Category: Tax Defense

Tax legislation usually reaches the news only when rates change. The quieter bills, the ones about how the IRS actually operates, tend to matter more to the people who end up across the table from the agency. On July 1, the House Ways and Means Committee approved seven tax administration bills, five of them unanimously, and the bipartisan five have a genuine path through a divided Congress. For New Mexico taxpayers, a state with chronic ghost-preparer problems, a large rural population the IRS serves badly, and its share of fraud victims, several of these deserve attention now, both for what they would fix and for what they signal about where enforcement is heading.

Which bills moved, and which have a real chance?

Two passed on party lines and face long odds: a hospital transparency measure expanding Form 990 reporting for tax-exempt hospitals, and an IRS workforce bill creating a data scientist fellowship. The other five cleared committee unanimously: a ghost preparer enforcement bill, the Tax Relief for Fraud Victims Act, a bill pausing tax deadlines for Americans held hostage abroad, an AI fraud-detection pilot, and a bill letting the National Taxpayer Advocate file amicus briefs in tax litigation. Bipartisan unanimity matters because the Senate’s tax writers, Chairman Crapo and Ranking Member Wyden, are pushing their own comprehensive tax administration package and prefer one big bill to a parade of small ones. Whether the House’s pieces pass individually or get folded into a Senate vehicle, the unanimous five represent policy both parties have already agreed on. That is as close to “watch this space” as tax procedure gets.

Why is the ghost preparer bill a New Mexico story?

A ghost preparer is someone paid to prepare returns who refuses to sign them or use a preparer tax identification number, leaving the taxpayer holding sole responsibility for whatever fictions the preparer invented: inflated withholding, fabricated credits, dependents who do not exist. When the refund unwinds, the taxpayer faces the bill, the penalties, and sometimes a fraud referral, while the preparer has vanished with a per-return fee. The problem concentrates in exactly the communities New Mexico has: rural, elderly, and immigrant taxpayers with limited access to reputable preparation. The committee’s bill would tighten the preparer penalty regime so that anonymous preparation carries real consequences, including for amended-return mills. The advice that does not wait for Congress: never use a preparer who will not sign your return. If you already have, and a notice arrived, the responsible move is a proactive review before the IRS’s math becomes an assessment, which is what our audit defense practice exists for.

What would the Tax Relief for Fraud Victims Act change?

Current law, as we walked through in detail in our post on pig butchering scams and the theft loss deduction, lets investment fraud victims deduct losses under I.R.C. § 165(c)(2) because a profit motive was present, while romance scam and impersonation scam victims, whose money left for personal reasons, get nothing after the 2017 suspension of personal theft losses. H.R. 9500 would soften that line, expanding the deduction for losses arising from fraud, deceit, or misrepresentation regardless of which button the scammer pushed. For a state with a large retiree population, that is not an abstraction; it is the difference between a devastated victim getting a five-figure tax offset or a second injury at filing time. Unanimous committee approval does not make it law, but it makes planning worthwhile: victims should document losses now as though the deduction might broaden, because substantiation built today serves any rule Congress enacts tomorrow.

Should taxpayers worry about the IRS using AI to pick audits?

The AI Tax Integrity Act would formalize a pilot program using artificial intelligence for fraud detection. Realistically, the IRS already uses algorithmic scoring, the DIF system has ranked returns for decades, and machine learning increasingly drives which partnership, ERC, and refund claims get pulled. Codifying a pilot adds oversight and reporting, which taxpayers should welcome. The practical takeaway is about posture: pattern-detection systems flag statistical outliers, and an honest return can be an outlier, a big theft loss, a casualty deduction, a one-time capital event. The defense to an algorithm’s suspicion is the same as it ever was, contemporaneous documentation and a coherent paper trail, but the speed at which notices arrive is increasing. Answering a computer-generated notice with silence is how small flags become full examinations.

Why does the Taxpayer Advocate amicus bill matter to litigants?

The National Taxpayer Advocate exists to be the taxpayer’s institutional voice inside the IRS, but has never had authority to speak directly to the courts deciding the procedural questions that shape collection practice: notice adequacy, deadline equity, the reach of collection due process rights. Letting the Advocate file amicus briefs puts an informed, taxpayer-side perspective in front of the Tax Court and the courts of appeals in cases where the taxpayer is often unrepresented and the government’s brief is the only expert voice in the room. For the kind of procedural fights our Tax Court practice handles, an Advocate’s brief on the taxpayer’s side of a close procedural question could move real cases.

What should New Mexico taxpayers do while Congress deliberates?

Nothing in this package is law yet, so the moves are preparatory. Keep using signing, PTIN-holding preparers, and treat any refusal to sign as a walk-away signal. If you are a fraud victim, build the documentation file now under existing § 165 rules and preserve the amended-return window. If your return this year contains an outlier item, assemble its substantiation before any notice arrives, not after. And if a notice does arrive, respond through counsel within the deadline, because every bill in this package assumes what practitioners already know: the taxpayers who get hurt worst are the ones who ignored the first letter.

