IRS & State Tax Problems — Comprehensive FAQ & Guide

When that white envelope arrives with “Department of the Treasury” in the corner, don’t panic — but don’t ignore it either. IRS notices come with deadlines, sometimes as short as 10–30 days. Each notice has a code, like CP14 (balance due) or LT11 (Final Notice of Intent to Levy). The code tells you the purpose, the urgency, and your rights.

The best first step is to read it carefully and note the response deadline. Next, contact a licensed tax professional immediately. At Mike Habib, EA, the process starts with reviewing your notice, explaining it in plain English, and pulling your IRS transcripts to verify the balance or issue. From there, he can either dispute incorrect assessments or negotiate a resolution before enforcement actions kick in.

Delaying even a week can mean losing the ability to appeal, prevent a levy, or dispute a balance. The clock is ticking the moment that notice is sent.

Ignoring a tax notice is like ignoring a smoke alarm — the problem doesn’t go away; it just gets worse. The IRS sends notices in a sequence. If you don’t respond to early letters, they assume you agree with the balance due and will escalate collection. This often means filing a Notice of Federal Tax Lien or issuing a wage garnishment or bank levy.

State agencies operate similarly, but some — like California’s FTB — move even faster. A missed notice can lead to enforcement within weeks, not months. Interest and penalties continue to pile up daily.

Mike Habib, EA has seen cases where a taxpayer ignored a $5,000 balance for two years and ended up owing over $12,000 after penalties and interest. Professional intervention can often stop the snowball effect, but the sooner it starts, the better the results.

Yes. Unlike private creditors, the IRS doesn’t need a court order to garnish your wages. After sending you the required notices — including the Final Notice of Intent to Levy and the Notice of Your Right to a Hearing — they can contact your employer directly.

Your employer must comply by law and will send a significant portion of your paycheck to the IRS each pay period. The amount you keep depends on IRS exemption tables, which are often much lower than your actual living expenses.

Mike Habib, EA can step in to request a release of the garnishment, often by showing financial hardship or setting up an alternative arrangement like an installment agreement. Acting before the garnishment starts is ideal, but even after it begins, there are ways to stop or reduce it.

Absolutely. State tax agencies often have even broader garnishment powers. In California, the Franchise Tax Board can issue a wage garnishment order without a court order, and it can take up to 25% of your disposable income — sometimes more if multiple garnishments are in place.

States can also garnish for unpaid sales tax, payroll taxes, and other state obligations. And unlike the IRS, some states don’t have the same appeal windows, meaning once they start, stopping them can be more challenging.

Mike Habib, EA knows the specific rules for IRS and state garnishments and uses them to negotiate quick releases, allowing clients to regain full paychecks while working toward a resolution.

Stopping a wage garnishment usually involves one of three strategies:

1. Negotiating an installment agreement so the agency agrees to stop garnishing in exchange for regular payments

2. Proving financial hardship, which may qualify you for “Currently Not Collectible” status with the IRS or reduced garnishment with a state agency

3. Challenging the underlying liability if it’s incorrect or expired by statute

The key is speed — agencies are far more cooperative before the first garnished paycheck goes out. Mike Habib, EA prioritizes urgent garnishment cases, often contacting the agency the same day to request an immediate release or modification.

A bank levy is when the IRS or a state tax agency seizes funds directly from your checking or savings account. They issue a notice to your bank, and the bank must freeze the specified amount (up to your balance) for 21 days before sending it to the agency.

That 21-day period is your only window to get the levy released. After that, the money is gone. Bank levies can be devastating if you rely on those funds for rent, payroll, or basic living expenses.

Mike Habib, EA acts quickly to contact the agency, request a levy release, and negotiate an alternative. In some cases, proving the levy would cause undue hardship can lead to immediate relief.

Yes, and they often have fewer restrictions than the IRS. California’s FTB can levy bank accounts for unpaid income tax, CDTFA for sales tax, and EDD for payroll taxes. Like the IRS, they notify your bank, which freezes the funds before sending them to the state.

