The Tax Levy: Forced Debt Collection

When a taxpayer makes no effort to pay their back taxes and ignores requests for payment, the IRS or state taxing authority employs aggressive collection actions, such as a tax levy, to collect on the debt. A tax levy is when the IRS or state legally seizes property or an asset in order to satisfy, or partially satisfy, a tax debt.

The IRS has the legal right to levy almost anything a taxpayer owns or has right to. These include:

  • Any property held by the taxpayer such as house, vehicle, or boat.
  • Any property that is held by another, but belongs to the taxpayer such as wages, dividends, rental income, retirement accounts, bank accounts, accounts receivables, licenses, commissions, federal payments or state refunds, or the cash loan of life insurance.

The IRS can levy any or all of these assets up to the full amount of the tax debt.

Bank Levy

A common form of levy is the bank levy. In a bank levy, the IRS orders a taxpayer's bank to transfer a certain amount to them that would partially or fully satisfy the tax debt. The IRS will always look to fulfill as much of the tax debt as they can, even if that means levying the entire bank account. By law, the bank must wait 21 calendar days after a levy is placed before sending payment. During this time, the funds in the account are frozen, and the taxpayer does not have access to them. Under certain circumstances, the levy can be released during the 21 day holding period. However, if the levy is not released, after the holding period is over the bank is required to transfer the taxpayer's money to the IRS.

For IRS purposes, the term "bank" includes trust companies, savings and loan associations, credit unions, etc.

Levy on Wages

Another common levy is a levy on wages, commonly known as wage garnishment. If the IRS finds that the taxpayer in tax debt is gainfully employed, the IRS may consider placing a levy on their wages.

The IRS sends a notice Form 668-W, Notice of Levy on Wages, Salary and Other Income to inform the employer about their employee's tax debt and how it must be fulfilled. The employer is required to send the taxpayer's wages (full or partial, depending on the case) to the IRS until the tax debt is either paid in full or the taxpayer makes arrangements to pay it through one of the IRS' tax debt resolution plans.

After receiving notice from the IRS, employers usually have one full pay period before they are required to transfer the funds to the IRS from the employee's wages.

If Levy Causes Economic Hardship

A levy, especially on the wages or bank accounts of a taxpayer, can cause serious economic hardship. If a levy, or potential levy, forces a taxpayer into a financial crisis, the levy can be fully or partially released. While the powers of the IRS are extensive, they cannot force a taxpayer to pay their taxes, if paying their taxes means being unable to meet basic living needs.

Before releasing the levy, the IRS will consider the severity of the taxpayer's financial condition and the effect of the levy on the taxpayer's ability to meet basic living necessities. If a levy is causing economic hardship, the IRS will release it and consider satisfying the tax debt through a resolution plan such as Offer in Compromise, Partial Payment Installment Agreement, or even postponing collection of the debt by designating the case as Currently Not Collectible. A levy release only stops the levy and does not impact the tax debt. The taxpayer will need to resolve the tax debt case after the levy has been released, or it is likely they will be levied again.

If the IRS Wrongly Issued Levy Notice

If you believe that the IRS has wrongly issued a levy notice, you have 30 days from the date on the notice to file a request for a Collection Due Process hearing. This is your chance to provide proof that the IRS made an error.

Even if you wish to consider resolving the tax debt through other methods or make a request for innocent spousal relief, to contest the levy, you need to file for a Collection Due Process hearing. At the end of the hearing, if the matter stays unresolved, the IRS may renew collection actions.

A levy is released permanently only if the taxpayer pays the entire tax debt, the ten year statute of limitations expires, or the taxpayer resolves the tax debt by using a payment plan.

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