Frequently Asked Questions

How North Star Law Firm Can Help

North Star Law Firm represents New Mexico taxpayers at every stage the bills in this package touch: cleaning up ghost-preparer damage, substantiating and defending theft loss deductions, answering computer-generated notices before they metastasize, and litigating procedural rights when the IRS gets them wrong. Phillip Zagotti, JD/CPA, represents taxpayers before the IRS and in the U.S. Tax Court under Circular 230. The firm’s tax defense practice covers audit defense, penalty abatement, and Tax Court litigation. If a preparer, a scammer, or an algorithm has put your return in the IRS’s sights, contact North Star Law Firm before the response deadline runs.

The FBI logged more than $9 billion in reported losses from investment fraud and business email compromise in a single recent year, and the real number is higher because shame keeps many victims from ever filing a report. The cruelest variety has an ugly nickname: pig butchering. The scammer spends weeks or months building trust, often through a dating app or social media, then walks the victim into a fake trading platform showing spectacular gains, and disappears the day a real withdrawal is requested. The money is usually gone for good. What is left, for some victims, is a meaningful tax deduction under I.R.C. § 165, and whether you can claim it turns almost entirely on one question: what did you think you were doing when you sent the money?

Why does the tax code treat scam victims differently from disaster victims?

Section 165 allows individuals three categories of loss deduction: losses in a trade or business under § 165(c)(1), losses in transactions entered into for profit under § 165(c)(2), and personal casualty and theft losses under § 165(c)(3). The 2017 tax law suspended the third category for all but federally declared disasters, and the 2025 tax legislation carried that limitation forward. That change gutted the deduction for purely personal thefts. But it never touched § 165(c)(2). A loss on a transaction entered into for profit remains fully deductible as an itemized deduction, with no disaster declaration required, no $100 floor, and no 10 percent of adjusted gross income haircut.

That is the entire ballgame for pig butchering victims. These scams are, by design, fake investments. The victim believed they were funding a brokerage account, a crypto position, or a gold trade. That profit motive is what moves the loss from the suspended personal category into the still-alive investment category. The IRS Office of Chief Counsel reached exactly this conclusion in a 2025 memorandum analyzing a series of scam fact patterns: where the victim transferred funds expecting an investment return, the theft loss stayed deductible; where the victim sent money for reasons of the heart, with no profit expectation, the deduction was gone.

What counts as “theft” for a New Mexico victim?

Theft for § 165 purposes is measured by state law. New Mexico’s fraud statute, NMSA 1978, § 30-16-6, makes it a crime to take anything of value by fraudulent conduct, practices, or representations, and larceny and embezzlement statutes fill in the edges. A pig butchering scheme, inducing transfers through fabricated identities, fabricated platforms, and fabricated returns, sits comfortably inside those definitions. You do not need a conviction. You do not even need the scammer’s real name. What you need is evidence that a criminal taking occurred under the law of the state where you were fleeced, and that you were not simply a disappointed investor in a legitimate venture that went bad.

When do you claim the loss, and why is timing a trap?

Section 165(e) fixes the deduction in the year the theft is discovered, not the year the money left your account. Discovery sounds simple, but there is a second gate: under Treas. Reg. § 1.165-1(d), no deduction is allowed for any portion of the loss with a reasonable prospect of recovery. If your civil suit against a money mule is pending, or an exchange has frozen some of the funds, or law enforcement has seized a wallet with traceable assets, the deductible amount is reduced until those prospects resolve. Claim too early and the IRS disallows the premature portion; wait too long and you may strand the deduction in a closed year. In practice the analysis runs claim by claim: the portion with no realistic recovery path is deductible now, and the remainder rides until the recovery effort dies.

How much is the deduction actually worth?

Consider a retired Albuquerque couple who moved $120,000 from an IRA and savings into what they believed was a crypto trading platform, watched a dashboard show it grow to $310,000, and lost every dollar when the platform vanished. Two numbers matter. The deductible theft loss is the $120,000 actually stolen, the tax basis of what they parted with, never the $190,000 of phantom gains the dashboard displayed. And if any part of the stolen funds came out of a traditional IRA, there is a second wound: the withdrawal itself was taxable income when it came out, even though a scammer ended up with the cash. The § 165(c)(2) deduction, taken as an itemized deduction on Schedule A via Form 4684, is what offsets that income. For this couple, the deduction could erase most of the federal tax on the year of the theft, and because New Mexico’s personal income tax starts from federal taxable income, the benefit flows through to the state return automatically. On combined federal and New Mexico rates in the mid-30s, documentation is worth real money: roughly $40,000 in tax on these facts.

What documentation makes or breaks the claim?