The hold period can vary, and in some cases, there is no grace period like the IRS’s 21 days. That means acting fast is even more critical. Mike Habib, EA knows how to contact the right department within the agency to request a release before the funds are transferred.

A Notice of Federal Tax Lien (NFTL) is the IRS’s way of securing its interest in your property for an unpaid tax debt. It’s a public record that can damage your credit and make it harder to sell or refinance property. It applies to all your current and future assets until the debt is resolved.

Liens don’t mean the IRS will seize your property immediately, but they give the IRS legal priority over other creditors. Removing a lien often requires full payment, but in some cases, a lien withdrawal or subordination can be negotiated.

Mike Habib, EA evaluates whether a lien can be avoided, removed, or reduced in its impact, protecting your credit and assets.

Yes. Most states have a lien process similar to the IRS. California’s FTB, CDTFA, and EDD can all file liens for unpaid taxes. Like federal liens, these are public records and can harm credit, limit borrowing, and complicate property transactions.

State liens often appear faster than IRS liens and may be harder to negotiate. Mike Habib, EA works to resolve the underlying debt and, where possible, request a lien withdrawal or release to minimize long-term financial damage.

A lien is a claim — it says the IRS or state has a legal right to your property as security for a debt. A levy is action — it’s when they actually seize your property or funds. You can have a lien without a levy, but if you have a levy, it usually means a lien has already been filed.

Understanding this difference matters because liens affect your credit and financial transactions, while levies immediately take your money or assets. Both require urgent attention, but levies have a much shorter window for stopping the loss.

An IRS audit is an examination of your tax return to verify that income, deductions, and credits are accurate. Being audited doesn’t always mean you did something wrong. The IRS uses several methods to select returns, including:

– Random selection through statistical formulas
– Document matching (e.g., W-2 or 1099 forms not matching your return)
– Related examinations (your return is linked to someone else under audit)
– High-risk deductions or income levels flagged by their system

Audits can be correspondence audits (by mail), office audits (at an IRS office), or field audits (at your home or business). Field audits are the most serious and require professional representation.

Mike Habib, EA prepares clients by reviewing records, anticipating IRS questions, and communicating with auditors on your behalf. His goal is to minimize tax adjustments, avoid additional penalties, and ensure the audit stays within its legal scope.

Yes, and they often do. While the IRS generally has a three-year statute of limitations to audit a return, that window extends to six years if they suspect substantial underreporting of income (more than 25%). There’s no limit if they allege fraud or if no return was filed.

Auditing multiple years at once can lead to massive tax bills and penalties. It also increases the complexity of the case, as issues in one year may carry over into others.

Mike Habib, EA’s approach is to handle multi-year audits by identifying patterns, preparing consistent explanations, and, when possible, negotiating a global resolution that limits exposure for all years under review.

The records depend on the items being examined, but generally include:

– W-2s, 1099s, and other income statements
– Bank statements
– Receipts for deductions (business expenses, charitable contributions, medical costs)
– Mileage logs for vehicle deductions
– Contracts, invoices, and proof of business activity
– Prior year returns for context

The IRS requires documentation to be contemporaneous — meaning created at or near the time of the transaction. Recreating records after the fact is risky.

When Mike Habib, EA represents you, he helps gather and organize records, ensuring they address the specific issues the auditor is reviewing while avoiding unnecessary disclosures that could open new issues.

If you can’t provide records, the IRS may disallow deductions or estimate income based on industry standards, bank deposits, or third-party data. This often leads to a higher tax bill than necessary.

However, all hope isn’t lost. The Cohan Rule allows taxpayers to claim reasonable estimates for certain expenses if they can show they were incurred, even without perfect documentation. But strict proof is required for items like travel, meals, entertainment, and certain business expenses.

