The Tax Levy Defined: What is it, how it works, and how to handle one

When you owe tax debt, your assets are at serious risk. A tax levy is a big issue that can be difficult to eliminate alone. Learn all about the levy, different types of collection, how to release one, and how to get help here.

What is a tax levy?

A tax levy is a collection procedure used by the IRS and other tax authorities, such as the state treasury or bank, to settle a tax debt that you owe to them.

This involves collecting assets and seizure of your property, either tangible or intangible, in a variety of ways. Most commonly, owed funds will be garnished from your wages or removed from your bank account.

Unlike other forms of property seizure such as those from traditional creditors, when a tax levy is performed, the IRS can take property without taking you to trial or winning a judgment against you.

A levy occurs when unpaid tax debt is owed to the IRS or another institution such as your bank or state. If you have failed to pay enough taxes, any taxes at all, or failed to file your taxes on time, you may begin to get warnings that you have debt due.

The definition of a tax levy

Types of tax levy:

Different types of tax levy

Wage garnishment

Wage garnishment is the most common form of tax levy. If your wages are levied, your employer will be required to hold a certain percentage of your pay to send to the IRS in order to pay your tax debt. Your employer will usually have one full pay period after receiving notice of the levy before they are required to begin withholding your pay.

The levy will remain in effect until the debt is paid off, or until another resolution has been made. If it is the first time your wages are being garnished, you are protected by the Consumer Credit Protection Act, which prohibits employers from firing employees over first-time wage garnishments.

Bank levies

During a bank levy, your bank will be contacted by the IRS and required to put a hold on your available funds, making your bank account frozen. Your bank may or may not notify you of this action depending on their processes.

After 21 days, the determined funds will be deducted from your account. Some sources of funds are protected from a levy, such as federally sourced funds like social security, or money received from child support. Your bank should determine which funds to keep back before releasing any money to the IRS.

Property seizure

Real, physical property that can be levied includes assets such as a house, car, or boat. The IRS can seize this property in order to sell it and apply proceeds towards the debt you owe.

The sale of your property is generally posted to the public for at least 10 days before it is sold, with notice of the sale also provided to you. If there is are any funds from the sale remaining after being applied to your debt, the IRS will let you know so that you can be refunded.

This type of levy is very rarely used and is generally withheld for only the most serious of circumstances such as tax fraud or other illegal tax issues.

Reduced tax refund

If you are due a tax refund, the IRS can hold or deny paying you this money, and instead apply it towards your debt. This can also apply to state refunds.

What happens in a tax levy?

Much like many other IRS procedures, a levy will come with ample warnings. If you owe money to the IRS, state treasury, or bank you will have already received a tax lien forewarning you of an incoming tax levy. That means a levy should never be too much of a surprise!

The levy is the last resort opinion that will come with plenty of notice. The IRS will send many letters in advance and is required to send a series of notices to you before proceeding with the levy. You will receive, via certified mail:

  1. Multiple notices and demands for payment (IRS Notices CP14, CP501, and CP503)
  2. A notice of intent to levy (IRS Notice CP504 – Intent to Levy State Tax Refund or Other Property)
  3. A final set of notices titled Final Notice of Intent to Levy and Notice of Your Right to a Hearing letting you know that the levy is imminent

The Final Notice of Intent to Levy and Notice of Your Right to a Hearing is usually sent about 30 days before the levy and may be delivered via mail, in person, or at your workplace.

The notice will describe your rights to appeal and the processes that you can take to correct the levy before it is set into action.

If, after 30 days, you have not taken any action or requested an appeal, the IRS can begin the levy at any time. 

It is important to note that if you owe money to multiple sources, for example, your mortgage lender, credit card company, and the IRS - the IRS will likely take precedent in collecting their debt via the levy.

How do you release or remove a levy?

In general, levies are released when your debt is paid off.

If the tax levy would, however, put your financial situation in a place of severe hardship - defined by the IRS as preventing you from meeting basic, reasonable living expenses - it’s possible to have a chance to get the debt withheld.

You always have the right to appeal the levy, which will prevent it from moving forward.

A qualified CPA, Enrolled Agent (EA), or another tax professional can advise you with the best way to handle your unique situation and help you proceed with your appeal.

Get Help With a Tax Levy

How do I stop a tax levy?

There are a variety of ways to handle a tax levy.

  • Appeal
    • If you paid all owed taxes before the final notice was sent, you can file an appeal for the levy. You can also file an appeal for other extenuating circumstances, such as bankruptcy.
  • Payment plan
    • Depending on your personal financial situation, the IRS can offer you a variety of different payment plans. If you come to an agreement and settle upon a payment plan that works for you, the levy will be stopped.
  • Offer in compromise
    • If you qualify for an offer in compromise, the IRS will agree that you can less than the original total amount of debt that was owed. This offer is typically reserved for those in particular financial hardship.
  • Temporary delay
    • If significant financial hardship is proven, the tax levy can be delayed. However, this does not that your debt will not need to be paid eventually!

What is the difference between a tax levy and a tax lien?

The difference between a tax lien and a tax levy

A tax lien is a claim made on your property and assets by the government when you owe tax debt over $10,000. This claim is used as a “security” for the debt that you owe.

Before a lien, you receive an official demand by the IRS to pay your tax. If you fail to pay, the claim will begin.

If you do not pay the tax debt you owe, a levy will begin.

Simply put, a tax levy is the exercise of the claim made by a tax lien, taking the claimed property and assets to fulfill your debt.

Does a levy affect your credit?

While tax levies themselves do not directly affect your credit, their effects can lead to damages. If the tax levy leads to wage garnishments, the lack of funds can leave you behind on other bills lead to late payments.

It is important to note, however, that a tax lien will appear on your credit report for at least 7 years, and if left unpaid can remain for up to 15 years.

Do You Need Help?

If you are struggling to handle a tax levy on your own, we can help connect you with an accountant to help you navigate the options available to you.

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Posted: 23 Jul, 2020

The Ageras authors don't provide any personal advice with regard to financial or fiscal matters - but accountants do. Fill in the form and receive non-binding quotes for professional tax advice.

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