The IRS treats large theft loss deductions as audit bait, so the file has to be built like an exhibit binder. That means the complete message history with the scammer, screenshots of the fake platform and its fabricated balances, wire and crypto transaction records tracing every dollar out, the police report, the FBI IC3 complaint, any report to the New Mexico Department of Justice’s consumer protection division, and a written chronology of the recovery efforts that failed. A Form 8275 disclosure statement is often prudent for a sizable claim. This is precisely the kind of substantiation an attorney-CPA builds for a living, and it doubles as the record you will want if any recovery litigation ever does bear fruit.

Could Congress make this easier for fraud victims?

Possibly. The House Ways and Means Committee advanced the Tax Relief for Fraud Victims Act, H.R. 9500, with unanimous bipartisan support in July 2026. The bill would expand the deduction for losses arising from fraud, deceit, or misrepresentation, softening the TCJA’s suspension for victims who currently fall on the wrong side of the profit-motive line. It is not law, and Senate action is uncertain, but the direction of travel is clear: Congress knows the current rule punishes romance scam victims twice. Until something passes, the profit-motive analysis under existing § 165(c)(2) is the road that exists.

Frequently Asked Questions

How North Star Law Firm Can Help

North Star Law Firm represents New Mexico fraud victims in documenting and claiming theft loss deductions, defending those claims on examination, and coordinating the tax position with recovery litigation. Phillip Zagotti, JD/CPA, represents taxpayers before the IRS under Circular 230, and the CPA half of the practice builds the substantiation file the deduction lives or dies on. The firm’s tax defense practice handles the audit defense that a six-figure deduction can attract, and if the loss left you unable to pay other tax balances, the firm evaluates every collection alternative from offers in compromise to installment agreements. If a scam took your savings, contact North Star Law Firm before you file the next return; the discovery-year clock is already running.

People stop filing tax returns for ordinary human reasons: a brutal year, a divorce, a business that cratered, a paralyzing fear that filing will trigger the bill they can’t pay. Then the not-filing becomes its own problem, compounding annually, until a decade has gone by and the idea of fixing it feels impossible. Here is the fact that changes the whole picture: in most cases, the IRS does not want twenty years of returns. Under its own policy, filing the last six years is generally sufficient to be considered compliant. The path back is shorter than non-filers fear, and walking it deliberately, in the right order, usually produces a smaller bill than the one the IRS has already penciled in on your behalf.

How many years do you actually have to file?

The IRS’s longstanding administrative position, Policy Statement 5-133, carried in the Internal Revenue Manual, is that enforcement of delinquency procedures ordinarily reaches back six years, with anything more requiring managerial approval and special circumstances. In practice, a non-filer who submits the most recent six years of returns is generally restored to compliance, which is the gateway condition for every resolution tool: installment agreements, offers in compromise, penalty relief, everything. Two caveats keep the six-year rule honest. Years where the IRS has already filed a substitute return or opened an inquiry need attention regardless of age. And the six-year norm is administrative grace, not a statute. For significant income, fraud indicators, or business payroll issues, the analysis is case-by-case and belongs under privilege with counsel before anything is mailed.

What is a substitute for return, and why is it always wrong?

Ignore the IRS long enough and it files for you. Under I.R.C. § 6020(b), the IRS prepares a substitute for return from the information documents it holds, W-2s, 1099s, brokerage forms, and assesses tax on it. The SFR is engineered against you: single or married-filing-separately status regardless of your family, no dependents, no business expenses against 1099 gross receipts, no basis against stock sales, standard deduction only. A self-employed contractor with $120,000 of 1099s and $70,000 of real expenses gets taxed, plus self-employment tax, on the full $120,000. Filing an accurate original return for an SFR year routinely cuts the assessment dramatically, and it remains possible after the SFR exists. One more wrinkle worth knowing before choosing any strategy: an SFR is not a “return” for bankruptcy discharge purposes, which can permanently affect whether that year’s tax could ever be discharged.

What penalties are stacking while you wait?

Three meters run at once. The failure-to-file penalty under I.R.C. § 6651 is the brutal one: 5 percent of the unpaid tax per month, capping at 25 percent. It maxes out in five months, which means the worst of it is already sunk for old years, and filing now doesn’t re-run it. The failure-to-pay penalty accrues at 0.5 percent monthly up to its own 25 percent cap, and interest compounds daily on everything, penalties included. The order of operations matters: the balance can’t be negotiated, abated, or discharged until returns exist. Filing is what stops the file-penalty logic, starts the assessment statutes, and converts an open-ended problem into a fixed number that can be attacked with the normal tools, including reasonable-cause penalty abatement, where the same brutal year that caused the non-filing often supplies the grounds.

Can you still get your refunds?

Only the recent ones, and this is the trap that punishes withholding-heavy non-filers hardest. A refund must be claimed within three years of the return’s due date under I.R.C. § 6511; after that, the money is simply forfeited to the Treasury. It cannot even be applied against the years where you owe. A W-2 employee who stopped filing in 2019 but kept having tax withheld may have overpaid several of those years, and every year that slips past the three-year line converts an asset into nothing. This is why the path back starts immediately with the refund-alive years even while older balance-due years are still being reconstructed.

