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What Is A Tax Levy?

Charlie Brooks

Nov 29, 2022 15:26

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A tax levy may exist if you get a tax bill from the Internal Revenue Service (IRS), ignore or refuse to pay your taxes, and do not make agreements to resolve your tax burden. What exactly is a tax? And why would the government have the legal ability to confiscate your property? The next section will address these questions and more. Learn all you need to know about tax levies, including what they are, how they occur, and how to avoid them.

What Is A Tax Levy?

When you owe tax to the Internal Revenue Service or another taxing authority, such as a state treasurer or a bank, they may take legal action against you, called a tax levy, to get their tax back.


This encompasses several methods of collecting assets and seizing your tangible or intangible property. Most frequently, owing payments are garnished from a debtor's earnings or bank account.


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In contrast to other kinds of property seizure, such as those from traditional creditors, the IRS can seize your property through a tax levy without taking you to a court or obtaining a court judgment.


A levy happens when the IRS or another entity, such as your bank or state, is due delinquent tax debt. If you have failed to pay enough taxes, any taxes at all, or filed your taxes on time, you may begin to get notices that you owe money.

What Are The Tax Levy Types?

Common forms of tax levies include wage garnishment, bank levy, 1099 Levy, tax refund reductions, property confiscation, other asset seizure, and passport seizure. Depending on the circumstances of the individual, the IRS will employ whichever way is easiest for them to collect the tax debt.

Wage Garnishment

The IRS will call the employer of a delinquent taxpayer and instruct them to withhold a particular amount of taxes. A wage garnishment will continue until sufficient funds are collected to cover the debt, plus interest and fees.

Bank Levy

The IRS will call the taxpayer's bank and instruct them to place a 21-day hold on the taxpayer's cash. After 21 days, the bank is required to deduct the tax and submit it to the IRS. If insufficient funds satisfy the amount, the IRS may continue the process until the debt is settled in full.

1099 Levy

The IRS will issue levies to recover current (not future) 1099 payments from a taxpayer.

Reduced Tax Refunds

After filing taxes, the IRS may retain the funds that would otherwise be repaid to the taxpayer. Not only is this true for federal tax returns but also for state tax refunds.

Property Seizure

The IRS can seize and sell whatever property a person possesses, keeping the revenues.

Other Asset Seizure

Other taxpayer assets, such as retirement funds, stock dividends, licenses, life insurance policies, account receivables, and other income, will be subject to IRS levy.

Seizure of Passports

If a person owes more than $50,000 in past taxes, the IRS can request that the State Department revoke or refuse a passport.

How Does A Tax Levy Work?

A levy is always possible if you owe money to the IRS or another taxation authority. Before taking assets, the IRS will give enough notice. Ideally, you will discover means to avoid the tax levy from occurring.


The IRS must inform you by letter of any taxes you owe, so check your mail often. Maintain an up-to-date mailing address and speak with the IRS if you are experiencing financial difficulties.


When a tax levy is imminent, you will receive a document with the heading "Final Notice of Intent to Levy and Notice of Your Right to a Hearing."; the IRS could confiscate your property or assets within 30 days. If you are not already engaging with the IRS, you should do so at that moment.

What Exactly Is A Tax Lien?

A tax lien is a legal claim the IRS makes on the property you possess in order to ensure payment of any tax liability you owe. This includes any assets acquired after the IRS filed a lien against you.


A tax lien does not result in property seizure. Tax liens are automatically filed within ten days of the IRS receiving the initial notice of taxes due and payment demand, and the letter acts as notice that the tax lien will become effective.


The IRS may also issue a Notice of Federal Tax Lien. The local government has recorded this in the public records, and it notifies your creditors that there is a federal tax lien on your property.

The IRS will inform you within five business days following the first filing of the Notice of Federal Tax Lien. A notification of the lien filing and a letter explaining your entitlement to a Collection Due Process (CDP) hearing will be sent to you. This meeting is optional and will be used to discuss the lien and the amount owed.

