Tax Season: Filing Bankruptcy Before the IRS Levies on Your Vehicle

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Can the IRS seize your car or truck in payment of a tax debt you owe? Yes, if it has substantial equity. Will it do so? Possibly.

 

What’s a Tax Lien and What’s a Levy?

The IRS’s recording of a tax lien is a formal notice—to anyone who cares enough to find out—that you owe taxes to the IRS. That recording does not directly involve the taking of money or property from you.

An IRS levy is its seizure of your real estate or personal property through the levy process. The most common IRS levies are on money owed to you or on accounts held for you by others—your paycheck about to be paid to you by your employer or money held in your bank or credit union accounts. Beyond that, the IRS can also levy on (seize) almost anything you own.

Generally the IRS records a tax lien before levying on your property but is not required to do so.

Aren’t Certain Kinds of Assets—Like My Vehicle—Protected from Levy by Being “Exempt”?

There ARE categories of IRS-exempt assets, but they are very limited. The IRS exemptions are completely different from and in almost all respects much less generous than the set of property exemptions you’d be entitled to if you filed a bankruptcy case. The bankruptcy exemptions often protect all of what you own, while the IRS exemptions seldom do so. State and local laws cannot exempt property from collection of federal taxes.

There is no IRS exemption at all for vehicles. There’s an exemption for “personal effects of the taxpayer’s household” but that does not apply to vehicles. See Section 6334(a) of the Internal Revenue Code.

So, Can the IRS Seize My Car or Truck?

Yes, under certain conditions.

1. The IRS may not make an “uneconomic levy.” As the Internal Revenue Manual (5.17.3.3.5.3)says: “The [Internal Revenue] Code prohibits levy on property if the amount of estimated sale-related expenses exceeds the fair market value of the property at the time of levy. There has to be equity in your vehicle, value beyond what you may owe to a lender.

2. The IRS cannot levy on a vehicle if doing so “is creating an economic hardship due to the financial condition of the taxpayer.” See Section 6343(a)(1)(D) of the Internal Revenue Code. If you need the vehicle at issue to get to work, the store, the doctor, to or to school, most likely the IRS would consider taking it to be a hardship for you, and not levy on it.

3. For practical reasons, the IRS is not going to be interested in a vehicle that, after the effort and cost to seize and liquidate into cash, would net the IRS just a few hundred dollars.  

So, Will the IRS Likely Seize My Car or Truck?

Even if you and your vehicle meet the above conditions, the IRS will likely only take your vehicle if you are being uncooperative. However, if you’ve not been reading the notices it has been sending you, and/or if you have been repeatedly not complying with the IRS’s requests to contact it in order to pay your tax debts, your vehicle(s) could very well be at risk. The IRS will likely first try to get cash out of you by levying on your paycheck and/or bank accounts, but it is not legally obligated to do so.

Stopping the Risk of a Vehicle Levy

If you file a bankruptcy case, the IRS is immediately prevented from levying on your vehicle, and from taking any other action to collect on a tax. As the Internal Revenue Manual says (5.17.3.5.2.3): “The Service is automatically stayed from taking any act to… enforce a lien against property of the estate or to collect a claim against the debtor upon the filing of a bankruptcy petition.”

If the tax you owe qualifies for a Chapter 7 discharge (permanent write-off) in bankruptcy, the IRS will not be able to levy on your vehicle (or take any other collection action) after the bankruptcy is completed, generally just a few months after the case is filed. If the tax does not qualify for discharge but is paid through a Chapter 13 case, after that case is completed the IRS also cannot levy on your vehicle.