IRS & State Tax Levy Guide: Understanding & Resolving
What is a Tax Levy?
A tax levy is a legal seizure of your property by the IRS or state taxation authorities. The IRS or State can levy your property if you have delinquent tax debt and don’t take action to resolve your tax debt problems.
The IRS and state tax authorities have the power to seize the money in your bank account, take a portion of your wages directly out of your paycheck, and levy many other types of property. Tax levies are generally only used after the IRS has sent you several notices asking you to pay your tax bill and you fail to respond.
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How IRS Tax Levies Work
The IRS must follow specific procedures before levying your property. The following must happen before the IRS can proceed with a levy:
- The IRS must assess the tax against you and send you a bill. You may receive a Notice of Deficiency or some other type of IRS notice. Taxes can be assessed by you filing a tax return or the IRS filing a substitute for return (SFR).
- You fail to pay your bill or negotiate another type of resolution by the deadline stated in the notice.
- The IRS will send another notice—the Notice of Intent to Levy. You have 30 days to request a hearing.
After the 30-day period expires, the IRS can move forward with the levy. Your bank or employer is required to comply with an order from the IRS to issue a levy against your assets or wages.
Most levies are one-time events at the time of the IRS order. However, some types of levies are recurring, such as wage garnishments. Garnishments can last until the IRS recovers the tax amount owed, plus penalties and interest in full.
You can only get levied property back in rare situations. You have a much better chance of avoiding a levy before it happens, such as during a Collection Due Process hearing. Garnishments can be stopped or lowered by working out another alternative with the IRS.
Most state tax levies work similarly to IRS levies. The most common forms of levies for states issue are wage garnishments and bank levies. Each state has its own set of rules to how and when they can place a tax levy as well as rules to stop or prevent a tax levy. Visit our State Tax Relief section to find information and links to resolve a state tax levy.
Types of Tax Levies
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The IRS has the authority to levy a broad range of assets. Only a few types of property are protected explicitly from an IRS levy, which is defined below. Each state has its forms of levies, many are similar to the IRS types below, but for state-specific issues, refer to our state tax relief guides to find more information.
Some types of levies are used more commonly than others, including bank levies and wage garnishments.
The following are some of the most common types of IRS tax levies.
The IRS can seize any funds in your bank account that are available for withdrawal. If you owe the IRS more than the balance in your bank account, they can drain the entire account.
If you have a joint bank account, the IRS can still levy the funds if you have the right to withdraw them. It won’t matter whether you or someone else deposited the money into the account.
When your bank receives a levy notice from the IRS, they will wait 21 days before complying with the levy. You won’t be able to withdraw funds that the levy has attached to during this time. The only way you’ll be able to avoid the levy is by getting the IRS to fully or partially release it.
A wage garnishment is a recurring levy. The IRS can’t take all the money from your paycheck, but they can use one levy to receive a portion of earnings from every paycheck until your tax debt is paid off.
The amount the IRS will leave you with is dependent upon your filing status and the number of dependents. A married taxpayer who files jointly and has two dependents has an exempt amount of $630.77 per week, with the rest going to the IRS. Any bonuses or commissions your receive can be levied in full. The IRS will mail publication 1494 to your employer, which will explain how much will be exempt from the levy. If your employer does not return within three days, the exempt amount will default to married filing separately with no dependents. If you have multiple sources of income, they can garnish 100% of the wages from a particular employer.
The IRS reserves this type of levy for situations where the taxpayer refuses to cooperate, and other kinds of levies will not work. The IRS can seize your house, car, boat, and most other types of property.
However, the IRS can’t seize property that is expected to have zero net proceeds. If you owe more on your mortgage than the fair market value of your house, the IRS can’t seize it because all of the proceeds would go to your mortgage lender.
The IRS can levy up to 15% of your Social Security benefits payments through the Federal Payment Levy Program (FPLP). This levy can be issued regardless of how much you receive each month in Social Security benefits.
Only Old Age and Survivors benefits will be systemically levied under the FPLP. Disability benefits, lump-sum death benefits, and Supplemental Security Income won’t be levied through the FPLP.
Tax Refund Offset
If the IRS owes you a refund, they can seize that if you owe back taxes. If the IRS applies you refund to your outstanding balance, they will send you a notice in the mail.
Unlike other levies, the IRS may continue to levy your tax refunds even after you’ve entered into an installment agreement or during the calendar year after your Offer in Compromise is accepted.
A 1099 levy is used to levy the earnings owed to an independent contractor or self-employed taxpayer. Unlike a recurring wage garnishment, a 1099 levy only gives the IRS the right to receive incomes that are currently owed to the delinquent taxpayer.
The IRS can issue 1099 notices to several of your clients to seek repayment of your unpaid tax liability.
Assets That are Exempt From Tax Levies
- Books, mainly those that are educational
- Undelivered mail
- Workman’s compensation income
- Personal items with a total value of less than $6,250 (this includes things such as furniture, fuel, personal care items, misc personal items)
- Business supplies: Items that are necessary for the taxpayer to generate income
- Unemployment benefits
- Income that is used to support children under the age of 18. Must be income that was court ordered to support the children, such as child support.
- A primary residence when the unpaid tax amount is considered small (the value of the home larger than the debt owed)
- Public assistance payments that come from a government agency. Public assistance payments include things like welfare and SNAP food benefits.
IRS Notice of Intent to Levy
The Notice of Intent to Levy is the last notice you must receive before the IRS can seize your property. The notice will also inform you of your Collection Due Process (CDP) rights, including the right to request a hearing.
