Have you ever been levied by the IRS? I have.
I used to do a lot of day-trading, back before the Dot.com bubble burst. It’s not that I made a lot of money, but I was doing a large volume of trading. Little did I know that despite the fact that the profits were minimal, the tax implications were huge.
One day, my day-job’s payroll department head called me and asked me to come to her office. She wouldn’t say on the phone what it involved. I was shocked to find out, once I met with her, that the IRS had placed a levy on my wages and claimed that I owed a tax debt of over $500,000! Wtf? Like a good boy, I had filed my tax returns every year. Heck, maybe I am sick, but paying my income taxes doesn’t bother me.
I couldn’t figure out how the IRS could think that I owed such a large tax debt. I wished that I had earned enough money to owe that amount of taxes.
Because our next pay period was close to two weeks away, I had a limited time to straighten things out or my next paycheck and ALL subsequent paychecks would be cut to the bone. I was told I would not take home more than $700 per month, hardly enough to live on.
My first step was to call the IRS… and stay on hold for a long time. What I found out, when I spoke to the IRS representative was that the IRS had made changes to my returns for a three year period. I was told that I had not reported well over $1,000,000 dollars in income that the IRS knew of, because the IRS had received 1099s for numerous stock trades. Apparently, every stock trade I made that was reported to the IRS was viewed by them as 100% profit. It was as if I bought each stock for a penny and the selling price was total profit to me. I wish! Now, the IRS had adjusted my returns to show the ‘income’ I did not claim and added on years of penalties and interest.
I knew I did not really owe this money, but did not know what to do to solve the problem.
The IRS representative told me to gather all the records of my trades and amend my previous return for the years in question, showing the cost basis for the stocks I bought and the price I sold them for. If I could prove that I did not owe the money the IRS said I did, I could replace the inflated IRS assessment and get the levy released.
I asked why I did not receive a letter warning me of these changes as I thought that was standard practice. I was told that a Notice of Intent to levy was sent as well as letters for each tax year that showed proposed changes to the returns I had filed. I am sure that I did not receive these letters from the IRS and choose to not open them. I had moved since the tax years in question, but the IRS representative told me that the IRS letters were sent to the last address I used when I filed a return, which was my current address. No matter, even if the IRS had not sent the letters or sent tehm to my old address, nothing was going to stop the levy, aside from giving them the information proving that my trades had not resulted in large profits to me.
Fortunately, I had all the records of my trades on my computer. It took a few nights (and lots of coffee), but I was able to gather all the facts and figures. I took them to a friend of mine who prepares tax returns and had everything completed in less than a week.
The next step was to go to submit the returns to the IRS. I went to a local IRS office. I took the amended tax returns, a copy of the levy paperwork from my employers, and a printout of all the stock trade information with me. After a long wait to speak with someone, my returns were submitted. I took two copies, one for the IRS and one that I asked to be stamped as ‘filed’ for my records. My returns showed that I owed less than $2000 for all three years, including the penalties and interest that had accumulated from the date the returns were due. I brought cash in to pay the total amount and received a receipt.
When I asked how long it would take to stop the levy, I was told that I had to wait for the returns to be processed, which could take weeks. I asked if there was anything I could do to speed up the process and did not get a positive answer. The one helpful tip I received from the IRS rep was that because I was under a levy order, that my bank account could be hit, not just my wages. I thought it was nice of the the IRS rep to warn me.
I immediately went to the bank and took all but $20 out of my account. If my next paycheck was going to be about $350, I would need what I had in my account to pay my rent and other bills. If my bank account were hit, too, I would be totally messed up, unable to eat, pay for gas, etc.
After going to the bank, I decided to call the IRS Taxpayer Advocate Office. This is a free service that is designed to take a second look at any case where a taxpayer feels he or she is not getting a fair shake. In my case, this was a lifesaver. The Advocate arranged to have my returns expedited, if I would fax a copy of my filed returns. I did so immediately and attached a copy of the receipt. I was told to call back at the end of the week. All I could do was wait and see.
I called back, as directed. I was nervous, with a sick feeling in my stomach. I was told that the IRS had not yet processed my returns. That meant that my paycheck set for the following Monday was going to be hit by the levy. The Advocate told me to call back the next week. When I called back, I received good news. The IRS agreed that my amended returns were accurate. I had provided all the necessary proof and my account was paid in full. I gave the Advocate the fax number and contact information for my payroll department. The IRS faxed a letter that day, releasing me from the levy.
The notice didn’t arrive in time to stop my one check from being levied, but, because I had already paid my tax debt, I was entitled to a refund from the IRS for the amount taken from my paycheck. That took about six weeks to arrive. I was lucky that I had enough savings on hand to cover the shortfall the levy caused or else I would have been short on my rent.
None of this experience was fun, but I learned a few valuable lessons:
- Never leave anything off a tax return. Be extra careful with any income that comes from a 1099 source. As I found out, it is not the IRS responsibility to look at the situation and apply basic logic. It seems clear to me that of course everything that showed on the 1099 from the day-trades was not profit, but I understand that it was my responsibility to prove this to the IRS.
- Keep good records. If I did not have the records showing all my stock trades, it could have been a nightmare to research the value of the stocks on the days I bought and sold them. That would have meant more paychecks levied and potential financial disaster.
- I found out that many independent contractors who do not file a return get hit with huge tax bills that they could have avoided, if they filed a return that showed all their business overhead. It is not the IRS’ responsibility to fill in the blanks, so if an independent contract does not itemize the expenses he or she incurred to earn the 1099 income, the IRS will figure the tax assessment based on the total income showed on the 1099. People in a business with high overhead, like an owner-operator truck driver, can face enormous assessments if they don’t supply the IRS with their costs for doing business.
- It may take the IRS a few years to catch a mistake. When they do they add interest and penalties to what is owed.
- The IRS Taxpayer Advocate (1-800-829-1040)can be helpful and the service is free. I have spoken with other people who have worked with the advocate. Some had good results and others did not. Still, as it doesn’t cost anything, it is an option worth trying. I am sure there are times when a tax professional is required to solve a tax problem, but it can’t hurt to call the Advocate. The worst that can happen is that they tell you that they can’t help you.