This provides a forum for negotiating a collection alternative and gives you rights to petition the Tax Court if the IRS is unreasonable.
- Generally, only a tax attorney can represent you at Tax Court (or you can represent yourself).
Ok, so you missed your CDP rights deadline…now what? If it has been less than a year since receiving your final notice, you can still file the CDP request. However, you do not get Tax Court rights with it, and the IRS can still collect from you while it is pending (although the IRS generally will not). This type of request is considered a CDP Equivalency Hearing. The tools mentioned above are a great starting point to avoid a larger headache. So act early and quickly to keep the IRS off your back.
How to Stop an IRS Wage Garnishment AFTER it is Issued
Once you received the dreaded IRS Form 668-W Notice of Levy on Wages, Salary, and Other Income (aka wage garnishment) you can no longer ignore the IRS. However, you still have options.
Advocate for a Collection Alternative
“Collection Alternative” is a term coined by the IRS that essentially encompasses two things—an offer in compromise or installment agreement. These alternatives are available either before or after the wage levy has been issued. Nevertheless, if you are reading this section, I suspect there is a wage levy in place already. Therefore, let’s look at the basic components of each.
Offer in Compromise (OIC)
An OIC is easily the most powerful and beneficial tool available to any taxpayer with back taxes. If you qualify for one of the three types you could settle your tax debt for next to nothing. However, it takes a trained eye to fully plan and prepare an OIC.
Common Problems When Attempting an OIC Yourself
- Understating expenses and overstating income—this will kill your chances of success.
- Leaving assets and income out of the OIC packet—this is actually a crime (see IRC § 7206). It also will ensure you do not get an OIC accepted (maybe ever).
Three Types of OICs
- Doubt as to Collectibility (most common)
- Effective Tax Administration (often overlooked by practitioners but very powerful)
- Doubt as to Liability (this is where you challenge the underlying amount owed)
If an OIC is not right for you, then it might be time to negotiate an installment agreement.
Installment Agreement (Payment Plan)
There are various types of Installment Agreements available to taxpayers. Each type has a unique structure and result. The inquiry is too in-depth for this article, but I will identify the basic structures below. Also, there are several benefits to negotiating an installment agreement.
- No more levy(ies)
- Make monthly payments instead of draining your savings or racking up credit card debt
- Possibly avoid having a tax lien filed
- Possibly get a tax lien removed
- The monthly payment will probably be much lower than the garnished amount
Types of Installment Agreements
- Direct Debit Installment Agreement
- Streamlined Installment Agreement
- Guaranteed Installment Agreement
- Partial Payment Installment Agreement
You can establish these agreements on your own. However, it is a good idea to consult with a tax attorney to address the specific facts of your case. This will ensure you are aware of your rights and how each installment agreement can impact you (credit score, liens, fees, etc.).
What if you are in a hardship status?
Another mechanism referred to as “Currently Non-Collectable,” is available to taxpayers currently facing a financial hardship (unemployment, underemployment, etc.). Essentially, if you do not have enough monthly income to meet your reasonable and necessary living expenses, the IRS has to release the wage levy. This is generally true even if you have not filed all of your tax returns (see Vinatieri v. Commissioner, 2009). However, to qualify you will need to provide financials to the IRS. Usually, this requires filling out a 433-A or 433-F and providing supporting documents (paystubs, bank statements, bills, etc.). Again, it is possible to do this on your own…however, it is important to consult with a tax attorney to ensure you know how it could impact you long term.
What about Bankruptcy?
Another option you may have to get your wage garnishment released is bankruptcy. Actually, under the right circumstances, your back taxes may also be partially or fully dischargeable. Even if they are not, a bankruptcy filing triggers an automatic stay, which protects debtors (you) from collections during the bankruptcy case. You should consult with a bankruptcy attorney familiar with the dischargeability of taxes before making a final decision. Nevertheless, bankruptcy can be a powerful tool and should not be overlooked.
Can I Just Quit my Job?
I have read on several blogs that taxpayers can simply quit or change jobs on a continuous basis to avoid IRS wage garnishments. Although this is certainly a true statement, it may not be advisable. After all, there is a statute out there that goes a little something like this:
“Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.”
As you can see, one could argue you are in violation of IRC § 7201 if you quit or change jobs solely to avoid a wage garnishment. Accordingly, take the time to weigh your other options before it comes to this.
The IRS is an extremely powerful creditor. Whenever possible, you should try to face your tax issues head-on. This will mitigate your exposure to wage garnishments, bank levies, tax liens, and more. However, if you fall behind and the IRS slaps you with a wage garnishment there is still hope. Understanding your rights is the first step to resolving any legal issue. Therefore, do your research, consult a professional, and protect your rights.