Tax Debt: How to Pay It Off Before A Bank Levy
For the last ten or so years, I have done our taxes at home from my computer. Once I realized how easy it was through free tax programs, like H&R Block and TurboTax, I decided that there was no reason to pay someone else to do it. For years, it worked well, until I made a mistake.
You see, it has always been free for me to file my federal taxes with these programs, but sometimes I have to pay to file the state ones. On one of these years, I was broke until payday, which was a week away. I went ahead and sent in the federal taxes with every intention of sending in the state taxes on payday. Like so many other times, my good intentions got tossed to the side when I realized I had forgotten to budget in a bill. I told myself it was no biggie, and that I could do it on the next payday. It was only February, so I had a while before the deadline.
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The problem was that eventually, life happened and I forgot all about it. It’s not that I was trying to forget it. I mean, we always got a refund, so it was really my family who was suffering from not filing our state taxes, not the state. They did not quite see it that way, though, because I ended up being charged a fine for not filing. Up until last year, the state took our state refund every year to repay what we owed, but I was not sure we would ever get it paid off, thanks to interest.
Being in debt to the state or federal government is not a place anyone wants to be. I was fortunate enough that our fine was only a few hundred dollars so that it could get paid off. Not everyone is that lucky. If you are in debt to the IRS, it is absolutely imperative that you pay them as soon as you possibly can before you face repercussions, such as a bank levy. This article is going to help you do just that.
What Is a Bank Levy?
Let’s start with understanding a bank levy. A levy, in general, is when a creditor has the legal right to seize your property. Therefore, a bank levy is when they have the right to seize your bank accounts.
I do not know about you, but I do not like anyone accessing my account. That just feels like too much of a personal invasion, so I would much rather find a way to deal with the debt on my own. If you feel like I do, let’s see if we can dig you out of this mess.
How Can I Avoid a Bank Levy?
The first step in avoiding a bank levy is in understanding how it all works.
You Get a Notice
When you owe tax debt, they will send you a notice. It is usually titled something like “Notice and Demand for Payment”. It should tell you exactly what you owe, including any interest and fees. If you do not reach out to the IRS at this point to make an arrangement or pay your debt, the next step is to receive a 30 day notice that is usually called “Final Notice of Intent to Levy and Notice of Your Right to a Hearing”.
Final Notice
This is basically saying, “Hey, bud, you owe us and if you do not pay soon, we are going to take the necessary steps to get it on our own.” You now have 30 more days to reach out to the IRS or make your payments.
Your Accounts Get Frozen
If you do not take satisfactory action during this time frame, you may wake up one day to find that your bank accounts are frozen. Yep, frozen. I hope you paid your bills, filled up your tank, and swapped over to a paper check beforehand. Otherwise, you are in trouble.
Once your accounts are frozen, you have 21 days to pay what you owe before the bank gives the IRS the money in your account. Anybody else wondering how you can pay them if they have your money frozen and untouchable? Even worse, if the amount in your account at the time of the freeze is not enough to cover your debt, the will freeze every penny that is put into your account until it is all paid.
The question is, how long can you go without having money to live on? Unless you have prepaid everything and stockpiled nonperishables, I am assuming not very long.
Steps to Get Out Of Debt Before a Bank Levy
Most people could not go long without money, so let’s prevent all of this as much as possible by following these steps:
Figure Out Your Debt
As soon as you receive notice that you owe tax debt, you need to get to work. Obviously, you may not be able to start right at that second, but you need to make an appointment with yourself to get started that week. Time is not a luxury to count on when you owe a tax debt.
Take a look at what you owe and at your budget. What can you do with it? Can you afford to pay a certain amount out of your monthly income? Can you look into a personal installment loan to pay off the tax debt (trust me, it’s better to owe the financial institution down the street than the federal government)? What can you do to make space in your budget to make a payment?
Talk to a representative
It is important to speak to an IRS representative. This is helpful, first of all, if you do not understand why you owe this debt. However, that is not the only reason for speaking to a representative.
If you make a call to them saying, “Hey, I owe you guys and I want to pay you. Here’s what I can afford to do,” they are going to be happy to work with you. The truth is that they really are not unreasonable. They just want their money, and it is each representative’s job to get that money. If you are telling them you want to pay, they will do what they can in terms of helping you get a reasonable repayment plan.
Additionally, they may be able to work with you in erasing some of the interest you owe in order to help you repay your debt. On top of that, if you are experiencing financial hardship, such as being out of work due to serious injury or something similar, they might be able to put a halt on the whole thing for a certain period of time.
Truthfully, whether you owe the government, your bank, or your Uncle Larry, the best thing you can do is communicate with them. When you ignore them, they feel it is necessary to take action. When you communicate with them, they are a lot more willing to help you out.
