Can the IRS take your car if you owe back taxes? The short answer is yes, the Internal Revenue Service can seize a variety of assets to settle unpaid tax debt.
However, it’s important to understand the IRS collections process involved. Specifically, you should understand how much control you have over your situation before the IRS seizes your car.
This article will help you understand a little more about:
- How the IRS collections process works
- What you should do if you have overdue taxes
- How to avoid legal seizure of your property
Let’s start with a brief overview of the IRS collections process.
How does the IRS collections process work?
On behalf of the federal government, the IRS follows specific collections procedures, based upon the Internal Revenue Code and Treasury regulations. Everything is laid out in the Internal Revenue Manual, specifically Part 5. Collecting Process.
Although we’ve written an in-depth article about the collections process, below is a brief overview.
1. Calculate tax liability
Usually, taxpayers do this when they file their income tax return. For taxpayers who do not file an income tax return, the IRS will eventually calculate your tax bill based upon the various forms that they receive. This might include:
- Compensation amounts from submitted W-2 statements and 1099-MISC from your employer
- Investment or other earnings as reported by Form 1099 regarding your financial accounts or retirement accounts
The important part thing to remember is that if you haven’t filed your income tax return and you owe income taxes, the IRS can hold you accountable for your unpaid taxes as well as interest and penalties.
Even if you can’t pay your tax bill in full, it’s a good idea to file your tax return on or before the tax filing deadline. Your tax situation only will get worse if you avoid filing.
2. First bill
After you’ve filed your tax return, if you still have outstanding taxes, the IRS will send you your first tax bill. This officially starts the collections process.
Generally, your bill will give you the option to pay your taxes in full, or invite you to discuss a payment arrangement if you cannot do so.
Installment agreement as a payment option
When you call the IRS about your payment options, you’ll be speaking directly with an IRS agent, also known as a revenue officer. A revenue officer’s job is to get you, the taxpayer, to commit to paying:
- As much as possible
- As soon as possible
A convenient way to do this is to set up an installment agreement. This allows you to make monthly payments and work down your delinquent tax debt over time. This might be the best option for someone who:
- Has positive cash flow and can pay something, but
- Cannot pay the entire balance at once
You can set up an installment agreement to come from your bank account, or you can file IRS Form 2159 to set up a payroll deduction agreement.
The most important thing: While you’re making payments on an approved payment plan, the IRS collections process stops. As long as you make your monthly payments, an IRS seizure cannot happen. So your car stays safe.
3. Second bill
If nothing happens after the first tax bill, the IRS will send a second one. There isn’t a lot of difference here, but these IRS notices serve a purpose.
That purpose is to fulfill the due process requirements before the federal government starts to escalate the collections process.
Again, if you take immediate action, such as paying your tax bill in full or setting up an installment plan, then you have control over how you pay down your outstanding debt. This is the best way to maintain control over your tax issues.
4. Notice of federal tax lien
If you do not take action after the first or second tax bill, then you can expect to receive a notice of federal tax lien.
Even at this point, the IRS isn’t taking any property. A tax lien is the government’s way of laying a claim on assets that you own, in case you try to sell them.
How does a tax lien work?
A common example of how a tax lien might work would be real estate, such as a vacation home. If you decide to sell a second home because money is tight, then a federal tax lien helps ensure that the federal government gets paid first.
After the costs of the sale (such as real estate commissions, settlement costs, etc.) the proceeds first settle any outstanding tax debt.
After that, then you receive any left over money.
- Financial assets, such as your bank account
- Real estate, such as your house
- Personal property, such as your car, a boat, or valuables
But if a tax lien doesn’t settle your tax bill, the IRS has no choice but to actually start seizing assets.
5. Federal tax levy
As a last resort, the IRS will send you a CP504 notice, also known as a Final Notice of Intent to Levy. At this point, seizure of a vehicle is pretty certain, unless the outstanding car loan makes the car worth less than you owe.
An IRS levy permits asset seizure of a lot of things just so the government can get paid. Additionally, the federal government can place a levy on sources of income, such as:
- Wages or other compensation
- Social Security benefits
- Federal income tax refunds
When can the IRS take your car?
The IRS can seize a taxpayer’s vehicle as a final resort in the collections process. This happens after:
- Calculation of outstanding tax liability
- IRS has sent at least 2 tax bills to the taxpayer
- IRS has issued a notice of federal tax lien, and
- The taxpayer has demonstrated:
- Lack of communication during the process
- Continued nonpayment of outstanding tax liability
- No indications of economic hardship or willingness to pursue payment plan options
In other words, the IRS can only take your car if all other means of resolving past due taxes have failed. But if your car is a junker, or your outstanding auto loans make it impossible to get much money by selling at fair market value, then the IRS might look for something else, instead.
Additionally, if you can demonstrate an economic hardship, or that this vehicle is the only way you can get to important commitments, the IRS may let you keep it. Important commitments might include:
- Getting to and from work
- Transporting your children to and from school
- Important doctor appointments
- Shopping for groceries and living essentials
How do I avoid having the IRS take my car?
Paying taxes in full is the best way to avoid IRS seizure of taxpayer assets. Besides that, good communication, making payments when possible, and attempts to get into a payment arrangement are all ways to avoid asset seizure.
Here are some other options.
Contact the taxpayer advocate service (TAS)
The Taxpayer Advocate Service is a federal agency within the IRS that exists solely to represent taxpayer rights, and to ensure that the federal government respects those taxpayer rights.
If a revenue agent is cutting corners to get you to pay more money faster, the Taxpayer Advocate can step in and hold the IRS accountable. For free.
Contact a tax professional
You may learn more about your options by hiring a tax expert, such as a tax attorney. Not only can a tax attorney give you tax advice, but they can help give you legal advice and navigate tax cases through the court system. This might be an option if you do not agree with your tax liability, or you feel that your tax assessment was done improperly.
If you agree with your tax bill, then a tax professional can help you navigate the system. But you’ll spend a lot of money to do something that you might be able to do yourself. Money best spent on paying down your tax debt.
Most tax attorneys, CPAs, or enrolled agents will offer a free consultation to discuss your tax assessment and explore your options.
Hi! I’m Forrest!
After retiring from a 24-year career as a Naval officer in 2017, I became a financial planner to help people achieve success in managing their personal finances. In 2022, I sold my partnership stake in my financial planning firm to focus on helping people full-time through my writing.
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