What about your New Mexico state returns?

They travel with the federal fix. New Mexico’s personal income tax begins from federal adjusted gross income, so the state returns are largely a by-product of preparing the federal ones, but they must actually be filed, because the Taxation and Revenue Department runs its own matching, its own assessments, and its own collection, including wage levies. New Mexico also has its own refund limitation periods, so the use-it-or-lose-it logic applies twice. A complete re-entry files both tracks together and, where balances exist on both, sizes the combined payment arrangements so they coexist with rent and groceries.

What does the step-by-step path back look like?

First: transcripts, before a single return is prepared. Wage and income transcripts show every information document the IRS holds; account transcripts reveal SFRs, assessments, and the collection clocks already running. That intelligence dictates everything else. Second, scope the engagement to the six-year norm unless the transcripts show reasons to deviate. Third, prepare accurate returns, actual expenses, correct filing status, basis on securities, prioritizing refund-alive years and SFR-correction years, since those two categories move real money. Fourth, file strategically and follow through: confirm processing, then attach the resolution (installment agreement, offer in compromise, currently-not-collectible, penalty abatement) that the resulting balance and the financials support. Non-filers who arrive voluntarily, through counsel, before the IRS comes looking are treated meaningfully better at every step than those who wait for the knock. The window for choosing which kind of non-filer you are is exactly as long as you make it.

Frequently Asked Questions

Will I go to jail for not filing tax returns?

Willful failure to file is a misdemeanor under I.R.C. § 7203, but criminal prosecution of ordinary non-filers who come forward voluntarily is rare. The government reserves prosecution for egregious cases: large income, badges of fraud, repeat behavior after warnings. Coming back voluntarily through counsel is the strongest protection available.

Do I really only need to file six years of returns?

In most cases, yes. IRS Policy Statement 5-133 makes six years the general enforcement norm, and filing them restores compliance for resolution purposes. Years with existing substitute-for-return assessments or open inquiries need handling regardless of age, and unusual facts deserve a privileged conversation before anything is filed.

The IRS already filed a return for me and says I owe $40,000. Is that number real?

Probably not. Substitute returns give you the worst filing status, no dependents, no deductions, and no business expenses or securities basis. Filing an accurate original return for that year typically reduces the assessment, often dramatically for self-employed taxpayers whose 1099 gross was taxed as pure profit.

Can old tax debts from unfiled years be discharged in bankruptcy?

Sometimes, but the timing rules require, among other things, that a return was actually filed more than two years before the bankruptcy. Years where only an IRS substitute return exists may never qualify. This is exactly why the filing strategy should be designed with the discharge rules in view from day one.

Should I file all the returns at once or spread them out?

Generally together, as one coordinated package, after transcript review, since a partial filing can trigger collection on some years while others are still being prepared. The refund-alive years are the exception: they go in as fast as possible, because the three-year clock forfeits them permanently.

How North Star Law Firm Can Help

North Star Law Firm brings New Mexico non-filers back into the system deliberately: transcript analysis first, six-year scoping, accurate return preparation that undoes inflated substitute-for-return assessments, and the resolution, payment plan, offer, hardship status, or discharge analysis, that the final numbers support. Phillip Zagotti, JD/CPA, prepares the returns and negotiates the outcome under one attorney-client privilege, which matters most in exactly these cases. The firm’s tax defense practice handles the full re-entry, and where old tax years may be dischargeable, the bankruptcy practice runs the timing analysis before anything is filed. The first conversation is free, confidential, and privileged. Contact North Star Law Firm and start the way back.

Every taxpayer with a serious IRS debt has heard the radio pitch: settle for pennies on the dollar. Here is the truth behind the slogan. The IRS settles tax debts every day under I.R.C. § 7122. But acceptance is not charisma, hardship stories, or a negotiator’s magic. It is arithmetic. The IRS accepts an offer in compromise when the amount offered equals or exceeds what the agency calculates it could collect from you before the collection statute runs, a figure called reasonable collection potential, or RCP. If you can compute RCP, you know whether an offer will fly before you spend a filing fee. So let’s compute one, start to finish, for a realistic New Mexico taxpayer.

What is reasonable collection potential?

RCP is the sum of two components: the net realizable equity in everything you own, plus a multiple of your monthly disposable income. Net realizable equity means quick-sale value, the IRS applies a discount, typically to 80 percent of fair market value, minus loans secured by the asset, with certain property effectively off the table. Monthly disposable income means gross income minus allowable living expenses, and “allowable” is where offers are won and lost: the IRS caps most expense categories at published Collection Financial Standards: national standards for food and clothing, regional standards for transportation, and county-by-county housing standards, so an Albuquerque mortgage and a Las Cruces rent are judged against different ceilings. Spending above the standard generally doesn’t count, no matter how real the bills are, though a one-year transition allowance and documented special circumstances (medical needs, court orders) can justify deviations when they are proven rather than asserted. The whole exercise runs off Form 433-A (OIC) and its attachments, which means the quality of the financial package is the quality of the offer.