Mike Habib, EA uses alternative documentation — such as credit card statements, invoices from vendors, or even sworn statements — to reconstruct a defensible record set and preserve as many deductions as possible.

A correspondence audit is conducted entirely by mail. The IRS sends you a letter requesting specific documentation for items on your return. These audits are typically for less complex issues, such as verifying a charitable deduction or confirming reported income.

The danger is that correspondence audits can expand into more years or more issues if your response raises questions. Sending too much information can unintentionally give the IRS grounds to look deeper.

With Mike Habib, EA, correspondence audits are handled with precise, tailored responses — providing exactly what’s required, nothing more. This keeps the scope narrow and increases the chances of a favorable outcome.

A field audit is when the IRS comes to your home, business, or your representative’s office. These audits are the most serious because they indicate the IRS believes there may be significant issues with your return or business operations.

In a field audit, the IRS can inspect your records, assets, and even your lifestyle to determine if reported income matches reality. They may interview employees or review operational procedures.

Mike Habib, EA ensures field audits are conducted at his office whenever possible, shielding clients from direct contact with auditors and controlling the flow of information. This limits the risk of offhand comments or unplanned disclosures that could harm the case.

Yes. This is common when the IRS suspects unreported income is being moved between personal and business accounts or when deductions overlap. For example, if you run a small business and deduct home office expenses, they may want to review both returns to verify accuracy.

Simultaneous audits can be overwhelming without professional help. Mike Habib, EA coordinates the defense for both returns, ensuring explanations are consistent and records are organized to show legitimate separation of personal and business finances.

Payroll tax problems occur when a business fails to deposit employee withholding taxes (Social Security, Medicare, and federal income tax) or fails to file payroll tax returns. The IRS treats payroll taxes very seriously because they involve trust fund taxes — money withheld from employees’ paychecks that must be turned over to the government.

If the IRS believes nonpayment was willful, they can assess the Trust Fund Recovery Penalty (TFRP) against owners, officers, and even certain employees personally, regardless of the business entity type.

Mike Habib, EA defends against TFRP assessments and works to resolve payroll tax debt before the IRS takes aggressive collection action that could shut down a business.

Yes. Through the Trust Fund Recovery Penalty, the IRS can hold individuals personally responsible for the unpaid portion of payroll taxes that were withheld from employees’ wages but not remitted. This includes not only business owners but also managers, bookkeepers, or anyone with authority over finances.

Once assessed, the IRS can collect from your personal assets — including bank accounts, wages, and property.

Mike Habib, EA defends clients in TFRP investigations, often arguing lack of willfulness or lack of responsibility, or negotiating payment arrangements that preserve personal and business operations.

The EDD administers California’s payroll taxes, including unemployment insurance, disability insurance, and employment training tax. They audit businesses to ensure correct classification of workers (employee vs. independent contractor), proper reporting of wages, and timely payment of payroll taxes.

EDD audits can result in large back taxes, penalties, and interest, especially if they reclassify independent contractors as employees.

Mike Habib, EA represents businesses during EDD audits, challenging worker classification findings and negotiating settlements that reduce financial impact.

The CDTFA handles California sales and use tax, as well as certain excise taxes and fees. Sales tax audits are common for retailers, contractors, and service providers with taxable sales.

CDTFA auditors often use “markup tests” or sampling methods to estimate underreported sales. These estimates can be aggressive, leading to inflated tax bills.

Mike Habib, EA challenges flawed audit methods, provides alternative calculations, and negotiates settlements or payment plans to protect businesses from crippling liabilities.

Yes. Both the IRS and state agencies can seize business assets — including inventory, equipment, and vehicles — to satisfy unpaid tax debts. Seizures are rare compared to liens and levies, but they happen when agencies believe you have ignored repeated collection efforts.

Once assets are seized, they can be sold at auction, often for far less than their market value.

Mike Habib, EA works to stop seizures by negotiating resolutions before enforcement escalates to this point. If a seizure is imminent, he can sometimes get it halted by proving the business’s ongoing viability and offering an alternative collection method.