What the Notice of Intent to Levy Means and How Long You Have to Respond
This notice is informing that your property is about to be seized by the IRS. The IRS can levy your bank account, wages, or other property and apply the funds to the debt you owe the IRS.
You have 30 days to request a CDP hearing in writing. The IRS won’t levy your assets during these 30 days unless one of the following exceptions applies:
- The tax collection is in jeopardy.
- State tax refund levies.
- Federal contractor levies.
- Disqualified Employment Tax Levies.
If you request a CDP hearing, you can try to avoid the levy by disputing the tax liability, proposing a collection alternative, or showing that the levy would cause financial hardship. The IRS won’t proceed with the levy while the CDP hearing process is ongoing.
You also have the right to have the U.S. Tax Court review the determination made at the CDP hearing. If you don’t request your CDP hearing within 30 days, you lose the opportunity to have the Tax Court review your case.
In some cases, you may be able to request a hearing after the 30 days has expired, which is known as an equivalent hearing. You don’t have the right to have the Tax Court review the decision made at an equivalent hearing, and the IRS can move forward with the levy during the hearing process.
Types of Intent to Levy Notices
You may receive any of the following notices when the IRS is threatening to levy your property:
- CP 504. The IRS uses this notice is used when they will levy your state tax refund. You don’t have the right to request a CDP hearing for this type of levy.
- CP 90/CP 297. This notice is used to inform you that the IRS may levy federal payments you receive. The levy could include Social Security benefits, federal salaries, or other federal payments.
- Letter 1058/LT 11. These notices will list your unpaid balance and inform you of an impending levy. You have 30 days to request a CDP hearing. A Notice of Federal Tax Lien may also be issued, even if you request a hearing.
- CP 91/CP 298. This notice refers specifically to a levy of Social Security benefits, and the IRS usually sends after a CP 90 or CP 297.
Each notice should state how much you owe and inform you that you have 30 days to request a CDP hearing.
Get Tax Levy Help
The most important thing to do is act before your CDP rights expire. A tax professional can help you determine the best strategy for stopping an impending tax levy.
You can use any of the following tax resolution strategies to avoid an IRS tax levy.
The IRS won’t levy your assets once you’ve entered into an installment agreement. These payment plans allow you to pay off your debt over time by making monthly payments that fit your budget.
Different payment plans may be available depending on how much you owe, your financial situation, and other factors. You may be eligible for any of the following types of payment plans:
- Guaranteed installment agreements may be available if you owe $10,000 or less and can pay off your full debt within three years.
- Streamlined installment agreements that offer 72-month repayment periods for tax debts of $50,000 or less.
- Partial payment installment agreements that involve partial debt forgiveness at the end of the repayment term.
You can request a payment plan as a collection alternative during the CDP hearing process.
Offers in Compromise (OICs) settle your tax debt for less than you owe. The IRS will only accept an OIC if you don’t have equity in assets or disposable income to pay towards your tax debt. The offer must also be at least as much as your reasonable collection potential.
OICs may include a lump-sum payment or series of payments. The IRS generally won’t try to levy your assets while they consider your OIC. If your offer is accepted, the IRS will forgive your remaining tax debt once you pay your offered amount and meet the other terms of your agreement.
You may be able to avoid the levy if it would cause serious financial hardship. You will need to show specific proof of the consequences that will occur if the levy takes place.
You can also request that the IRS classifies your account as “currently not collectible.” This status will prevent any future levies, but you’ll still owe the tax debt, and penalties and interest will keep accruing.
The IRS has ten years to collect once the IRS assesses a balance with some exceptions. States also have various rules on statutes, with some being longer and some shorter than the IRS. If your financial situation does not improve, the statutes will eventually expire, and the IRS can no longer attempt to levy for the debt owed.
Dispute the Tax Liability
You can argue that you don’t owe the tax to avoid a levy. However, you may not be able to present these arguments at a CDP hearing if you had an earlier opportunity to make these arguments and failed to do so.
Appeal the Levy
There are several reasons that the IRS may be required to release a levy:
- The levy was improper because you paid the amount you owe.
- You didn’t receive the required notices before the levy.
- The collections statute of limitations expired before the levy.
- You were in bankruptcy while the levy was issued.
You may be able to request a levy release before or after the property is levied. Wrongfully levied property may be returned, but you must make such a request within two years of the levy.
You may request innocent spouse relief to avoid responsibility for some or all of the tax debt associated with a jointly filed tax return. You may qualify for any of the three types of innocent spouse relief.
In some cases, you may be required to request innocent spouse relief within two years from the date the IRS first attempted to collect the tax from you.
You can argue that you don’t actually owe the tax because you’ve been a victim of tax identity theft. If someone else filed a fraudulent tax return using your personal information, you might be able to have the return removed from your tax records.
Tax Levy vs. Tax Lien
A tax lien does not involve a seizure of your assets. A Notice of Federal Tax Lien may be filed to notify your other creditors that the IRS has an interest in your property. A tax lien can make it difficult to sell or refinance your home unless you get the lien released or withdrawn.
A tax levy is a seizure of property. You may check your bank balance and find that the finds have disappeared, or you may receive a paycheck and find that the IRS has taken half of your earnings.
If you are facing an IRS tax levy, you may have several options for stopping the levy. Contact a tax professional to get help determining the best option for protecting your property and resolving your tax debt problems.
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