A worked example: $85,000 owed, Las Cruces, self-employed

Meet a hypothetical: a self-employed contractor in Las Cruces owes $85,000 for four back years in tax, penalties, and interest. He grosses about $5,200 a month; his household is two people. Here is the RCP buildout the IRS would run from his Form 433-A (OIC):

An offer of $15,120, about 18 cents on the dollar, is mathematically acceptable on these facts. Not because the IRS is generous, but because $15,120 is genuinely all the formula says it could squeeze out before the statute expires. Change one input and the answer moves: add $40,000 of home equity and the offer quadruples; add $700 of monthly disposable income and it roughly doubles. The pitchmen sell the 18 percent outcome without mentioning that the formula, not the pitch, produced it.

Why does the payment structure change the multiplier?

A lump-sum offer (20 percent down with the application, balance in five or fewer payments after acceptance) uses a 12-month multiplier on disposable income. A periodic-payment offer, paid over six to twenty-four months, uses 24 months, doubling the future-income component; our contractor’s acceptable offer would jump from $15,120 to $18,840. The lump-sum structure is almost always cheaper if the cash can be found. Family loans and retirement withdrawals frequently fund the down payment precisely because the math rewards it. The counterweight: the 20 percent deposit is nonrefundable even if the offer is rejected, which is why you compute RCP honestly before filing, not hopefully after.

What trips up offers that should have worked?

Four recurring killers. Unfiled returns: the IRS returns the offer unprocessed if you aren’t filing-compliant, so the back returns come first. Dissipated assets: money spent on non-priority items after the tax debt arose (the boat, the kid’s tuition, the crypto flyer) can be added back into RCP as if you still had it. Current-year slippage: self-employed taxpayers must be making estimated payments during the offer’s pendency; a new balance defaults everything. And the calendar: an offer suspends the ten-year collection statute while pending. For a taxpayer whose statute has only two or three years left, an offer can be a strategic blunder, because currently-not-collectible status and running out the clock may cost less than any offer the formula would accept. A representative who doesn’t pull transcripts and check the statute dates before recommending an offer is selling, not advising.

What if the math says you don’t qualify?

Then the offer isn’t the tool, and something else is. A streamlined installment agreement pays the debt on terms payroll can survive. A partial-pay installment agreement pays what the financials allow and lets the statute extinguish the rest, functionally an offer in slow motion, without the deposit. Currently-not-collectible status stops collection entirely while hardship persists. Penalty abatement can shrink the balance the other tools are aimed at. And for older income tax years, bankruptcy discharges tax debts that meet the timing rules, a path the offer mills never mention because they don’t practice it. The right answer falls out of the same financial analysis the offer requires; the difference is doing the analysis before picking the product.

Frequently Asked Questions

Does the IRS really accept offers for less than the full tax debt?

Yes, thousands per year, under I.R.C. § 7122. But acceptance follows a formula: the offer must equal or exceed your reasonable collection potential, computed from asset equity at quick-sale value plus a 12- or 24-month multiple of monthly disposable income under the IRS’s expense standards.

How long does an offer in compromise take?

Commonly six to twelve months from filing to decision, sometimes longer. Collection activity is generally suspended while the offer is pending, but so is the ten-year collection statute, which is why the statute dates should be checked before filing, not after.

Will an offer in compromise stop a wage levy?

A pending, processable offer generally halts levy action, and an accepted one resolves it. If a levy is active right now, faster interim relief, a hardship release or installment agreement, usually comes first, with the offer following once the paycheck is safe.

What happens to my tax refunds during and after an offer?

Under current IRS practice for offers accepted in recent years, the IRS no longer recaptures the refund for the calendar year the offer is accepted in most cases, a meaningful improvement over the old rule. Refund offset rules do still apply while an offer is pending, so timing matters and should be planned.

Can I do an offer myself with the IRS’s online pre-qualifier?

The pre-qualifier is a decent screening tool for simple wage-earner cases. Where it fails is judgment: valuing a small business, defending expense items above the standards, spotting dissipated-asset addbacks, and comparing the offer against statute-expiration and bankruptcy alternatives. The formula is public; the strategy is not.

How North Star Law Firm Can Help

North Star Law Firm runs the reasonable collection potential math for New Mexico taxpayers before anyone pays a filing fee, and then pursues the tool the math actually supports, whether that is an offer in compromise, a partial-pay installment agreement, currently-not-collectible status, or a discharge analysis in bankruptcy. Phillip Zagotti, JD/CPA, represents taxpayers before the IRS under Circular 230, and the CPA half of the practice is precisely what an offer package is: financial statements the government will believe. The firm’s tax defense practice handles offers and every alternative to them, and the bankruptcy practice covers the path the offer mills won’t tell you about. The consultation, and the first pass at your RCP, is free: contact North Star Law Firm.