An Offer in Compromise allows you to settle your tax debt for less than the full amount owed if you can’t pay in full and doing so would cause financial hardship. The IRS considers your ability to pay, income, expenses, and asset equity when deciding.

OICs are difficult to get approved, with strict documentation requirements and low acceptance rates.

Mike Habib, EA evaluates whether you qualify, prepares the detailed application, and negotiates with the IRS or state agencies to secure the lowest possible settlement amount legally allowed.

Currently Not Collectible status means the IRS temporarily suspends collection because you can’t afford to pay without causing hardship. Interest and penalties continue to accrue, but the IRS won’t levy your assets while you’re in CNC.

CNC is not automatic; you must prove financial hardship with documentation of income, expenses, and assets.

Mike Habib, EA applies for CNC status on behalf of clients, often as an interim solution while planning a longer-term resolution, such as an Offer in Compromise or installment agreement.

An installment agreement is a payment plan with the IRS or state tax agency that allows you to pay your debt over time. Terms vary based on the amount owed, your financial situation, and the agency’s rules.

There are guaranteed agreements for smaller debts, streamlined agreements for debts under certain thresholds, and non-streamlined agreements requiring full financial disclosure.

Mike Habib, EA negotiates the most favorable terms possible — often lowering monthly payments and avoiding default — while ensuring you remain compliant going forward.

Yes, but negotiation isn’t as simple as making an offer and hoping the IRS accepts. The IRS has structured programs — like Offers in Compromise (OIC), Partial Payment Installment Agreements (PPIA), and Penalty Abatement Requests — that allow you to settle or reduce your debt under specific criteria.

Success depends on presenting a well-documented case showing either inability to pay, doubt about the amount owed, or effective tax administration (meaning paying would cause an unfair hardship).

Mike Habib, EA analyzes your financials to determine the most realistic negotiation strategy. He then builds a complete, compliant package with supporting evidence and negotiates directly with IRS personnel to secure the most favorable result possible.

Penalty abatement is the removal or reduction of IRS penalties, which can significantly reduce your total debt. Common penalties include:

– Failure to file
– Failure to pay
– Accuracy-related penalties
– Trust fund recovery penalties

You may qualify if you have reasonable cause (serious illness, natural disaster, incorrect advice from a tax professional) or if you meet the First-Time Abatement criteria (clean compliance history for the past three years).

Mike Habib, EA prepares a detailed penalty abatement request that ties your circumstances to IRS-approved criteria, increasing the likelihood of success. Even if penalties are not fully removed, partial relief can make repayment more manageable.

An IRS lien is a legal claim against your property for unpaid taxes. It doesn’t take your property — it just secures the government’s interest, similar to a mortgage lien. A lien can damage your credit and make it harder to sell or refinance assets.

A levy, on the other hand, is the actual seizure of property or funds to satisfy a debt. This includes bank account levies, wage garnishments, and property seizures.

Mike Habib, EA helps prevent liens from becoming levies by negotiating with the IRS early and, if a levy is already in place, working quickly to have it released through proof of hardship, payment arrangements, or other legal remedies.

You can remove a lien by paying your tax debt in full, entering into certain installment agreements, or requesting lien withdrawal if the lien was filed in error. You can also request subordination (allowing another creditor priority) or discharge (removing the lien from a specific property).

Lien withdrawal is often possible if you owe under a certain amount, are in a direct debit installment agreement, and are current with all filings.

Mike Habib, EA evaluates eligibility for lien removal programs and prepares the necessary documentation to maximize approval chances. This not only protects your assets but also restores financial flexibility.

The IRS can garnish wages without a court order once they’ve issued proper notices. To stop a garnishment, you must either pay the debt, set up an installment agreement, obtain Currently Not Collectible status, or submit an Offer in Compromise.

