IRS Tax Debt and Asset Protection in Florida

The IRS has collection powers that surpass those of any private creditor or federal agency. A federal tax lien attaches to all of a taxpayer’s property and rights to property, overrides most state exemptions, and persists for ten years from the date of assessment. Florida’s homestead, tenants by entireties, and head of household protections, which reliably shield assets from private creditors, are either eliminated or significantly weakened when the IRS is the creditor.

How the Federal Tax Lien Works

When a taxpayer fails to pay after the IRS sends a notice and demand for payment, a federal tax lien arises automatically under 26 U.S.C. § 6321. The lien covers all of the taxpayer’s property and rights to property, both real and personal, wherever located. This lien exists whether or not the IRS has filed any public notice.

The IRS perfects the lien by filing a Notice of Federal Tax Lien (NFTL) in the public records. The NFTL puts third parties, including buyers, lenders, and other creditors, on notice of the government’s claim. Filing the NFTL establishes the IRS’s priority position against other creditors who may have competing claims against the same property.

The critical point for asset protection is that the lien attaches before the NFTL is filed. A taxpayer who transfers property after receiving the IRS’s notice and demand has already transferred property subject to the tax lien. The NFTL simply makes the lien enforceable against third parties who would otherwise have no way of knowing about it.

The Ten-Year Collection Period

The IRS has ten years from the date of tax assessment to collect the debt. This ten-year window is the Collection Statute Expiration Date (CSED). After the CSED passes, the IRS must release the lien and can no longer pursue collection. The tax debt effectively expires.

Several events can toll or extend the CSED. Filing for bankruptcy suspends the collection period for the duration of the bankruptcy case plus six months. Submitting an Offer in Compromise suspends the period while the offer is being evaluated. The taxpayer can also agree to extend the CSED, and the IRS sometimes conditions installment agreements on the taxpayer signing an extension.

The ten-year CSED is shorter than the 20-year life of a Florida civil judgment. A taxpayer whose only collection exposure is IRS debt may benefit from the shorter collection window if asset protection planning can keep non-exempt assets out of the IRS’s reach long enough for the CSED to expire.

Homestead

The Florida homestead is not protected from federal tax liens. Unlike private creditors, who cannot force the sale of a debtor’s homestead under any circumstances, the IRS can place a lien on a Florida homestead and in some cases force its sale.

The IRS can foreclose on homestead property through a judicial action under 26 U.S.C. § 7403. The court has discretion to order the sale of the property, but the IRS must satisfy certain procedural requirements and demonstrate that the circumstances justify forcing a sale of the taxpayer’s primary residence. In practice, the IRS rarely forces the sale of a homestead. The agency typically waits for the taxpayer to sell or refinance the property voluntarily, at which point the lien must be satisfied before the title company will close the transaction.

The practical effect is that a federal tax lien on a homestead functions as a cloud on title rather than an immediate seizure. The taxpayer can continue living in the home, but cannot sell or refinance without addressing the lien. In some cases, the IRS will issue a certificate of discharge to release its lien on the property if the remaining assets subject to the lien are at least double the tax liability plus senior encumbrances.

Tenants by the Entireties

Tenants by entireties property is one of the most effective asset protection tools against private creditors in Florida. When the IRS is the creditor, this protection is substantially diminished.

The U.S. Supreme Court held in United States v. Craft (2002) that the federal tax lien attaches to a taxpayer-spouse’s interest in property held as tenants by the entireties, even when the other spouse does not owe taxes and state law would ordinarily protect the property from creditors of either spouse individually. The Court’s analysis focused on the taxpayer’s “bundle of sticks” in the property—the right to use, exclude others, survivorship, and share in proceeds of sale—and concluded these rights constitute “property” under § 6321 regardless of state-law labels.

The IRS values the debtor-spouse’s interest in entireties property at one half of the total value. For cash and cash equivalents held in joint accounts, the IRS can levy against the debtor-spouse’s half without court action. For real property, the IRS must bring a foreclosure action under § 7403, and the court will order compensation for the non-debtor spouse’s interest from the sale proceeds.

