IRS Tax Levy: What It Is and What You Can Do About It
Two things are sure in life: death and taxes. So while you can skip paying your taxes for a while, you can be sure that it’s a bad idea that will always catch up with you.
One of the ways government uses to reclaim unpaid taxes is through tax levies.
What Is a Tax Levy?
The state or the IRS (Internal Revenue Service) can legally seize your property if you have delinquent taxes and are not doing anything to settle them.
Besides property seizure, the state or the IRS can also;
- Take a portion of your wages from each paycheck until the outstanding amounts are settled
- Seize cash in your bank accounts
However, this is a process, and the IRS only takes these measures after unsuccessfully trying to resolve the issue with you.
How a Levy Works
If you owe the state taxes, a levy is one of the ways the state can institute to recover the outstanding amounts. However, before taking these measures, you get plenty of warnings.
This being a legal process, the IRS is expected to follow set stipulations before levying your assets. As such, the following events must take place before a tax levy is instituted:
- The IRS must compute what you owe and send you a comprehensive bill. This comes alongside a Notice of Delinquency or a similar type of notice from the IRS. The IRS can also file a substitute for return (SFR).
- You must fail to pay the bill and not reach out to negotiate possible resolutions within the deadline offered in the Notice of Delinquency.
- Another notice is sent, known as a Notice of Intent to Levy. You can also get a Notice of Your Right to a Hearing. You should never ignore any of these as they let you know a levy is imminent and the IRS could seize your property in 30 days.
If you still aren’t communicating with the IRS at this point, do so as a matter of urgency and ideally request a hearing. Failure to do so and the IRS is at liberty to move forward with the levy. Once they do, your bank and employer must comply with IRS orders to issue levies against your paycheck, savings, or assets.
A levy can be a one-time event, where the IRS seizes amounts or property that settles the debt in a one-off transaction. A levy can also be recurring. For example, when the IRS garnishes your salary. In this case, the IRS takes a certain amount from your monthly wages until it recovers the amount owed, plus penalties and interest in full.
While it’s rare, you can get levied property back. However, this is a long shot, and it’s always best to avoid levies before they happen. This can be done during a Collection Due Process Hearing.
Conversely, garnishments can be avoided or lowered by reaching out to the IRS and finding other amicable ways to settle your arrears.
State Tax Levy vs. IRS Levy
State tax levies are very similar to IRS tax levies.
While IRS levy procedures are the same regardless of where you are in the country, State tax levies differ from state to state. Each state has its rules on when and how to place tax levies. Every state must also draw rules regarding stopping or preventing tax levies.
The most commonly issued levies from the state are bank and wage garnishment levies.
What about IRS tax levies?
Tax Levy Examples
When you fail to honor payment notices on outstanding balances or to reach out for resolution, the IRS takes increasingly stern actions to force compliance.
Here is a look at the more common IRS tax levy strategies.
Bank Levy
The IRS can seize your savings and checking accounts to satisfy your tax debt.
An IRS bank levy is initiated by the IRS sending a notice to the bank holding your money. As we mentioned earlier, the bank must comply. Typically, the IRS issues one notice at a time. However, they can eventually send notices to all banks where they believe you hold accounts.
As if that’s not bad enough, your joint accounts are not spared. If you jointly run accounts where you hold the right to withdraw funds, these accounts can also be levied. This happens regardless of where the funds were deposited by yourself or the other parties in the joint account.
Upon receipt of the levy notice, your bank waits 21 days before forwarding your funds to the IRS. You cannot withdraw funds during this period unless the IRS partially or fully releases your money.
Now, if the funds in your account aren’t enough to settle your entire tax debt, the IRS can drain the account. They can then move on to subsequent accounts if they exist.
Aside from having your accounts frozen and your money sent to the IRS, most banks will charge administrative fees to your account upon handling the levy.
It gets worse. If the seized account doesn’t satisfy the debt, the IRS can move on to attach other assets.
Wage Garnishment or Levy
With a bank levy, the IRS can take everything that is in a particular account at a go. However, wage garnishment is considered a recurring levy. Let’s explain.
