In a Nutshell

If the Internal Revenue Service (IRS) garnishes your wages for unpaid tax debts, you do have options to stop the IRS. There are a few different tax procedures you can use to stop a garnishment. In some cases, it may even be a good idea to file bankruptcy.

Written by Attorney John Coble.  
Updated July 22, 2020


If the Internal Revenue Service (IRS) garnishes your wages for unpaid tax debts, you do have options to stop the IRS. There are a few different tax procedures you can use to stop a garnishment. In some cases, it may even be a good idea to file bankruptcy.

Dealing With the IRS When They Have Garnished Your Wages

The IRS uses several different types of collection actions. The primary methods are to garnish your wages, seize your bank account, or record a tax lien against you. Before the IRS will take any collections actions, it must follow procedures to ensure your collections due process rights.

Procedures the IRS Must Follow Before They Take Collections Action Against You

The IRS will give you many opportunities to settle your back taxes before they will execute what the IRS calls a wage levy. Wage levies are the same thing as wage garnishments. You may see a few different letters that say the IRS intends to levy. If you see a letter that has LT 11 or Letter 1058 on it, as a general rule, this is the one that means a levy is imminent. An IRS levy can be either a garnishment or a seizure. LT 11 or Letter 1058 is the end of the road in the IRS's collection due process procedures. These letters will say "Final Notice of Intent to Levy and Notice of Your Right to a Hearing" or something similar. For either of these letters, you have 30 days to respond by requesting a hearing or resolving (paying) the debt. If you fail to respond within thirty days, the IRS can seize the funds in your bank accounts or garnish your wages.

How Much of Your Wages Can the IRS Take?

For other garnishments, 75% of your paycheck or thirty times the minimum wage, whichever is greater, is exempt from garnishment. This law does not apply to garnishments by the IRS. The IRS exemption calculation is based on the number of dependents you have and your standard deduction. Thistable shows the exemption amounts for different taxpayers based on their filing status. For higher-income taxpayers, the IRS exemption is much lower than the exempt amounts for garnishments by other creditors. For this reason, an IRS garnishment will leave most debtors in a much worse position than garnishments by other types of creditors.

It's important to let the IRS know if you make court-ordered child support payments direct instead of having your employer deduct these payments from your paycheck. If this is the case, the IRS will reduce your garnishment by the amount of these child support payments.

Ways to Stop an IRS Garnishment

You have several options for tax relief. The first question to ask when determining how to stop an IRS garnishment is, "Do you owe the tax the IRS claims you owe?" If you do not owe the money, you can request an audit reconsideration which is to ask the IRS to reconsider how they calculated the taxes due. Other situations where you may not owe the amount due include situations where the debt is your spouse's debt. If this is the case, you may qualify for innocent spouse relief. Identity theft is another defense to tax liability. 

The IRS has a three-year statute of limitations for assessing taxes against you. The statute of limitations for assessment is extended to six years if the gross income you put on your return is off by more than 25%. The assessment statutes begin to run from the due date of the return. There is no statute of limitations for assessments for fraudulent returns, false returns, or missing returns. There is a ten-year statute of limitations for collections. The collections statute of limitations begins to run on the assessment date. If one of these statutes of limitations has expired, you may have a defense to the IRS’s collecting the debt.

If you do owe the money to the IRS, you have several alternatives. Generally, the IRS will want extensive financial information to verify your need for relief from their collections activity.  You can work out an installment agreement with the IRS. As long as you make these payments, the IRS will not garnish your wages. Another option is an offer in compromise (OIC). An offer in compromise is a form of a debt settlement with the IRS. That is, you are settling your debt for less than the full amount owed. An OIC may be either a lump-sum payment or it could be made in monthly payments. Which of these two alternatives is best for you will depend on your financial situation.

Another method of dealing with IRS collections is to request currently not collectible (CNC) status. The IRS grants CNC status if the taxpayer can prove that they cannot currently afford to pay anything to the IRS. For most people, this is only a temporary solution. But, if you know your financial situation is never going to improve, CNC status can be a permanent solution for you. An example of a permanent CNC solution is when you are permanently disabled. Even in such a case as this, if you inherit money or win the lottery, you will lose your CNC status and the IRS will collect for these types of unexpected income.

How Bankruptcy Affects IRS Wage Garnishments

Bankruptcy is a powerful tool for dealing with IRS wage garnishments. Bankruptcy may completely eliminate your tax debts without the need to pay anything. Or, if you do have to pay money to the IRS, bankruptcy can make the payments much more manageable.

The Automatic Stay

The automatic stay stops all collection activity the moment you file bankruptcy. Creditors won't even send the usual periodic bills due to the risk that sending a bill might be a prohibited collection activity. §362(b)(9) of the Bankruptcy Code lists several exceptions to the automatic stay for governmental tax authorities such as the IRS.

