The IRS is one of the most effective debts collectors and is sometimes referred to as a “supercreditor” because they can force payment from a debtor without use of the court system. Chances are pretty good that if you have a legitimate tax debt with the IRS, they will get you to pay at least part of what you owe. The biggest question is how they will go about doing this.
The IRS has several tools at its disposal, one of the most effective being the tax levy. If you’re facing a potential IRS tax levy, you’re at risk of the IRS taking your property against your will to pay off your tax debt. This is a pretty extreme (and scary) scenario, but you have ways to fight and/or delay the tax levy.
You can sometimes do this alone, but it’s usually a good idea to have a tax professional, such as those from Fortress Tax Relief, help you. To better understand how Fortress Tax Relief can help you with a tax levy, let’s take a closer look at what tax levies are, how they work, and strategies for fighting them.
What Is a Tax Levy?
A tax levy is the taking of property to pay a tax debt. This “taking” can come in several forms, such as freezing a bank account, garnishing wages, or taking physical possession of real estate or personal property, like a house or car. After the IRS takes possession of the non-monetary property, they will usually sell it and use the proceeds to pay off the tax debt.
What’s the Difference Between a Tax Lien and a Tax Levy?
A tax lien is a legal claim on property to help ensure a tax debt gets paid. A levy is when the collector seizes your assets. A good way to understand how tax liens and levies differ is to compare them to a home mortgage.
Your bank has a mortgage lien on your home, which gives it the right to repossess your home if you default on your home loan. This is a legal interest the bank has, but long as you make your mortgage payments on time, the bank won’t take your house.
However, if you were to stop making payments on your mortgage loan, the foreclosure process may begin which could result in the bank taking your house. In this analogy, the mortgage lien is like a tax lien while foreclosure is like a tax levy.
When can the IRS Impose a Tax Levy?
The IRS must give you at least 30-days notice before actually taking your property. When doing so, the IRS should send you a notice outlining your right to a Collection Due Process hearing. However, there are some exceptions to these rights in rare situations, one of the most prominent being the jeopardy levy.
Generally, the IRS will impose a tax levy only after providing you with several opportunities to pay your tax debt in full or to make some other arrangements to pay off your tax debt, such as setting up an Installment Agreement (also known as a Payment Plan). The IRS typically sends several notices about your options.
Notices You Receive Before a Levy
The first notice will be a tax bill that explains you have unpaid taxes and that you should pay them off as soon as possible. The amount owed will include the amount of the unpaid taxes plus any applicable penalties and/or interest.
If your tax debt isn’t resolved after receiving this first bill, the IRS will send at least one more tax bill. If you receive two or more tax bills, you’ll get more time before having to worry about a tax levy. Just don’t forget that interest and penalties may continue to accrue during this time.
If you ignore these tax bill notices or can’t come to an agreement with the IRS to satisfy your tax debt, the IRS may then file a Notice of Federal Tax Lien in the public record. This notifies current and potential creditors that you have a tax debt and that some or all of your property may be used to satisfy that debt. Sometimes the tax lien comes before the levy, but it’s possible for it to come after the levy.
If the tax debt remains unpaid or no other arrangements exist to satisfy your unpaid taxes, then the IRS may send you a CP504 notice. This notice will remind you that you have an outstanding tax balance that’s getting larger due to interest and penalties. The CP504 notice will also mention the possibility of a tax levy, but it won’t signal that the IRS is about to start a levy action against you.
Final Notice of Intent to Levy
Only when the IRS sends you a Final Notice of Intent to Levy will a tax levy be imminent. The exact appearance and wording of this notice can vary, but near the top of the letter, it will state Final Notice, Notice of Intent to Levy and Notice of Your Right to a Hearing. You may receive one or more of the following:
One of the key features of this notice is that it will contain information explaining your due process rights. It will also note a deadline for when you need to pay or request a hearing so that you can avoid the levy.
What Is a Jeopardy Levy?
In most situations before implementing a jeopardy levy, the IRS will first complete a jeopardy assessment. A jeopardy assessment occurs when the IRS establishes a taxpayer’s tax debt. Normally, the IRS provides the taxpayer an opportunity to contest the validity of the tax debt, such as requesting a hearing, filing an appeal, or otherwise explaining why the IRS’ conclusion that the taxpayer has unpaid taxes is incorrect.
After the jeopardy assessment, the IRS will send a notice and demand for payment of any unpaid taxes. If the tax debt is not immediately paid in full, then a jeopardy tax levy will follow. In limited situations, there could be a jeopardy levy without a jeopardy assessment.
A tax levy is bad enough, but at least there’s time to contest the IRS’ conclusions or get help to avoid the tax levy. But with a jeopardy levy, the first a taxpayer learns of an unpaid tax bill from the IRS could be with a frozen bank account or the IRS taking possession of personal property.
Reasons for Jeopardy Tax Levies
Generally speaking, a jeopardy assessment or levy won’t occur unless the IRS reasonably believes that the taxpayer is:
- Making plans to flee the United States;
- Taking steps to hide or transfer property;
- In financial trouble; or
- Doing anything to threaten the IRS’ ability to collect unpaid taxes.