In urgent situations, a wage garnishment release can be requested by showing immediate financial hardship.

Mike Habib, EA moves quickly in garnishment cases, often securing releases within days by negotiating alternative payment terms and ensuring you remain in compliance to prevent future garnishments.

A bank levy is when the IRS orders your bank to freeze and send funds from your account to them. You typically have 21 days from the date of the levy to resolve the matter before the bank must release the funds to the IRS.

Stopping a bank levy involves negotiating directly with the IRS to release the hold — usually by arranging a payment plan, proving hardship, or showing that the levy will prevent you from meeting basic living expenses.

Mike Habib, EA uses this 21-day window to secure a release and protect your funds while also addressing the underlying tax debt to prevent future levies.

The FTB can garnish wages for unpaid California state income taxes. Unlike the IRS, the FTB often takes a larger percentage of your paycheck, leaving you with less disposable income.

FTB garnishments remain in place until the debt is fully paid or a negotiated arrangement is made.

Mike Habib, EA negotiates directly with the FTB to stop garnishments, reduce payment amounts, and structure repayment terms that allow you to meet living expenses while resolving your debt.

The FTB can also issue bank levies for unpaid state taxes. Like the IRS, they freeze your account and withdraw funds, but California law sometimes allows less time to respond than the IRS’s 21-day period.

Mike Habib, EA acts fast to contact the FTB, request a levy release, and arrange alternative payment terms. He also ensures you are compliant with state filing requirements, which is often a condition for halting enforcement.

Yes, but only certain income tax debts can be discharged in bankruptcy if they meet strict criteria:

– The tax return was due at least 3 years ago
– The return was filed at least 2 years ago
– The assessment is at least 240 days old
– No fraud or willful evasion occurred

Payroll taxes and trust fund taxes are never dischargeable.

Mike Habib, EA works with bankruptcy attorneys to determine if tax debt is dischargeable and whether bankruptcy is the most strategic option, considering all alternatives.

Chapter 7 is liquidation bankruptcy, where eligible debts (including some tax debts) are wiped out after non-exempt assets are sold to pay creditors. Chapter 13 is a reorganization bankruptcy, where you repay debts over 3–5 years according to a court-approved plan.

Tax debts dischargeable in Chapter 7 may also be addressed in Chapter 13, but Chapter 13 allows you to pay non-dischargeable taxes over time without interest or penalties accruing.

Mike Habib, EA advises on which bankruptcy chapter best aligns with your tax resolution goals before you commit to the process.

The Fresh Start Program is a set of IRS initiatives designed to help taxpayers get back into compliance. It includes expanded Offer in Compromise eligibility, higher thresholds for streamlined installment agreements, and more flexible lien withdrawal rules.

Fresh Start doesn’t erase tax debt automatically — it’s a framework for making repayment or settlement more manageable.

Mike Habib, EA helps clients take full advantage of Fresh Start provisions, structuring agreements that reduce financial strain and improve long-term compliance.

While the IRS enforces federal tax laws, each state has its own tax agency with separate rules, penalties, and collection powers. State agencies like California’s FTB, EDD, and CDTFA can be more aggressive in certain enforcement actions, such as wage garnishments or asset seizures.

Some states have shorter response deadlines, higher penalty rates, and less flexible payment arrangements than the IRS.

Mike Habib, EA understands both federal and state systems, allowing him to craft strategies that coordinate resolutions with both agencies to avoid conflicting obligations.

The IRS generally has 10 years from the date of assessment to collect a tax debt. This is known as the Collection Statute Expiration Date (CSED). However, certain actions — like filing bankruptcy, requesting an OIC, or living abroad — can pause (or “toll”) the clock.

Knowing your CSED can be a strategic advantage in negotiations.

Mike Habib, EA calculates CSED dates for clients and uses them to guide resolution strategies, sometimes allowing for a waiting game that results in the debt expiring without payment.