The first sign is usually the paycheck itself. A New Mexico worker opens a deposit notice that is hundreds, sometimes thousands, of dollars light, and the payroll office points to a document called Form 668-W. The IRS has levied your wages. Unlike almost any other creditor, the IRS did not need a lawsuit or a judgment to do it, and unlike a normal garnishment, the levy is continuous: it attaches to every paycheck until the debt is paid, the levy is released, or the collection clock runs out. Here is how the machine works, what it can and cannot take, and, most importantly, the five paths that get it released, ranked roughly by speed.

How does an IRS wage levy actually work?

The levy power comes from I.R.C. § 6331, which lets the IRS seize property and rights to property, including salary and wages, after notice and demand for payment go unanswered. A wage levy is served on your employer, not on you, and your employer is legally obligated to comply; an employer who pays you instead of the IRS becomes personally liable for the amount that should have been withheld. One levy attaches to all future paychecks. That continuous feature is what makes wage levies uniquely painful, and it is also why the levy, not the audit, not the notice, is usually the moment people finally call for help. The better move is calling before the levy, but the paths below work either way.

How much of your paycheck can the IRS take?

Here is the part that shocks people: the law does not cap what the IRS takes at a percentage of pay, the way ordinary creditor garnishments are capped. Instead, § 6334 exempts a small floor of each paycheck (computed from your standard deduction and dependents, divided by your pay periods), and the IRS takes everything above the floor. For a single New Mexico worker with no dependents paid biweekly in 2026, the exempt amount works out to roughly $600 and change per check; a worker grossing $2,400 biweekly could see well over half the check go to the IRS, every check. Compare that to the 25-percent cap that applies to ordinary judgment creditors and you see why an IRS wage levy escalates a tax problem into a rent problem immediately. Bonuses and commissions are reachable too.

What notices have to come before a garnishment?

A wage levy is never actually the first letter. It just feels that way, because the earlier mail was easy to set aside. The sequence typically runs from a first bill (CP14) through escalating reminders (CP501, CP503), then CP504, and finally the one that matters most: the Final Notice of Intent to Levy, Letter LT11 or 1058, which triggers your right to a collection due process hearing under I.R.C. § 6330. File the CDP request within 30 days and levy action generally stops while the IRS Independent Office of Appeals hears your case, and the hearing can include collection alternatives like an installment agreement or offer in compromise, not just protests about the underlying tax. The CDP window is the single most valuable procedural right in the collection process, and it is routinely wasted because the letter sat unopened.

What are the five ways to get a levy released?

Section 6343 requires the IRS to release a levy in specified circumstances, and in practice five paths do nearly all the work. The table ranks them by typical speed.

Two more releases operate automatically in the background: the levy must end when the debt is fully paid, and when the ten-year collection statute expires. A representative’s first task is pulling account transcripts to check both. A surprising number of levies are feeding balances with only a year or two left on the collection clock, which changes the entire negotiation.

Does New Mexico garnish wages for state taxes too?

Yes. The New Mexico Taxation and Revenue Department has its own levy authority for unpaid state income tax and gross receipts tax, and it uses it: wage levies, bank levies, and intercepts of state payments. A taxpayer behind with the IRS is frequently behind with TRD for the same years, since New Mexico’s personal income tax starts from federal adjusted gross income. The two collection tracks run independently: releasing the federal levy does nothing to a state levy, and vice versa. A complete resolution addresses both at once, often with parallel payment agreements sized so the combined monthly outflow is actually survivable.

What mistakes make a garnishment worse?

Three come up constantly. First, quitting or switching jobs to dodge the levy. The levy follows you to the new employer once the IRS finds it, and the gap in wages usually torpedoes the financial showing needed for hardship or CNC status. Second, ignoring the levy because a refund is expected. Refunds get offset, not delivered. Third, agreeing to an unaffordable payment plan out of panic; a defaulted installment agreement makes the next negotiation harder and reinstates enforced collection. The levy is a pressure tactic, and the IRS releases it routinely once a credible resolution posture exists. The goal is to build that posture deliberately, accurate financials, realistic proposal, both tax agencies covered, rather than to make the pain stop for one paycheck.

Frequently Asked Questions

Can the IRS garnish my wages without going to court?

Yes. Unlike private creditors, the IRS levies administratively under I.R.C. § 6331, with no lawsuit or judgment required. The trade-off is a set of procedural rights, most importantly the collection due process hearing after the final notice, that don’t exist in ordinary debt collection.

How fast can a wage levy be released?

In genuine hardship cases, sometimes within days of getting financial information to the IRS. Most releases come through negotiating a resolution, an installment agreement or currently-not-collectible status, which typically takes days to a few weeks once a power of attorney is on file and transcripts are pulled.

