What is a Tax Levy?
A levy is a creditor’s right to claim property, assets, or accounts in order to satisfy a debt. Tax levies specifically are a tool used by the IRS when all other attempts at convincing a taxpayer to take care of their outstanding balance have failed.
So, what is a tax levy and how do you handle it?
The IRS will usually leverage their ability to levy your property or garnish your wages when a taxpayer repeatedly ignores notices of tax debt.
Levies can be avoided, undone, or appealed against. Understanding when and how the IRS uses tax levies can help you understand your options, and avoid them in the future.
What is a Tax Levy?
Liens and levies are the two most aggressive tools the IRS has in its arsenal to collect a taxpayer’s tax debt. Liens are the lesser of the two tools, securing the IRS’s right to the equity of property over that of other creditors.
This effectively means that the IRS can claim the value of your car, home, and other assets in order to pressure you to pay your dues. The IRS can also override any claims other creditors have to these items, and greatly affect your chances of getting a loan or opening a line of credit.
While a lien stops short of outright claiming property or withdrawing funds from your accounts, it can leave a lasting impact on your financial state.
Levies are often what liens turn into when a taxpayer continues to fail to set up a payment plan or otherwise contact the IRS. Levies never come out of nowhere – but if they do, that may be grounds for appealing a levy.
Usually, the IRS provides warning in the form of a Final Notice of Intent to Levy, as well as a Notice of Your Right to A Hearing. These are usually your last warning shots, and a chance to contact the IRS (and a tax professional) to work out some sort of realistic payment plan.
How are Levies Avoided?
Levies are avoided by paying back taxes and penalties. In most cases, that is the easiest and by far most viable option. However, that doesn’t mean you must pay a lump sum. You do have various options for contacting the IRS and paying back your debt, even if you cannot reasonably cover the entirety of the debt. The IRS will take what it can get, provided you have the documentation to prove that you can only reasonably cover as much as you pledge to pay.
Levies can be lifted or even reversed if you can contact the IRS and set up a payment plan, or prove that you’ve already engaged in/started a payment plan shortly before they claimed your property or garnished your wages.
Similarly, if the IRS’s levy against you somehow violated your rights as a taxpayer – either by mistaking your debt, not providing any warning, or charging you with unpaid taxes that do not apply to you – then you do have the option of appealing through the Independent Office of Appeals, or alternatively, through the US Tax Court.
Before exploring these options, however, it is critical that you visit and review them with a tax law professional.
Property or Account Levies
The IRS will usually issue two types of levies:
- A levy on your accounts or properties, (liquidating property or claiming the contents of a non-exempt bank account), or;
- A continuous levy on your income made through your employer, who will garnish a set amount depending on the number of dependents you have, until your debt is satisfied.
The first kind of levy is a claim on a single account or property. The IRS may issue more than one levy to satisfy the debt. The IRS will first lay a claim on your bank account, and hold it for 21 days before claiming the money, or they will place a notice of levy on your property, set a calculated minimum bid price (which you can appeal, if you feel it is below fair market value, triggering a second valuation or professional appraisal), and sell your property.
If the total value of your property or the contents of your bank account were less than the total debt, you are still held liable for the rest. If the total value of your property or contents of your bank account were more than the total debt, you will be eligible for a refund from the IRS equal to the surplus.
Note that if the IRS sells your property while someone else has a claim on it as mortagee or lien holder, they will pay their claim before refunding any money you, should the total value of the property exceed the tax debt.
Wage Levies (Wage Garnishment)
Alternatively, the IRS may garnish your wages. State and federal wage garnishment laws do not apply when the IRS seeks your wages as a way to cover your tax debt. Instead, the amount exempt from the IRS’s wage levy depends on the number of dependents in your household.
The IRS directs employers (who are responsible for withholding wages for the IRS) to utilize Publication 1494 to determine how much to withhold.
Are Levies One-Time?
Wage levies are ongoing until the levy is revoked, your debt is paid, or a payment plan is set up with the IRS. Bank accounts and property can only be levied once, but the IRS will continue to levy other property unless you contact them and set up a payment plan for the remainder of your debt.
What If I Can’t Pay My Debt?
The IRS must release a levy if you can prove that it is causing financial hardship. According to the IRS, an economic hardship occurs when the IRS determines that their levy “prevents you from meeting basic, reasonable living expenses”.
The IRS will determine this based on your financial information, and they will ask you to provide proof via income and expenses to verify that the levy is indeed making it impossible for you to meet “reasonable living expenses”.
When the IRS releases a levy on account of hardship, you are not exempt from your tax debt. But you can then write an Offer in Compromise, explaining how much you can afford to pay in monthly installments and send in the initial payment.
The IRS will then see if you are eligible for an Offer in Compromise, determine if your offer lines up with what they consider to be your Reasonable Collection Potential, and either accept or decline your offer. You can appeal a decision to decline your OIC, or work with the IRS to determine what they think is reasonable based on the information you have provided.
Contact a Professional
If you have been met with a levy notice, or fear that a levy is a next step the IRS will take to collect, time is of the essence. Get in touch with a tax law professional to determine what your next steps should be to avoid unnecessary penalties and additional costs.