VIEWPOINTS : Till Debt Do You Part: How IRS Collects Its Due

“My wife is afraid that the IRS is going to come to our house in the middle of the night, knock on our door and take our furniture and lawn mower.”

The words of a character out of George Orwell’s “1984”? Franz Kafka’s “The Trial”? One of Darth Vader’s underlings in any of the “Star Wars” trilogy?

Sadly, none of the above. These were the exact words of one of my clients recently. And it was clear that he shared his wife’s fears about what the Internal Revenue Service might do to collect on a debt.

I reassured him as well as I could. But, when it came right down to it, the couple’s dread, while a bit melodramatic--although for them, quite realistic--was not easy to alleviate. The IRS can, in fact, exercise enormous power over your belongings and way of life if it chooses to do so.

What is essential to note, however, is that this enormous power is almost always a last-ditch effort on the agency’s part. Its responsibility is to collect the most money at the lowest cost, and seizing personal property (even lawn mowers) isn’t a very efficient way to do that.

Before I tell you a little bit about what the IRS can do, I should tell you what you need to do before the IRS will start carrying off your major household appliances:

- Never open your mail. For if you had, you’d have noticed that, before the IRS presented you with a Writ of Entry, which allows its agents to come into your home or business to snatch your assets, the agency had sent you three things: a notice that an examination of your tax return was under way; a “30-day letter” indicating what determinations had been made in your case and giving you a month to write back and state whether you agree or disagree, and a “90-day letter” letting you know that if you disagree with the IRS’ determinations, you have three months to file a petition to that effect in U.S. Tax Court.

- Ignore all the warnings. Some people think that if they ignore a problem it will work itself out somehow. Or they believe that the federal government is so large and so incompetent that if they don’t respond to something, it will take years for that something to rear its ugly head again; and when it does, they simply can claim they never received any of the letters in the first place.

But once you’ve either failed to open your mail or ignored the warnings, you will start to receive a series of four notices, or letters. The last of these makes it quite clear that the IRS indeed has the legal authority to settle your debt to the government by attaching your wages, hauling away your car or even selling your home or business.

By the time some people receive that letter, the panic has set in, and the nightmares about lawn mowers being thrown over a brutish shoulder and carried kicking and screaming into the night set in. Strangely, some people at this point still refuse to seek professional help. They are afraid to contact a tax professional or the IRS itself--in much the same way that a hypochondriac who ignores a head cold too long obsessively begins to fear he may be suffering from a terminal disease and knows that a physician will end up only confirming it.

But tax collectors--rumor, myth and a few anecdotes to the contrary--are not lawn mower-eating monsters. They give a taxpayer a number of avenues of appeal, and, when those become exhausted, they’re usually willing to sit down and negotiate, with taxpayers or their representatives, a plan for the satisfaction of the debt. The IRS doesn’t want to force you into bankruptcy. From simply an economic standpoint, forcing someone into bankruptcy would make little sense. The agency would rather collect a portion of the tax due rather than get nothing from someone who is broke.

However, the agency certainly wields some power. For example, after all efforts to settle your problem have proven futile, the IRS can tow away your car from its parking space at work. Armed with a Notice of Levy, it can clean out your bank or savings account. It truly can seize your house or business and sell it. It can send an agent into your store to carry off your cash register. It can seize your house or business and sell it. It can remove your liquor license from the wall of the bar or restaurant you own. If you have an individual retirement account, it can grab the assets from that, too.

There’s more. In California and a few other states, the IRS can place a levy on your spouse’s wages to collect your premarital tax obligations (Moral: Never marry an IRS deadbeat). And if you think it’s difficult for the government to nab your paycheck or your savings, remember: You can be IRPed or entangled in WIRS. (The IRP, or information return report, shows, among other things, all of the wages and interest you receive; the Wage Information Retrieval System (WIRS, pronounced “wires,”) tells the government everything it needs to know about where you work. Don’t forget, your employer filled out a Form W-2 using your Social Security number, and your bank filled out a Form 1099, which makes locating your bank or savings accounts a piece of cake.

The Internal Revenue Code mandates that you pay back your debt with interest, currently at an 11% annual rate compounded daily. On top of that, there is a failure-to-pay penalty that accrues at the rate of 1% a month, up to a staggering 25%. Some taxpayers have found that it makes good sense to borrow money to pay off the government, since a commercial loan rate may prove more manageable.

Someone once said that the worst creditor to have is not organized crime but the IRS, because it has the power to collect the money that it’s owed by confiscating property without going to court to get a legal judgment. But don’t take my word for it. Instead, let me share this brief anecdote with you: A middle-aged couple ignored all of the IRS warnings and letters. The agency moved in, finally and reluctantly, and helped itself to a portion of the couple’s wages. The couple were left with take-home pay that couldn’t cover their expenses. The electricity was turned off in their home.

I’m not sure what became of their lawn mower. But I don’t think I want to find out.