What Is The Distinction Between A Tax Lien And A Tax Levy?

Tax liens are a consequence of tax difficulties. While a levy is used to confiscate property, a tax lien is a legal claim against your property that allows the government to execute a levy.


The government must first file a tax lien on your property. After being awarded the legal authority to confiscate the property, a levy is issued. This levy authorizes the government to seize the property that was subject to the initial lien. A levy is more forceful and dangerous since it signifies that the government has been authorized to seize your property.


When comparing a tax lien versus a tax levy, it may be difficult to determine which is worse. Recognize that both are significant and should be treated immediately.

When Will The IRS Issue A Levy?

If you owe taxes and haven't paid them (or made arrangements to settle your debt), the IRS may seize any assets you own or in which you have a legal claim if a levy is the next logical step. Suppose you owe taxes on property that is actually owned by someone else. In that case, the IRS may take it from you (such as salary, life insurance proceeds, dividends, interest, license fees, rent, accounts receivable, cash from rentals, or commissions). Also, the Internal Revenue Service may seize and sell your possessions (such as your car, boat, or house).

How Can I Predict An Impending Tax Levy?

A levy should not come as a surprise. In most cases, before the IRS may confiscate your property, it must fulfill certain standards. The first step is calculating the tax you owe and mailing you a letter titled "Notice and Demand for Payment."


The IRS will levy your bank account if the debt is not paid in full within 30 days. A "Final Notice of Intent to Levy and Notice of Your Right to a Hearing" letter will be sent. Extra correspondence, such as letters and notices, may be dispatched.


The levy will proceed in the absence of any response to the letters. Working with the IRS may enable you to avoid or postpone a levy. The Internal Revenue Service may agree to settle your tax liability or establish a payment plan as an option.


In rare cases, a levy may occur without a 30-day notice. If this occurs, you will get a notification once the levy has been collected. This might occur if:


  • A delay may compromise the tax collection.

  • This tax is collected from a state tax return.

  • The levy collects the tax debt of a government contractor.

  • Unpaid employment taxes are assessed by a Disqualified Employment Tax Levy (DETL).

How Can A Tax Levy Affect You?

Here are some potential outcomes if you are subject to an IRS levy:


Your salary may decrease. Wage garnishment is a typical method, and it indicates that your company must withhold a percentage of your earnings each pay period.


Your financial accounts may be frozen. Back taxes are mostly collected through bank accounts. The IRS often calls your bank to impose a 21-day hold on your account. If you have not reached an agreement with the IRS by that time, the bank may send part or all of your funds to the agency.


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Your residence may be in danger. But certain objects cannot be captured. The IRS states that it cannot take unemployment benefits, some annuity and pension benefits, certain disability payments, workers' compensation, certain public assistance payments, and child support payments. In general, undeliverable mail, some things required for school or employment, and certain furniture and household items are also excluded.

How Many Times Can The IRS Issue A Tax Levy?

IRS debt levies are subject to a time restriction, and this statute of limitations provides them with ten years to recover any delinquent taxes. After ten years, the IRS will erase the debt from its records and write it off completely.


Unfortunately, there is no limit on the number of times they can lawfully garnish your account throughout this 10-year period. Most likely, they will continue to garnish your funds until you reach a repayment agreement.


It is essential to realize that this is not a permanent levy when the IRS levies your account. This implies that you may deposit money the very following day without worrying about the bank freezing them. The levy will be deducted from any available money at the moment the bank processes it. This implies that the process will not be immediate if the IRS attempts to levy a second time, and it will take some time for the bank to process and activate the levy.

Can A Tax Levy Be Reversed?

The IRS is obligated to send a legal notice specifying the amount of time the taxpayer has to arrange cash, reverse a tax levy, and reclaim assets. However, it is more difficult to recover charged assets than it is to prevent the levy beforehand.