When the IRS garnishes your wages, they take a portion of your earnings from every paycheck until the debt is fully recovered. The IRS cannot take all your earnings at a go, leaving you with nothing to live on. There is an exception, however. If you have multiple employers, you can have 100% of your earnings from one of the employers levied. The same goes for any commissions and bonuses earned.
So how much will the IRS take?
The amounts are dependent on two things; the number of dependents and your filing status.
A married individual that jointly files gets a $630.77 exemption weekly, with the remainder going to the IRS.
The IRS sends form 668-W Notice of Levy on Wages and Salary and Other Income to your employer to effect this. Form 668-W is sent to your employer to show the IRS’s intent on garnishing your wages, including commissions and bonuses. Once your employer receives this form, they are legally required to remit part of your salary to the IRS.
Aside from losing a part of your income, this is embarrassing to an employee and challenging for employers to set up. Fortunately, you can still take action to try and get the levy released and resolve the tax liability.
Property Seizure
When a taxpayer refuses to cooperate to settle their lien, and the IRS is short on options, property seizure comes into play.
The IRS can seize your car, house, boat, and other assets. There are limitations, however.
For example, your house can be seized if you have a tax liability. However, this is only feasible if your house has a positive return.
For example, if your outstanding mortgage is higher than the value of your home, all proceeds would go to the lender and none to the IRS. In this scenario, it makes little financial sense for the IRS to go after your house.
Social Security Garnishment
Without a source of income, bank accounts, or properties to levy, the IRS can use surprising ways to get its money. One of these is your social security benefits.
Through the Federal Payment Levy Program (FPLP), the IRS can levy up to 15% of your social security payments. Unfortunately, this levy can leave you struggling because the IRS takes their percentage regardless of how much you get from your social security.
If it’s not much, it means you now have even less at your disposal.
This notwithstanding, the IRS is restricted to survivor’s and old age benefits only. Lump sum death benefits, disability benefits, and Supplemental Security income are off-limits.
Reduced Tax Refunds
The government makes reimbursements on any excess amounts paid to the government in taxes. This money is known as a tax refund.
If the government owes you a refund and you have a tax liability, the government retains your refund. The money is then (as you might have guessed) forwarded to the IRS. The IRS will then apply your refund to the owed amount and send you a notice regarding the same.
With other levies, the IRS ceases actions once you enter a repayment agreement. Not so with tax refunds, as the IRS can keep levying your refunds even after you have entered a repayment agreement.
1099 Levy
If you are an independent contractor, it might take longer for the IRS to locate you, but rest assured that you are still on its radar.
Without a salary to garnish or property to seize, the next best thing is to go after those you contract with. The IRS effects this by asking the contracts that owe you money to remit to them instead of to yourself. This goes beyond what is owed to you today.
The IRS can give notice to receive all your future payments until the debt is settled. When the IRS issues 1099 notices to your clients, they are legally obligated to comply.
Is there anything the IRS won’t touch? Let’s look at that next.
Property Exempt from IRS Levy
The Internal Revenue Code outlines a list of properties exempt from IRS Levies. These are:
- Educational books and clothes that are necessary to the taxpayer of their family
- Workman’s compensation claims
- Undelivered mail
- Personal items valued at under $6,250. These are items like fuel, furniture, personal care items
- Professional and business items, supplies, tools, books, and other tools of trade necessary for the taxpayer’s production of items. These items cannot exceed $3150 in value.
- Unemployment benefits, including those allocated to the taxpayer’s dependents
- Part of a taxpayer’s salary that is necessary for the taxpayer to comply with court orders, such as child support
What to do About Tax Levies
Once you get your first notice, the best thing to do is seek dialogue with the IRS.
However, dealing with state agencies like the IRS can be extremely stressful and intimidating. That’s why many people find it reassuring to have a professional to help them through the entire process.
At Cumberland Law Group, you get a free consultation to review your case and explore your options. The IRS is a mean machine; so are we. Call us today.