Will the IRS take my entire paycheck?

Almost. The law exempts only a floor based on your standard deduction and dependents divided across pay periods, roughly $600 per biweekly check for a single filer with no dependents, and the IRS takes everything above it. There is no percentage cap like ordinary garnishments.

Does a wage levy mean the IRS will also take my house or bank account?

They’re separate actions, but the same collection posture produces them. Bank levies are one-shot grabs of what’s in the account on the day of service; wage levies are continuous. Getting into a resolution, agreement, CNC, or pending offer, generally stops all of it.

My employer got a levy for state taxes from TRD. Is the process the same?

Similar in effect, different in procedure. New Mexico TRD levies are governed by state law with their own protest and hearing rights, and a federal resolution doesn’t touch them. Both need to be addressed, ideally together, so the combined payments fit your actual budget.

Can I be fired for having my wages garnished?

Federal law protects employees from discharge because of a single garnishment, and firing someone over an IRS levy is rare in practice; employers process them routinely. The bigger risk to your job is usually the stress of doing nothing; the levy itself is a payroll-department formality.

How North Star Law Firm Can Help

North Star Law Firm gets wage levies released for New Mexico workers and self-employed taxpayers: hardship releases, installment agreements, currently-not-collectible status, collection due process hearings, and offers in compromise, along with the parallel New Mexico TRD side of the problem. Phillip Zagotti, JD/CPA, represents taxpayers before the IRS under Circular 230, and the CPA half of the practice means the financial statements that drive a release are built right the first time. The firm’s tax defense practice handles the full collection lifecycle, and when the debt is old enough or deep enough, the bankruptcy practice can evaluate whether discharge is the better path. The levy will not release itself. Contact North Star Law Firm for a free consultation.

If you have a bank account in Mexico, Canada, or anywhere else outside the United States, federal law may require you to report it every year. That’s true even if the account earns nothing, and even if you’ve never owed a dime of U.S. tax on it. In July 2026 the IRS made two quiet moves that change the risk picture for anyone behind on those reports. It removed the long-standing Delinquent FBAR Submission Procedure from its website without any announcement, and it formally said the First Time Abatement program is being replaced by an automatic system. There are far more New Mexicans with foreign accounts than people assume, and for them the message is simple. The forgiving, informal era of FBAR cleanup appears to be ending, so the time to fix an old problem is while the fixing is still cheap.

Who actually has to file an FBAR?

The Report of Foreign Bank and Financial Accounts (FinCEN Form 114, universally called the FBAR) is required under 31 U.S.C. § 5314 whenever a U.S. person has a financial interest in, or signature authority over, foreign financial accounts whose combined value tops $10,000 at any moment during the calendar year. Pay attention to what that test is not. It is not $10,000 per account; it is $10,000 across all foreign accounts combined, measured at the year’s single highest point. It is not limited to accounts that produce income. And it is not limited to accounts you own. Signature authority over a parent’s account in Chihuahua, or an employer’s account in Toronto, can trigger the duty on its own. The FBAR goes to FinCEN, separately from your income tax return, which is exactly why so many otherwise-compliant taxpayers have never heard of it.

What did the IRS change in July 2026?

Two things, one loud and one silent. The loud one: the IRS announced that First Time Abatement, the administrative grace that waived failure-to-file, failure-to-pay, and failure-to-deposit penalties for taxpayers with a clean three-year history, is being phased out in favor of a new Automatic Exemption from Penalty starting with 2025 and 2026 returns. Qualifying taxpayers will get relief without asking for it. The silent change matters more for foreign account holders. The Delinquent FBAR Submission Procedure, which for years let taxpayers who owed no additional tax file late FBARs with a reasonable-cause statement and walk away penalty-free, has disappeared from the IRS website. No formal termination notice exists. But these programs are administrative grace, nothing more. The IRS can modify or end them at any time, without notice and comment, and a program that vanishes from the agency’s published procedures is a program you should stop counting on.

How bad are FBAR penalties if you do nothing?

Bad enough that they are routinely the largest number on the table. Larger than the tax, larger than the interest, larger than everything else combined. For non-willful violations, the inflation-adjusted penalty currently runs $16,536 per violation. After the Supreme Court’s decision in Bittner v. United States, 598 U.S. 85 (2023), a non-willful penalty applies per report rather than per account, so five unfiled years means five penalties, roughly $82,000, no matter how many accounts appear on each report. Willful violations occupy another universe entirely: the greater of $165,353 or half the account balance, per year, under 31 U.S.C. § 5321. A taxpayer with a $400,000 foreign account and three willful years is staring at penalties of $600,000, one and a half times the account itself. Criminal exposure exists at the extreme end. The gap between the non-willful and willful tiers is the entire game in FBAR representation, and the taxpayer’s own remediation choices become evidence in that fight.