In most cases, the IRS will only overturn a levy if:


  • Before the taxpayer was allowed 30 days to obtain a hearing, the levy was levied.

  • The IRS did not adhere to protocol.

  • The confiscated property is required to generate money, therefore assisting the taxpayer in paying off the debt.

  • The taxpayer signed into an arrangement for installment payments.

How to Get Help With A Tax Levy?

When you owe the IRS money, it is difficult to enjoy life. Nobody anticipates being in debt, and being in debt to the IRS is especially tough. The IRS appears to have limitless authority to collect debts.


In contrast to other creditors, such as your mortgage lender or credit card company, the Internal Revenue Service has the authority to garnish your salary, freeze your bank account, and, worst circumstances, jail you. No other creditor possesses the same level of influence and authority. Facing the IRS on your own can be scary, and if you're unprepared and unsure of what you're doing, it can lead to disastrous results.


Time is not on your side if the IRS has sent you a notice. To be successful and reclaim your life, you must have the proper plan. Negotiating with the IRS involves a certain skill set and body of knowledge. Working with a tax resolution professional is the best way to guarantee you utilize all your options and rights.

How To Prevent A Tax Levy?

There are ways to reduce the possibility that your assets may be subject to a tax levy. If you cannot demonstrate that the levy is unjust or you cannot pay your tax debt immediately, you may still be able to avoid a levy by calling the IRS and negotiating an alternate payment plan.

Make your tax payments on time

You do not always have to pay your whole tax payment in April. If you have fallen on hard times, the IRS may enable you to set up a payment plan that permits you to pay your taxes over a longer period.


Even though you may still owe interest and penalties, formalizing an installment plan with the IRS prevents them from believing that you just chose not to pay.

Make a proposal

You can also negotiate with the IRS and attempt to settle your tax arrears. An offer in compromise enables you to demonstrate that, given your income, costs, and assets, you are unable to pay what you owe. The IRS will allow you to pay less than your total tax liability if approved.

Provide evidence of financial struggle

When a tax levy causes you and your family extreme financial hardship, you can make a case for financial hardship to suspend your tax levy. The Internal Revenue Service must provide you with enough money to cover your immediate home expenses. The IRS may discharge the levy if you can demonstrate that you are unable to pay with the levy in place. To prove your claim, you must provide a comprehensive account of financial data, such as bank statements and pay stubs.

Establish that your assets lack equity

The IRS utilizes levies to liquidate your assets in order to settle your tax burden. When your assets have no monetary value, you may be able to demonstrate to the IRS that they are unsellable. If you can plausibly demonstrate that your assets lack equity, you may be able to have a levy upon them lifted. To establish this argument, you must submit bank statements indicating the balances of your checking, savings, and retirement accounts. You may also be required to furnish assessment reports for the assets that demonstrate their depreciation.

Negotiate an agreement for partial payment

If you cannot settle your debt through an installment plan, you may be able to do so by requesting a partial payment agreement. A partial payment arrangement is designed for taxpayers who might have physical or financial difficulties with a standard payment plan. The partial agreement allows you to make lower monthly payments on your tax bill. It enables you to avoid substantial financial burdens while satisfying the IRS and discharging any levies.

File for Bankruptcy

You might file for bankruptcy as a last option to remove a tax lien from your home. For several years, bankruptcy badly affected your credit report. During the time that your case is being filed and adjudicated, creditors and the IRS are prohibited from contacting you regarding your debts or taking collection measures against you. Depending on the age and amount of your tax obligation, you may be able to have it consolidated into a Chapter 13 bankruptcy, which will allow you to gradually repay your bills each month. In rare situations, Chapter 7 bankruptcy allows for the discharge of tax liability.

Final Thoughts

You should learn about your delinquent back taxes well before a tax levy appears on your paycheck or bank accounts. In part, because it takes so long for tax officials to actually seize your assets and in part because the statute of limitations on delinquent taxes might expire before the levy goes into force, tax levies are rather uncommon.