What Is a Tax Levy? Understand the Types, Process, and Purpose
What is a Tax Levy?
A tax levy is when the IRS takes property or assets to cover an outstanding tax bill. It only happens in cases where you have failed to pay your taxes and set up some agreement with the IRS. A tax levy is the most potent collection mechanism used by the IRS, and the IRS’s rights to subject you to a levy go far beyond the rights of any other creditors. Remember, the IRS is the most formidable liability collector in the United States.
Will the IRS Levy Your Assets?
By the time the IRS starts to levy your assets, you should have received numerous notices of intent to levy and demands for payment. In particular, the IRS will only seize your assets if the following things have already happened.
- The IRS sent you a notice demanding payment on your taxes.
- You ignored the notice or you failed to make payment arrangements.
- The IRS sent you a notice of the intent to levy and gave you 30 days to appeal or respond.
The IRS can start to take your assets at the end of that 30-day period. To avoid that, you need to contact the IRS to appeal or have a tax professional do it for you. A licensed tax professional with experience in tax resolution can analyze your financial and tax situation to pursue the best IRS options on your behalf.
Exceptions to the 30-Day Levy Notice Requirement
In rare cases, the IRS can levy your wages or property before sending you a Final Notice of Intent to Levy and Right to a Hearing. They may seize the property of yours without giving you notice beforehand.
If the IRS feels that the collection of the tax is in jeopardy, they can seize your property without notice in advance. Below you will find some reasons for this. For example:
- if you are looking to leave the country
- if you are dissipating assets by moving them outside the country or transferring them to other persons, or
- your “financial solvency is or appears to be imperiled.”
Disqualified Employment Tax Levy
The IRS serves a Disqualified Employment Tax Levy (DETL) for the seizure of unpaid employment taxes. A DETL usually happens if you previously requested a Collection Due Process appeal on payroll or employment taxes for other periods within the past two years.
Federal Contractors and State Tax Refunds
If you are a federal contractor the IRS does not need to notify of the levy until after the tax levy ensues. Moreover, the IRS can seize state tax refunds without offering hearing rights 30 days in advance.
What Property Can the IRS Levy?
Usually, the IRS starts the tax levy by reaching out to people or organizations who pay you. The IRS tells these entities to send future payments directly to the IRS rather than to you. In most cases, these entities or individuals comply because if they don’t, the IRS holds them personally responsible for those amounts. That includes the following:
Wage garnishment is the most common form of IRS levy. The IRS contacts your employer and instructs them to withhold a certain percentage of your wages. It is illegal for your boss to fire you over a wage garnishment, but it can be embarrassing and financially painful. The garnishment stays in place until the taxes owed no longer exists, the taxpayer makes alternative arrangements with the IRS, or the period to collect the taxes owed expires.
With this form of levy, the IRS contacts your bank and requests the funds in your account. Usually, you have a 21-day grace period to address the situation. The funds are frozen in your bank account during this timeframe so you cannot withdraw or use them.
The IRS is generally not able to levy social security payments, with a few exceptions. Although social security benefits are considered income for tax purposes and thus can be garnished, the IRS is restricted in how much it can take. In most cases, the agency is only permitted to withhold up to 15% of social security payments. Additionally, there are certain exemptions that may prevent social security from being levied, including those for low income households, individuals with disabilities or those who are over the age of 65. Despite these limits, however, the IRS retains the authority to impose social security levies in certain situations. Therefore, anyone who receives social security should carefully review their tax return each year and be aware of any possible levies or wage garnishments.
401Ks and pension plans are two types of retirement savings accounts that are common among American workers. Both 401Ks and pension plans are protected from creditors in most circumstances, but the IRS may be able to garnish these types of accounts if you owe back taxes. If the IRS levies your 401K, they may take up to 25% of the account balance. If the IRS levies your pension, they may take up to 100% of your benefits. In either case, the IRS will send you a notice of levy at least 30 days before they take any money out of your account. If you have questions about whether or not the IRS can garnish your 401K or pension, you should contact a tax professional for more information.
IRS 1099 Levy or Accounts Receiveable Levy
If a business or individual owes money to an independent contractor, the IRS can demand they send any money owed to the contractor to the IRS instead. The IRS can issue a series of 1099 levies to collect on 1099 income.
In addition to those items, the IRS can contact the holder of your retirement account, tenants who live in buildings you own, and nearly anyone else who pays you money.
Other Property the IRS Can Seize
The IRS can also seize real estate, land, cars, and boats. The IRS can take anything of value and sell it (auction it) to cover the taxes owed. However, the IRS rarely seizes these types of property. In fact, the IRS will only do this in extreme situations.
What Forms Does the IRS Use to Levy?
The IRS, in most cases, uses Form 668-W, Notice of Levy on Wages, Salary and Other Income, to levy an individual’s salary, wages, commission, bonuses, and other income. In the case of a 668-W, the IRS will send it to an employer. Alternatively, the IRS can send Form 668-A to a third party as well in order to levy property that the third party holds. For example, the IRS may send Form 668-A to a bank, credit union, a credit card company, or a client of the taxpayer (accounts receivable levy).
If you are receiving notices from the IRS, you need to take action. A tax professional can help you get back into good standing with the IRS or State. Usually, a taxpayer needs to get into filing compliance to set up a resolution with the IRS or State. Once the IRS seizes assets, it is difficult to get them back. Therefore, it is very important to take action quickly. With a tax levy, we highly recommended leveraging a licensed tax professional. Start your search today by using the form below. Our algorithm will find the top professionals that have experience in resolving tax problems just like yours.