What remediation paths are left?

Three, each with different eligibility, cost, and protection. The table below is the map. The Streamlined Filing Compliance Procedures remain available for taxpayers whose noncompliance was non-willful: three years of amended returns, six years of FBARs, a certification of non-willfulness, and a miscellaneous offshore penalty of 5 percent for U.S. residents (zero for taxpayers who meet the foreign-residency test). The Voluntary Disclosure Practice remains the path for taxpayers with willfulness exposure. It costs more, but it buys criminal protection. And a straight reasonable-cause filing, meaning late FBARs with a statement explaining why the failure occurred, survives as a matter of law under § 5321’s reasonable-cause exception even if the packaged DFSP program is gone. It simply carries no procedural guarantee that penalties will be waived on the front end.

Who in New Mexico gets caught by FBAR rules?

More people than the popular image of the offshore millionaire. New Mexico’s border geography and demographics create FBAR exposure in ordinary households. Families keep a Bancomer or Banorte account across the border for aging parents or property in Chihuahua. Retirees who moved to Las Cruces or Silver City after working abroad left pension or savings accounts behind. Dual citizens throughout the state inherit accounts they’ve never touched. Film-industry and national-lab professionals who worked overseas stints still have local payroll accounts. Small businesses in the borderplex sell into Mexico through a peso account. Every one of those fact patterns can cross the $10,000 aggregate line without anyone feeling wealthy, and every one of them stays invisible until an information exchange, an inheritance, or a routine audit surfaces it.

What should you do before the window narrows further?

Sequence matters more than speed, but both matter. First, establish the facts privately, with counsel, under attorney-client privilege: how many years, how many accounts, high balances, and whether anything in the record (quiet disclosures, advisor warnings, structuring behavior) pushes toward willfulness. Second, pick the lane deliberately. The streamlined certification is a signed federal statement, and certifying non-willfulness on willful facts converts a civil problem into a criminal one. Third, move while the programs still exist. The DFSP’s disappearance is the warning shot. Administrative grace is being rebuilt around automation, and packaged forgiveness programs the IRS considers redundant are being retired. Taxpayers who remediate before a program formally closes are consistently treated better than those who arrive after.

Frequently Asked Questions

Do I have to file an FBAR if my foreign account earns no income?

Yes. The FBAR filing duty under 31 U.S.C. § 5314 is triggered by the account’s existence and value, meaning more than $10,000 in aggregate across all foreign accounts at any point in the year, not by whether it produced taxable income. Income matters to your Form 1040 and to which remediation path fits, but not to whether the report was due.

Is the Streamlined program going away too?

Nothing has been announced, and the Streamlined Filing Compliance Procedures remain open as of this writing. But the DFSP’s quiet removal is a reminder that every one of these programs is administrative grace the IRS can end at any time. The IRS has said publicly in past years that streamlined relief will not last forever.

What’s the difference between willful and non-willful for FBAR purposes?

Willfulness in the civil FBAR context includes not just intentional violations but reckless disregard of a known or obvious risk. Courts have found willfulness where taxpayers answered ‘no’ to the foreign-account question on Schedule B while signing the return. The line is fact-driven, and it controls whether your exposure is roughly $16,500 per year or half the account per year.

Does the new Automatic Exemption from Penalty cover FBAR penalties?

No. The AEP program the IRS announced in July 2026 replaces First Time Abatement for income tax return penalties: failure to file, failure to pay, and failure to deposit. FBAR penalties arise under Title 31, not the Internal Revenue Code, and have never been covered by FTA or the new automatic process.

I only have signature authority over my mother’s account in Mexico. Do I really have a filing obligation?

Very possibly, yes. Signature authority alone triggers the FBAR duty if the aggregate threshold is met, even with no ownership interest and no tax liability. These are also among the most sympathetic fact patterns for reasonable-cause relief, which is exactly why they should be cleaned up deliberately rather than ignored.

Can New Mexico state taxes be affected by a foreign account cleanup?

If a remediation path involves amending federal returns to report foreign income, New Mexico personal income tax returns generally need to be amended to match, since NM piggybacks on federal adjusted gross income. A complete engagement handles both so the state side doesn’t become a loose end.

How North Star Law Firm Can Help

North Star Law Firm represents New Mexico taxpayers with foreign account compliance problems, from a single overlooked account in Juárez to multi-year, multi-account cleanups with willfulness exposure. Phillip Zagotti, JD/CPA, represents taxpayers before the IRS and the U.S. Tax Court under Circular 230, and the attorney-CPA combination means the penalty math, the amended returns, and the legal strategy are handled under one privilege. The firm’s tax defense practice covers FBAR remediation path selection, streamlined submissions, and reasonable-cause advocacy, and its tax law practice handles the go-forward reporting so the problem never comes back. The consultation is free and confidential. Contact North Star Law Firm before the remaining relief programs narrow further.