The practical takeaway for married Florida taxpayers is that entireties ownership does not shield assets from IRS collection when only one spouse owes taxes. Joint tax liability eliminates the question entirely. If both spouses are liable, there is no non-debtor spouse to invoke entireties protection.

Wages and Income

The IRS can levy against wages and other income streams without a court order. The IRS sends a Notice of Levy directly to the employer, and the employer must comply by withholding and remitting a portion of the taxpayer’s wages to the IRS.

Florida’s head of household wage exemption does not protect wages from IRS levy. A head of household who would be entirely exempt from wage garnishment by a private creditor can still have a significant portion of wages seized by the IRS. The amount exempt from levy is calculated using a formula based on the taxpayer’s filing status and number of dependents, published annually by the IRS in Publication 1494.

The IRS can also levy Social Security benefits, but only up to 15% of monthly payments through the Federal Payment Levy Program. Certain other federal benefits, including Railroad Retirement Act benefits, are subject to similar limitations.

Retirement Accounts

The IRS has the authority to levy retirement accounts including IRAs, 401(k) plans, and other qualified plans. Florida law exempts these accounts from private creditor garnishment, but that exemption does not apply to IRS collection.

Before levying a retirement account, the IRS must obtain written approval from a manager or director. The IRS generally treats retirement account levies as a last resort because of the financial hardship they impose. The revenue agent must consider the taxpayer’s age, health, other assets, and ability to rebuild retirement savings. The IRS also cannot compel a distribution that the taxpayer is not yet entitled to receive under the plan documents.

If the IRS does levy a retirement account, the withdrawal is subject to income tax but the 10% early withdrawal penalty is waived when the distribution results from an IRS levy.

Annuities and Life Insurance

Florida exempts annuity contracts and life insurance cash values from creditor claims under § 222.14 of the Florida Statutes. The IRS can override this exemption and levy the cash surrender value of life insurance policies and annuity contracts.

There is a statutory limit on life insurance levies. Under 26 U.S.C. § 6332(b), the IRS can levy the cash surrender value of a life insurance or endowment contract, but the taxpayer receives a 90-day notice before the levy occurs. This window gives the taxpayer time to negotiate an alternative payment arrangement or exercise other options under the policy.

Offers in Compromise

The IRS Offer in Compromise (OIC) program allows taxpayers to settle tax debt for less than the full amount owed. The IRS evaluates OIC applications based on the taxpayer’s reasonable collection potential, defined as the total value of the taxpayer’s assets plus expected future income over the remaining collection period.

A successful OIC requires demonstrating that the taxpayer cannot pay the full tax liability through a lump sum or installment agreement. The IRS subtracts exempt assets from the calculation of reasonable collection potential, which means that assets genuinely protected from IRS levy, such as exempt property in states with different exemption structures, reduce the minimum acceptable offer. In Florida, because the IRS can reach most asset categories, the reasonable collection potential calculation often includes nearly all of the taxpayer’s assets.

What the IRS Cannot Take

Despite its broad powers, the IRS is subject to certain statutory restrictions on levy under 26 U.S.C. § 6334. The IRS cannot levy clothing and schoolbooks, fuel and provisions for the household, tools of a trade up to a specified value, unemployment benefits, workers’ compensation, certain public assistance payments, or income needed to pay court-ordered child support.

Certain disability payments and annuity or pension payments under the Railroad Retirement Act are also exempt from IRS levy. These narrow exemptions are far more limited than the broad asset protection available against private creditors under Florida law.

Asset Protection Planning Against IRS Debt

Asset protection planning against IRS debt is significantly more constrained than planning against private creditors. The IRS can reach nearly every asset category that Florida law otherwise exempts, including homestead, entireties property, retirement accounts, annuities, and wages. The standard exemption-based strategies that work against private creditors provide little protection when the IRS is the creditor.

Effective planning focuses on the ten-year CSED, compliance strategies to reduce penalties and interest, and settlement options including OIC and installment agreements. The goal is typically to structure payments in a way that preserves the taxpayer’s ability to earn income and maintain essential assets while the collection period runs. Any asset transfers made after a tax liability arises risk being challenged as fraudulent—and the IRS has six years to bring a fraudulent transfer action under the Federal Debt Collection Procedures Act.