When you do not pay your federal tax debt, the IRS will take collective action. There are many steps involved before you find yourself with a wage garnishment. You receive the bill, you receive a lien, and then you will face a levy, which might come in the form of a wage garnishment. With each communication from the IRS, you have a minimum of 30 days to take action, which might mean you pay your bill, or it might mean that you enter into some type of tax relief negotiation. However, if you let it linger, then you might find that you face a wage garnishment.
Wage Garnishment 101
What is a wage garnishment? It is basically a collective action in which the lender takes money directly from your paycheck to pay off a loan. For many debts, the lender needs a court order to do it. However, for federal tax debt, the IRS simply needs to enact the levy with sufficient warning according to the general IRS guidelines, which is typically 30 days. Wage garnishments to pay off federal taxes are also not protected by Title 3, which limits the amount of money a debt collector can take from your wages.
One thing you do not want to happen is to avoid taking action and letting the IRS enact a wage garnishment to collect the monies owed. It might seem like an easy way to pay off the IRS, since it is an automated process. However, there are four big reasons why you want to find another way to pay the IRS.
Very Limited Budget
The number one reason to take action to avoid a wage garnishment from the IRS is that you are left with a very limited budget. Unlike most wage garnishments, which are restricted in the amount of money they can take at around 25 percent of your disposable income, the IRS can take all of your income after an exempt amount. The exempt amount is based on your filing status and dependents and is the same for everyone in that category.
For example, a single person with two exemptions paid monthly gets to keep $1,204.17 of their paycheck, while a married person filing jointly with three exemptions paid monthly gets to keep $2,070.83. Any amount above that, the IRS can take. It doesn’t matter if you make $2,000 a month or $6,000 per month, the IRS can take everything that is not exempt.
This means you are left with a very limited budget, especially if you are used to a high income. These exemptions are based on the average cost of living, which is much higher in many cities around the country. Imagine having to pay your rent, car payment, insurance, gas, groceries, and other necessities on $1,200 per month as a single person with two exemptions! In many places, you cannot even pay your rent or mortgage payment on that income.
Higher Penalty Fees
If you allow a wage garnishment to continue, you face higher penalties than if you were to negotiate a tax relief settlement such as an Installment Agreement. The penalty fees for not filing are 5 percent per month, with a maximum of 25 percent of your total tax bill. The late payment penalty is 0.5 percent of your unpaid taxes up to 25 percent. If you do not pay or file, you face a 5 percent penalty per month up to 47.5 percent of your total tax bill. However, if you set up an Installment Agreement, then you will only have to pay a 0.25 percent penalty fee. That difference can have a major impact on the total amount you end up paying. This does not impact the 3 percent plus federal short-term rate interest that compounds daily. There are also other ways to reduce your penalty fees, such as a Penalty Abatement.
Employment at Risk
You do have rights as a taxpayer, including not losing your job if you have a wage garnishment. However, if you have more than one wage garnishment, these protections end and you are at risk of losing your job. If your IRS wage garnishment is the only one you have, then you are safe from losing your job because of the wage garnishment. However, if the reduced wages put you in a dire financial situation, you might find that you default on another loan and end up with another garnishment. At this time, your employer can choose to fire you, leaving you in even worse circumstances.
The IRS does not generally report a wage garnishment to the major credit bureaus, so it might not have an immediate impact on your credit. However, any liens on your property that occur prior to your wage levy do. Plus, if you are trying to survive on an income significantly lower than you typically have, you will struggle to pay your bills. This might lead you to take out more loans or credit cards. Even if you are able to pay those loans off, they will negatively impact your credit score.
Ultimately, the longer you continue with your wage garnishment, the more likely it will indirectly hurt your credit. This, in turn, makes it harder for you to take out loans in the future, buy a car or house, or rent an apartment. This also shows up in background reports for employment, so it might hurt your chances of getting a new job.
What to Do
An IRS wage garnishment can be disastrous. Therefore, you want to take action to avoid it at all costs. Luckily, there are easy ways to do so, including:
- Take action the minute you receive a tax bill from the IRS
- Pay off your taxes when possible, even if you have to take out a loan or use a credit card
- Apply for an Installment Agreement; this gives you the power to decide how much money to pay the IRS each month
- Apply for one of the other tax relief options if you qualify, including Penalty Abatement, Offer in Compromise, and Innocent Spouse Relief
You do not have to deal with the IRS on your own. The tax professionals at Fidelity Tax Relief are waiting to help you. Call us today at 877-372-2520 to discuss your situation and discover the solutions available to you.