Either Pay In full or make payments
After speaking with the representative, you have two options: Pay in full or make payments. If the rep was able to settle on a payment arrangement with you, great! Keep up your end of the bargain and you should not have anything to worry about. If your situation changes and you can no longer afford the same arrangement, call them as soon as you can to try to negotiate new payment amounts.
There is a chance, too, that the representative was able to give you a settlement amount that is a deeply discounted number. Sometimes, that means you have to pay the full amount immediately. Whether you are paying it all or little bits at a time, do your best to keep up with what you agreed to.
Make a plan and stick with it
You absolutely have to have a plan to pay off any debt, and you really need to keep up with your payments. One very easy way to do this with tax debt or any other debt is to use a debt tracker. You can input the amount you owe, how much you will be paying monthly, and other details (this way, all of your information is in one spot). Every time you make your payment, mark it off.
This is easiest to do with an app like Debt Repayment Planner or something similar. You can set up alerts to remind you that you need to pay, too, so it should never slip your mind. Even if you use a digital app, though, it is important to keep track of any receipts you get for your payments. Not all debt trackers will allow you to do this, so you might either want to start a file on your laptop or tablet desktop or start a physical file and print your receipts out.
The last thing you want is for the IRS to lose track of a payment. As long as you have your receipts, you have proof of payment.
Ways to Pay Your Tax Debt Quickly
When you do have tax debt, you do not want to play around. Try these steps to pay it quickly:
Budget
Step number one: budget that payment in. This needs to be done as soon as you have figured out what your monthly payment will be. Determine which of your checks the amount can come out of, or split the payment across each check you get for the month. It may not be possible to take $100 out of one check, but it may be possible to take $25 out of four checks without hurting your pocket.
Use Other Debt (Personal Installment Loan)
I mentioned this previously, but it is worth repeating. Sometimes, it is better- and less risky- to take out a personal installment loan to pay off your tax debt. You can often pay these off easier and possibly with more time. After you talk to the IRS representative and know what you are facing with payments through them, look into personal installment loans. Choose the option with the lowest interest rate and the best repayment terms.
Another upside to installment loans is that you may get approved for enough to pay off other outstanding debts, which can prevent further collections and levies. They can also save you- if you can get approved- if the levy process has already started by allowing you to quickly pay off your tax debt.
Make Some Quick Cash
Tax debt can come in all sorts of amounts. Mine was only a couple of hundred dollars but some people have owed much more than I have earned in my lifetime. Of course, your debt depends on your income and other personal information. If you do not make a ton of income or decide to purchase an expensive home, your tax debt likely will not reach that of celebrity status.
Still, any debt is scary when you do not have the funds to pay for it. Fortunately, there are ways to make a quick buck. Here are just some that may help you pay off or at least put a dent in your tax debt:
Yard Sales
You probably have at least a couple of hundreds of dollars worth of stuff lying around your house that you really do not need or use. Sell it and put that cash on your debt.
Side Hustles and Second Jobs
Find a way to increase your monthly income. Depending on how much time and effort you put in, side hustles and second jobs can get you hundreds or even thousands a month. Challenge yourself to make a certain amount per month for your debt.
Refinance Your Mortgage
If you have a mortgage, you can most certainly look into refinancing it. You might walk away with enough money to pay off your tax debt and a lower interest mortgage.
Pay More When You Can
Even if you can only manage an extra $20 per month, put that with your tax debt payment. Since interest is calculated on how much you owe, the less you owe, the less interest you will have to pay. $20 may not seem like a lot, but if you can do that every month, you are saving yourself a pretty penny for the year.
And remember, you do not have to pay extra every month. Let’s say you cannot squeeze $20 more out on a monthly basis, but you did make $300 at your yard sale. Guess what? That actually adds up to more than paying that $20 per month, and you are paying it all at once. That will save you even more in interest. To see how much of a difference extra payments can make, check out a debt repayment calculator.
The bottom line is that whether you can add $1 to your payment or $1000, every extra cent helps. Challenge yourself to find ways to carve out $5 a week or to lower your grocery budget by $30 a month. By making a conscious effort to add more to your payment, you will be digging yourself out of your hole quicker, keeping the IRS off your bank, and keeping your bank accounts fluid.
Conclusion
Debt is not fun. Tax debt is definitely at the bottom of the “fun debt list”, if one actually existed. Sadly, tax debt can make a person feel so hopeless that they are not sure which way to turn and not sure how to keep their heads above water. Remember, though, that burying your head in the sand is never the answer, as tempting as it can be. You have to take responsibility.
Allow yourself to have a bit of a freak out session- we all need one of those from time to time- but do not let it last forever. It is time to take control of your life, your finances, and your debt. The alternative is to let the government take control, and I do not know anyone who wants that to happen.
So, take a breath and get ready to get in the pilot’s seat. Make your necessary calls, do your necessary calculations, and put a plan in place. If that plan includes personal installment loans or refinancing a mortgage, be sure to use a platform that will connect you with reputable lenders as this is not the time to get yourself into more financial trouble.