The IRS can notify you of the amount they have determined you owe and issue a demand for payment. This tax bill is not considered collections since it's the initial communication of the amount due. They can also continue efforts to determine how much you owe, i.e., start and complete audits. But, they cannot bill you in a manner where they are attempting to get you to pay the tax debt. This is logical because unlike a credit card bill where a person usually knows how much they have spent, with taxes, the taxing authorities look at what you have decided you owe and determine if they agree with you. You and your lawyer would want to know what the tax authorities think you owe so that you can decide if you agree with their calculations.

It is a violation of the automatic stay if the IRS sends bills and makes collections calls. The IRS also cannot garnish your wages or record new notices of federal tax liens without violating the automatic stay.

Why It Matters if Your Tax Debt Is an Old Debt or a New Debt

Bankruptcy can also eliminate an IRS garnishment by eliminating the debt the IRS is trying to collect. There are three important issues to consider when determining if bankruptcy can discharge a tax.

  1. Is the tax an income tax?

  2. Does the tax meet the 3/2/240 requirement?

  3. Is there a tax lien?

Income taxes are dischargeable in bankruptcy if the tax return was due over three years before filing bankruptcy and was filed over two years before the bankruptcy case was filed. The last requirement is that the tax authorities (IRS or state revenue department) assessed the tax at least 240 days ago. If these conditions are met, the tax is a general unsecured debt. Other types of general unsecured debts are credit cards and medical bills. Like any other general unsecured debt, these taxes are discharged in a Chapter 7 bankruptcy. Even if an income tax meets the 3/2/240 rule, the tax will not discharge in a Chapter 7 bankruptcy if the taxing authority has recorded a tax lien. The federal tax lien will turn the tax debt into a secured debt

If the 3/2/240 requirement is not met, then the tax must be paid in full because it is considered a priority debt. If you file a Chapter 7 bankruptcy, you will have to set up a payment plan with the IRS after your Chapter 7 bankruptcy discharge is granted. You still may be able to pay less than the full amount if you can negotiate an offer in compromise with the IRS. The automatic stay expires when the Chapter 7 bankruptcy discharge is entered, therefore, it's important to take quick action to resolve the issue with the IRS after getting your Chapter 7 discharge.

How Are Tax Debts Handled in a Chapter 13 Bankruptcy?

When a Chapter 7 bankruptcy can't eliminate a tax debt, you can pay the debt in full through a Chapter 13 bankruptcy. Chapter 13 bankruptcies include three-year to five-year repayment plans.

Lien Stripping

A few courts allow you to strip a federal tax lien away from a tax debt in a Chapter 13 bankruptcy. Most courts do not allow this, and since exemptions do not apply to tax liens, it can be tricky to do so. An experienced bankruptcy attorney will be necessary to determine if you live in an area where you can strip the tax lien.

You are able, however, to limit the amount of the lien to the total value of your assets minus any claims from secured creditors, and only pay the lien to the extent that it is actually secured. That’s because the lien can only exist to the extent that there is collateral to secured it. For example, if your lien is for $1,000.00, but you only have $100.00 of property, the Chapter 13 bankruptcy will pay off the lien by paying $100.00 to the IRS. There is a catch though. Your state law exemptions that apply to other liens do not apply to federal tax liens. So, most people will have at least some equity for the lien to attach to.

There is another catch. What kind of debt do you have after stripping the lien? If the 3/2/240 rule is not met on the underlying tax, you will have a priority debt. Chapter 13 bankruptcies must pay priority debts in full. But, if your old debt meets the 3/2/240 rule, then to the extent it is not secured by property, it turns into a general unsecured debt. In a Chapter 13 bankruptcy, this means the creditor (the IRS) will usually get pennies on the dollar for the debt and the remaining balance is discharged.

Conclusion

As a general rule, the IRS uses the same collections procedures anywhere in America. There are some distinctions based upon how courts in particular areas have ruled. To some extent, it will depend on how the bankruptcy courts in your area have ruled as to how much bankruptcy can do for you. If you have a tax garnishment and you need to know whether to negotiate with the tax authorities or file bankruptcy, it's best to find a bankruptcy attorney that also handles tax cases. These professionals will provide you with a free consultation. There are a few different types of tax professionals, including tax attorneys, certified public accountants, and enrolled agents. If you already know that your case will not benefit from bankruptcy, an enrolled agent may be your best choice to get your tax issue resolved. Enrolled agents are often former IRS agents and know the procedures better and have better contacts than most lawyers or accountants. Look for those who were formerly employed with the IRS.



About the author
Attorney John Coble

John Coble has practiced as both a CPA and an Attorney. John's legal specialties were tax law and bankruptcy law. Before starting his own firm, John worked for law offices, accounting firms, and one of America's largest banks. John handled almost 1,500 bankruptcy cases in the eig... read more

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