Yes. If you owe more than a certain threshold of seriously delinquent tax debt (currently over $59,000, adjusted annually), the IRS can certify your debt to the State Department, which can deny or revoke your passport.

This rule applies even if you are living abroad, potentially leaving you stranded.

Mike Habib, EA helps resolve the certification by arranging payment terms or challenging the debt amount, allowing for reinstatement of passport privileges.

IRS and state tax matters involve complex laws, strict deadlines, and high stakes. A single misstep — such as missing a deadline, sending unnecessary documents, or agreeing to unfavorable terms — can cost thousands of dollars or worsen your situation.

Mike Habib, EA brings decades of experience, deep knowledge of both federal and California tax procedures, and the ability to negotiate effectively with revenue officers, auditors, and settlement specialists. He shields clients from direct contact with tax agencies, reduces stress, and often secures better outcomes than individuals could on their own.

The IRS Taxpayer Advocate Service is an independent organization within the IRS that assists taxpayers who are facing significant hardship or whose issues haven’t been resolved through normal channels. They can intervene to expedite cases, prevent levies, or help if you’re experiencing financial difficulty.

However, TAS is not a substitute for professional tax representation. Their help is often limited to very specific situations, and they cannot negotiate settlements or represent you legally.

Mike Habib, EA works with TAS when appropriate but serves as your primary advocate, ensuring all options are explored and executed with expertise.

Yes. The IRS provides penalty relief for reasonable cause, which includes honest mistakes such as illness, natural disasters, or relying on incorrect advice from a tax professional. You must document your circumstances thoroughly to qualify.

Mike Habib, EA specializes in preparing compelling penalty abatement requests supported by the right evidence and IRS guidelines, improving your chances for relief.

If you owe taxes but lack the means to pay immediately, there are several options: installment agreements, Offers in Compromise, or Currently Not Collectible status. Ignoring the problem will lead to levies and liens.

Mike Habib, EA evaluates your financial situation and designs a plan that prevents aggressive collection while minimizing overall costs.

Do not attempt to handle an audit alone. Respond promptly to notices, keep communication in writing, and gather all requested documents. Never volunteer more information than necessary.

Mike Habib, EA guides clients through audits step-by-step, acting as your representative to communicate directly with auditors and negotiate any adjustments.

Yes, but coordination is key. Negotiating separately can lead to conflicting agreements or missed deadlines.

Mike Habib, EA manages multi-agency negotiations to ensure compliance with all parties and optimize payment terms.

Resolution timelines vary widely depending on debt size, negotiation complexity, and agency responsiveness. Small installment agreements might take weeks; Offers in Compromise can take 6–12 months or more.

Mike Habib, EA keeps clients informed throughout the process, setting realistic expectations and accelerating resolution wherever possible.

Without professional experience, you risk missing deadlines, agreeing to unfavorable terms, or inadvertently triggering enforcement actions.

Mike Habib, EA’s expertise ensures your rights are protected, deadlines are met, and you get the best possible resolution.

Yes. As a federally licensed Enrolled Agent, Mike Habib can represent clients before the IRS nationwide. He also has extensive experience with California state agencies like the FTB, CDTFA, and EDD.

Representation includes negotiating payment plans, stopping levies and garnishments, and guiding you through audits and appeals.

Mike Habib, EA has over 20 years of tax representation experience, a spotless professional record, and hundreds of client success stories. His firm holds the highest BBB rating (A+) and is praised for transparent communication, personalized service, and aggressive negotiation skills.

Choosing Mike Habib means choosing peace of mind and a team dedicated to resolving your tax problems efficiently and effectively.

1. Don’t ignore IRS or state notices — read them carefully and mark deadlines.
2. Gather all relevant tax documents and notices.
3. Contact Mike Habib, EA immediately for a free consultation.
4. Avoid direct contact with tax agencies without representation.
5. Work with your tax professional to explore resolution options and stop enforcement actions.

Early action is the most critical factor in successful tax problem resolution.