What Is a Tax Levy?
How It Works and
and How to Stop It?
Learn what an IRS tax levy is, how the IRS can seize wages, bank accounts, or other assets to collect unpaid tax debt, and what options may be available to help stop or resolve a tax levy.
What You Need to Know About Tax Levies?
Tax issues are stressful to face, particularly when the IRS takes serious measures to collect taxes against you. A tax levy is one of the most effective weapons that the IRS can employ. Tax levy enables the government to legally take your property or assets to help collect tax debt. A levy is not a claim against your property, as a tax lien is, but a real action, where your property can be sold.
Knowledge on what a tax levy is, its operation and ways of preventing it can help taxpayers to safeguard their income, bank accounts and valuable property. When it comes to unpaid taxes, it can make a big difference to know what to do as soon as possible.
What Is a Tax Levy?
Tax levy is a legal proceeding by the IRS or a state tax agency to collect the outstanding taxes by seizing the assets of a taxpayer. In case, a taxpayer does not pay a tax debt or does not respond to IRS notices, the government can recover the money by imposing a levy.
Tax levy may be imposed on various types of assets, such as:
- Bank accounts
- Wages and salaries
- Certain situations of retirement accounts.
- Vehicles
- Real estate
- Business assets
- Rental income
- Other valuable property
A levy does not just impose a claim on your property. Rather, it enables the IRS to confiscate property and use the funds to pay off your outstanding tax debt.
As an illustration, when the IRS levies the bank, your bank can be asked to freeze the money in your account and remit the amount that is available to the IRS after the stipulated waiting period.
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Tax Levy vs. Tax Lien: What Is the Difference?
A tax levy and a tax lien are two distinct collection actions that are confused by many people.
Tax Lien
A tax lien is a legal interest of the government in your property due to the unpaid taxes. It safeguards the interest of the government and can affect your selling or refinancing capabilities.
A lien does not immediately take your property. In most cases, you are allowed to use your assets even when there is a lien.
Tax Levy
The real seizure of property or money to pay the tax debt is called a tax levy. The IRS can act to collect what is due once a levy has been issued.
In simple terms:
Tax lien = The government takes your property.
Tax levy = The government takes your property or money.
This difference is relevant to understand since it is sometimes necessary to stop a levy as soon as possible.
How Does a Tax Levy Work?
The IRS is not in a position to normally confiscate your property without a particular legal procedure. An imposition of a tax normally follows a number of processes.
The IRS Assesses Your Tax Debt
It starts with the IRS concluding that you are liable to taxes. This can occur due to the fact that you have filed a tax return with a balance due, you have not paid your taxes or the IRS has determined a tax balance based on the available information.
The IRS starts collecting the tax debt once it is officially registered.
The IRS Sends Payment Notices
The IRS sends several notices asking to pay before issuing a levy.
These notices explain:
- The amount owed
- Available payment options
- Deadlines for responding
- Possible collection actions
The last one is the Final Notice of Intent to Levy and Notice of Your Right to a Hearing.
This notice allows the taxpayers a chance to object to the levy or to make some arrangements prior to seizure of their assets.
The Taxpayer Has an Opportunity to Respond
Once the final levy notice is received, taxpayers usually have a short time to demand a hearing or to settle the tax matter.
Failure to respond to IRS notices may lead to greater risk of a tax levy since the IRS may proceed to take enforcement measures.
The IRS Issues the Levy
In case the taxpayer fails to do so or to clear the debt, the IRS may impose a levy on the eligible assets.
The tax can be remitted to:
- Banks with your money.
- Paying your wages by employers.
- Companies which are indebted to you.
- Asset holding financial institutions.
The third party to whom the levy is made has to adhere to the instructions of IRS.
Assets Are Collected and Applied to the Debt
Once the assets are confiscated, the money obtained is used to:
- Unpaid taxes
- Penalties
- Interest
- Collection costs
In case the collected amount is not sufficient to meet the debt, the IRS can proceed with the collection.
Types of Tax Levies
Taxes can have an impact on various sources of property and income.