Luckily, the vast majority of tax levies are not jeopardy levies. Also, jeopardy levies can be appealed through an administrative or judicial review.
Other Types of IRS Tax Levies
A jeopardy levy might be one of the worst types of tax levies to face, but several others can be comparable in terms of how devastating they can be financially. In the following sections, we’ll take a look at some of the most common types of tax levies.
More often called wage garnishment, an IRS wage levy is where the IRS tells your employer to withhold a certain amount of money from each of your regular paychecks. Your employer then sends this money to the IRS to pay a tax debt the IRS believes you owe.
When the IRS is legally allowed to levy your wages, they’ll usually send Form 668-W to your employer. Your employer then has at least one pay period to make arrangements to send part of your paycheck to the IRS. Part of this process includes sending you a Statement of Dependents and Filing Status. This is a form the employer uses to figure out how much money to take out of each of your paychecks and send to the IRS.
You have three days to return this form to your employer. If you don’t, the amount of your paycheck that’s deemed exempt from the wage levy will be calculated as if you are a married taxpayer filing separate tax returns and have no dependents. Once started, a wage levy will continue until the IRS releases the levy.
Section 6332 of the IRC authorizes the IRS to demand that third parties, such as banks, transfer property subject to a levy to the IRS. When the IRS serves a levy on the bank, the bank must wait 21 days before complying with the levy. This waiting period allows you to contest the levy or make arrangements with the IRS to pay off your tax debt.
Regardless of whether you decide to fight the levy, work with the IRS to pay your taxes, or do nothing about the bank levy, the money in your bank account(s) subject to the levy will be frozen. This account freeze only applies to money in your account at the time the bank receives the levy. Any deposits made at a later time are not subject to the bank levy. But before you get too excited about timing your deposits as a bank levy workaround, just remember that the IRS can use another bank levy if they choose to do so.
Except for property exempt from tax levies (discussed below), the IRS can pretty much go after any property that you own. In addition to bank accounts or wages, the IRS will sometimes take your car, home, or other personal property.
The fact that the IRS could levy your home is particularly unnerving, although the IRS rarely does that. Yet the IRS will feel free to go after a vacation house or another piece of real estate that isn’t your primary residence.
When it comes to taking property, one thing the IRS considers is how much it’s worth. This includes whether or not you have equity in the property. For instance, if you have an underwater car loan or home mortgage, the IRS is unlikely to levy either of those assets.
The IRS also understands that taking property away from you that makes it harder for you to pay taxes is not a good tax collection strategy. This means the IRS taking the only vehicle that you use to commute to work is far less likely than a second vehicle that you only drive for fun on the weekends.
Levies on Federal Funds
As you might imagine, it’s a lot easier for the IRS to levy property already in possession of the federal government. Under the Federal Payment Levy Program, the IRS may levy up to 15% of federal payments (in most cases) sent to individuals. Federal payments subject to this levy may include:
- Social Security benefits.
- Federal employee retirement annuity payments.
- Certain federal salaries.
- Medicare provider payments.
- Travel reimbursements to federal employees.
- Military retirement payments.
- Railroad Retirement Board benefits.
This is not an exhaustive list, as there are other types of federal payments subject to levy, as well as future changes to the program which will add additional federal payments subject to an IRS tax levy.
Even when the IRS may levy certain federal payments, there are circumstances where the levy won’t be allowed, such as if you’re an innocent or injured spouse or you’re going through serious financial hardship.
Retirement Account Levy
Retirement accounts aren’t included in the list of property immune from an IRS tax levy. That being said, the IRS will generally avoid levying a retirement account to collect unpaid taxes, unless the taxpayer engaged in “flagrant conduct.”
Additionally, the IRS can’t typically levy retirement accounts unless you can access them. So if your company requires you to work for them for 20 years for your pension to vest, and you’ve only worked for them for 15 years, then IRS most likely can’t levy these pension benefits. However, if your employer offers a 401(k), then the IRS can most likely levy that retirement account because you have the right to access the money, albeit subject to some hefty penalties.
One reason why retirement accounts are usually left alone by the IRS is that Congress wants to encourage people to save for retirement. Think about it: the more money you have in a retirement account, the less likely you’ll have to rely on government benefits when you retire.
Tax Refund Offsets
Another option the IRS has to collect back taxes is to withhold part or all of a federal tax refund that might be coming your way. Imagine you’re entitled to a $3,000 federal tax refund for this year. But you owe the IRS $2,000 in back taxes for last year. In this situation, you can expect this year’s tax refund to only be $1,000.
Besides taking your federal tax refund, the IRS can levy your state or local income tax refund through the State Income Tax Levy Program and the Municipal Tax Levy Program.
Property Exempt from IRS Tax Levies
There are certain limits to what’s subject to a tax levy, but some of these exemptions only protect a certain amount of property.
