Bankruptcy by Example: Stop the IRS and the Oregon Department of Revenue from Levying on your Vehicle
Sept. 5, 2014
Can the IRS or ODR seize your vehicle in payment of a tax you owe? Yes, if it is worth more than you owe on it. Will they seize it?
Tax Lien vs. Levy
It’s worth understanding the difference between these two. An IRS or Oregon Department of Revenue (ODR) tax lien is a formal public notice—to anyone who knows where to look—that you owe taxes. A lien attaches to your property and affects your rights to the property. When a tax lien is filed or recorded it can hurt your credit. A lien does NOT involve the direct taking of money or property from you.
An IRS levy or ODR garnishment/seizure DOES involve their taking of your property—your real estate, personal property, or money owed to you. The most common ones by far are levies or garnishments on money owed to you by others—your paycheck being paid to you by your employer or money held in your bank or credit union accounts.
But beyond those, the IRS and ODR can also levy on or seize just about anything you own.
So, Can the IRS and ODR Seize My Car or Truck?
Yes, they can under certain conditions. Focusing for the sake of convenience on the IRS’s conditions:
The IRS may not make an “uneconomic levy.” As the Internal Revenue Manual says (126.96.36.199.5.3): “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.” If it costs the IRS more to go through the levy process than what they’d get out of your vehicle, it can’t levy on it. If you owe a lender on the vehicle, your equity in the vehicle has to be enough to exceed what the levy procedure would cost.
The IRS cannot levy on a vehicle if that would “creat[e] 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 to stay employed, to go to important doctor appointments, or perhaps to get your kids to school, the IRS would probably not seize it.
For practical reasons, the IRS is not likely to seize a vehicle that would not put much into the IRS’s pocket, after accounting for the effort and costs involved.
So, Will the IRS or ODR Likely Grab My Vehicle?
Statistically speaking, not likely.
Focusing again on the IRS, according to its annual table of Delinquent Collection Activities, in 2013 it made only 547 seizures of property. That includes the entire country, over the course of the entire year.
Contrast that with 602,005 federal tax liens filed during that year. And 1,855,095 “levies requested on third parties,” in other words, garnishments of paychecks and bank accounts and such. They are sensibly going after the easy money instead of using the much more complicated process of grabbing and selling tangible assets.
Preventing the Risk of a Vehicle Levy
Nevertheless, having your vehicle seized is still a possibility, especially if you haven’t been cooperating closely with the IRS or ODR. For example, if you’ve not been reading the notices they’ve been sending you, or if you have been repeatedly not complying with their requests to contact them to pay your tax debts, your vehicle(s) is at greater risk.
If you file a bankruptcy case—whether Chapter 7 or 13—the IRS and the ODR are immediately prevented from levying on your vehicle, and from taking any other action to collect. Again as to the IRS, as stated in the Internal Revenue Manual (188.8.131.52.2.3): “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.”
Henry and Susan owe a combined $15,000 to the IRS and the ODR for personal income taxes, interest, and penalties for 2009 when Harry tried to start a business after he had been laid off and then couldn’t find a job during the depths of the Great Recession. The business made money, but not enough to sustain their family. During that year he paid no quarterly estimated taxes and Susan even cut back on her employer’s tax withholding to try to make ends meet. Henry did find a job in 2010, but because it paid significantly less than his prior job their family has been struggling financially ever since.
They filed their 2009 tax returns on time, but because they owe so many other creditors with debts accrued during the business venture they have been trying to lay low from the IRS and ODR. But now Harry and Susan have just received very aggressive sounding notices from both taxing agencies threatening to, among other things, levy on and seize their vehicles, so they are extremely concerned about losing their vehicles.
They go to see a bankruptcy attorney even though they understood that bankruptcy can’t legally write off (“discharge”) income taxes. They are very pleasantly surprised that bankruptcy can indeed discharge an income tax debt if it meets certain (mostly time-based) conditions, and that their 2009 taxes meet those conditions.
So on their behalf the attorney files a relatively straightforward Chapter 7 case. That immediately prevents the IRS and the ODR from taking any further collection action against them or any of their assets, including preventing levies on their vehicles.
And then within less than 4 months, that $15,000 in income taxes is discharged, along with most of their other debts. This means that the tax is legally no longer owed, and cannot ever be collected by the IRS and the ODR. This huge burden is lifted from them.