Bank Account Levy
Bank levy enables the IRS to freeze and seize funds in your bank account. When your bank gets the levy notice, it usually keeps the available money at hand until it forwards it to the IRS.
This may cause instant financial strain as you may be limited to access your money.
Wage Levy (Wage Garnishment)
A wage levy enables the IRS to collect a part of your paycheck until you pay the tax debt or the levy is lifted.
The IRS does not require a court order to garnish wages as some creditors do. Nevertheless, it should be in accordance with federal collection procedures.
Property Levy
The IRS can confiscate tangible property, including:
- Cars
- Homes
- Boats
- Business equipment
- Other valuable assets
Property levies are not prevalent as compared to bank or wage levies but may occur in extreme situations of tax collection.
Business Asset Levy
Business owners can be levied on business assets, such as:
- Accounts receivable
- Inventory
- Equipment
- Business bank accounts
A business tax can have a lot of effect on day-to-day activities.
Why Does the IRS Issue a Tax Levy?
Tax levy is normally employed by the IRS in cases where taxpayers fail to solve their tax issues on their own.
Some of the typical causes of a tax levy can be:
- Unpaid tax balances
- Ignoring IRS notices
- Not filing tax returns.
- Not communicating with the IRS.
- Not making agreed payment arrangements
- Violating an existing IRS contract.
A levy is typically a collection measure of last resort, although it may occur in cases where taxpayers fail to make efforts to settle their tax debt.
How to Stop a Tax Levy
When you have been levied, time is of the essence. There are a number of alternatives that can be used to prevent or halt a tax levy.
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Pay the Tax Debt in Full
The best method of terminating a levy is by paying the entire amount due with penalties and interest. After the debt has been paid, the IRS will typically cease to collect.
Nevertheless, not all taxpayers are able to pay their balance at once. Other solutions can be offered in such cases.
Set Up an IRS Installment Agreement
An installment agreement is a way in which taxpayers can pay their tax debt in installments.
Provided that it is approved, the IRS can suspend levy actions provided that you keep the terms of the agreement.
Installment agreements may be beneficial to taxpayers with a regular income but cannot afford to pay the full amount at once.
Request a Collection Due Process Hearing
A taxpayer that gets a Final Notice of Intent to Levy has the right to request a Collection Due Process (CDP) hearing.
In this hearing, taxpayers can talk about such options as:
- Payment plans
- Tax settlement options
- Mistakes in the tax determination.
- Other reasons why the levy should not go on.
The demand to hold a hearing within the necessary time can possibly halt the enforcement of levies in the meantime.
Submit a request to an Offer in Compromise
An Offer in Compromise is a way in which a taxpayer can pay less than the entire amount of the tax.
The IRS considers such factors as:
- Income
- Expenses
- Asset value
- Ability to pay
It is not available to all, but it may be a possibility to taxpayers who are financially struggling.
Request Currently Not Collectible Status
In case you are unable to pay the tax debt because it would mean that you would not be able to meet the basic living expenses, you might be eligible to be placed in Currently Not Collectible (CNC) status.
When approved, the IRS temporarily pauses collection activities.
Interest and penalties can be kept on accumulating, but the levy can be discontinued.
Prove Financial Hardship
A levy can be discharged in certain cases where it causes a financial strain.
As an illustration, when you cannot afford to pay certain necessities like:
- Housing
- Food
- Utilities
- Medical expenses
you can ask the IRS to release the levy.
Take Action Before a Tax Levy Becomes a Bigger Problem
One of the most severe collection measures that the IRS may impose is a tax levy. It enables the government to confiscate money, wages or property to collect unpaid taxes. Nevertheless, when you are issued with a levy notice, it does not imply that you are not allowed to make any choices.
Knowing what a tax levy is, how it operates and how to avoid it can assist you to make wise choices and secure your financial future.
The greatest thing is not to disregard IRS communication. By using a payment plan or hardship request, settlement option, or professional tax help, it is always possible to deal with the issue early and avoid asset seizure and stress.
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