Owing delinquent taxes to the Internal Revenue Service can cause a problem for your other creditors. The federal tax agency typically jumps to the front of the line when recouping debts, meaning your other creditors must wait longer to receive payment. Any judgments the IRS wins against a debtor can also run simultaneously with a bank levy or tax lien, allowing the agency to claim an even larger portion of a debtor's finances and assets.
Creditor Debt Priority
The court assigns priority to each creditor in terms of recouping debts owed when multiple judgment actions occur at the same time or during a bankruptcy. The federal government, including the IRS, is typically at the top of the priority list. This means if a debtor owes the federal government back taxes, the IRS receives money before any other creditor may attempt to recoup debts owed. A creditor obtaining a judgment against a debtor who also owes the IRS cannot legally move to seize finances and assets marked by the IRS for the satisfaction of back taxes.
Seizing Tax Refunds
An unsecured creditor, including a credit card company or collection agency attempting to collect medical debt, usually cannot obtain a judgment enabling the creditor to seize a debtor's federal or state tax refund. This is not the case for certain federal and state agencies, including the IRS and child services departments, who may seize tax refunds to pay back tax debts and delinquent child support payments. These government agencies usually don't need a court order to seize this money. The debtor gets a letter in the mail notifying him of the seizure and the agency responsible for taking the refund.
Judgments For Assessed Liability
The IRS may sue a taxpayer in court to recover money owed from tax actions not directly related to tax liability, including an erroneous refund or failure to honor a lien. A lawsuit of this nature can result in a taxpayer owing the IRS additional money not directly related to any existing tax liability. This means the IRS can continue to garnish a debtor's wages to pay back tax debts while simultaneously securing a court judgment to force the debtor to pay back money received through an error or refusal to cooperate.
Judgments and Tax Liens
When the IRS wins a judgment against a debtor, the court does not merge any existing tax lien or bank levy into the judgment. This means the IRS can exercise the judgment to seize a portion of the debtor's finances while continuing to hold a lien on the debtor's property or a bank levy on the taxpayer's bank accounts. This provides a modicum of insurance for the IRS in the event the taxpayer tries to evade payment. The tax agency can simply exercise the levy or lien to recoup the debt owed.
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