For instance, child support payments are off limits to an IRS tax levy. But for the most part, the IRS can garnish as much as they want from your wages, as long as they leave a certain minimum amount. Unfortunately, this isn’t a large sum. In 2023, a single taxpayer with no claimed dependents would have $1,154.17 of their monthly pay exempt from a tax levy on wages.
Child support and a certain portion of your wages aren’t the only things exempt (or partially exempt) from IRS tax levies. Section 6334(a) of the IRC lists other types of property that enjoy full or partial protection from federal tax levies:
- Education-related clothing and books.
- Furniture, fuel, provisions, and personal effects.
- Books and tools used for work.
- Unemployment benefits.
- Undelivered mail.
- Workers’ compensation payments.
- Certain pension and annuity payments.
- Eligible disability and public assistance payments.
- Financial assistance provided through the Job Training Partnership Act.
- Your primary home (although there are some exceptions and conditions).
Keep in mind that there are nuances that may adjust how these exemptions work or how much of your property could be protected from a tax levy. For example, the levy exemptions for books or tools used for work, as well as fuel, furniture, provisions, and personal effects are capped at specific dollar amounts, although these change every year. In 2023, these caps were $5,400 for books and tools and $10,810 for furniture, personal effect, fuel, and provisions.
When the IRS Doesn’t Issue Levies
In most circumstances, the IRS will not institute a levy action unless the above-discussed due process steps have been completed. The IRS will also usually avoid a tax levy when:
- There’s a pending or active Installment Agreement;
- There’s an Installment Agreement that was terminated within the last 30 days;
- The taxpayer is appealing the termination of an Installment Agreement;
- A request for an offer in compromise (OIC) is pending;
- The taxpayer is appealing the rejection of an OIC; or
- There’s a pending Collection Due Processing hearing.
How to Stop a Tax Levy
The best way to get rid of a tax levy is to make arrangements to pay off your tax debt, either in full all at once or over time. Assuming this isn’t possible, the next best thing is to get the levy released. The exact process for releasing a levy will depend on several factors, such as:
- What’s being levied.
- The value of the property subject to the levy.
- Your financial situation.
- The availability of alternative tax payment options, like an OIC or payment plan.
- How much money you owe the IRS.
- Whether the IRS followed all the proper procedures for instituting a tax levy.
If you want to challenge an IRS tax levy or have property taken with a levy returned to you, you will have to file an appeal with the IRS Independent Office of Appeals. You can file an appeal by either requesting a Collection Due Process (CDP) hearing or participating in the Collection Appeals Program (CAP).
Collection Due Process
If you request a CDP hearing, you must do so within 30 days from the date of the letter notifying you of the intent to levy and use Form 12153, Request for a Collection Due Process or Equivalent Hearing. Until the CDP hearing takes place and a decision is made, the IRS is usually prohibited from continuing to proceed with the tax levy (though, they may be able to levy on tax periods that were covered by a prior intent to levy notice). The hearing itself is typically held over the telephone or through and it may include correspondence before or after the hearing depending upon the circumstances.
After the CDP hearing, the IRS Independent Office of Appeals will issue a determination letter. If you disagree with the conclusions in this letter, you can request a judicial review of your case with the U.S. Tax Court.Whether you decide to use the CDP or CAP appeals process, you can choose to represent yourself or hire someone else to represent you, such as an attorney, certified public accountant, or other individual permitted to practice before the IRS. Despite this ability to represent yourself, it’s strongly recommended you hire a tax professional because you’re only allowed one CDP hearing per tax period or assessment. Also, if you decide to go to U.S. Tax Court after the CDP hearing, you cannot bring up issues that weren’t previously raised during the CDP hearing.
Collection Appeals Program
Taking part in this program begins with requesting a conference with the manager of the IRS employee handling your tax levy. There is no time limit to request this conference unless you’re doing so in response to the IRS taking your property to sell your interest in it and use the proceeds to pay off your tax debt. In this situation, you have 10 business days to ask for the conference after the Notice of Seizure is given to you or left at your business or home.
Assuming you’re not happy with the outcome of the conference with the manager, you can then ask the IRS Independent Office of Appeals to review your case by completing Form 9423, Collection Appeal Request. Generally speaking, you must ask for this review within three business days after the manager conference. If you’re still not happy after the IRS Independent Office of Appeals reviews your case, you’re largely out of luck, as there’s no right for judicial review of this decision.
One reason for this limitation is that CAP appeals are typically reserved for disputes about procedural errors of the IRS. Despite this limitation, the CAP can be helpful if you think the IRS didn’t follow its own rules when levying your property. It also has the benefits of being available in more situations and usually taking less time to complete than the CDP hearing process.
Need Help With an IRS Tax Levy?
If you’ve received a letter from the IRS threatening you with a possible levy, it might seem like there’s nothing you can do to fight it. Yet you likely have several options available.
The experienced and knowledgeable tax professionals at Fortress Tax Relief can help explain what these options are and how you could take advantage of them. This initial telephone consultation is free, so don’t hesitate to give us a call today. Or fill out the contact form and we’ll get in touch with you as soon as possible.