Tax Levy: What It Is & How To Minimize Its Impact
A tax levy is close to one’s worst nightmare: when a taxpayer is unable to cover the tax debt he or she owes, the IRS can seize your assets (wages, bank accounts, etc.) and used them to cover the tax debt.
Below, we’ve put together thoughts from our tax attorneys about how to best manage this painful situation.
What is a Tax Levy?
A levy is the seizure of property in order to satisfy taxes due. The objects of the seizure can include garnishing wages or seizing assets and bank accounts. In most situations, a tax levy happens after a tax lien is issued. A tax lien represents a claim the government makes on your property (which can include real estate or any other asset). This claim acts as a reminder about your due income taxes, and the levy, in effect, represents the exercise of this claim.
What assets can be seized in a tax levy?
- Wages (i.e. wage garnishment, the most common form of levy – typically done by withholding a percentage of one’s pay)
- Bank accounts (the IRS can directly seize the contents of your bank accounts)
- Tax refunds (obviously, if the IRS believes you owe taxes, they will not issue tax refunds until their claims are settled)
- Investment funds
- Business income (including issuing unpleasant notices to your customers asking them to re-route recurring payments directly to the IRS)
- Pensions & retirement savings accounts
- Insurance policy payouts
- Physical assets (asset seizures are unfortunately quite common, and can impact any property, from real estate to boats, essentially anything tangible & of value)
As a form of additional punishment, in cases where over $50k is owed, the IRS can even seize your passport, restricting travel & other essential activities, until the debt is settled.
Finally, a tax levy will be registered on your credit record, with predictably negative consequences for your credit record.
How much time does the IRS give the taxpayer before a levy?
Fortunately, you will receive advance notice of any of the above actions, and will be able to stop a tax levy from occurring if you take action as soon as you get notified. First, let’s understand the process by which the IRS escalates up to a tax levy situation:
- First, the IRS must determine that taxes are due.
- The IRS then sends a typical tax information statement, indicating the taxes owed
- If the taxpayer misses the indicated deadline, the IRS starts to think something is amiss, and begins to send a series of warning letters.
- The final letter will be unequivocally titled “Final Notice of Intent to Levy”. At this point the taxpayer has just 30 days to settle the situation before asset seizures begin.
This process typically unfolds over about three months, although this can vary greatly based on the taxpayer’s prior history and the amount involved.
What can I do?
A tax levy is the IRS’ last resort.
The best way to avoid a levy is obviously to prevent one — by practicing responsible behavior and settling your taxes before their respective due dates. You can also work with the IRS to create payment plans if taxes owed are large enough to pose a hindrance to your life.
Should you find yourself facing a tax levy, you must take action — either settle the tax debts outright, on your terms, before the IRS decides which of your assets it will seize, or attempt to fight the issue with the support of tax expert. If the IRS already issued a tax levy, you have the right to submit an appeal and impede it from moving forward. This is a measure that allows the taxpayer time to prepare his or her case and engage in dialogue with the IRS to either contest the taxes owed and/or decide on a payment plan more palatable than unpredictable asset seizures.
Can levied assets be returned?
Although in principle the taxpayer can return assets seized as part of a tax levy, in practice it is much harder for the levied assets to be returned than to prevent the levy from happening.
Typically, assets can be returned under the following circumstances:
- The IRS did not follow proper protocol in exercising the levy, such as not giving appropriate 30-day advance notice. An experienced tax lawyer can help highlight such procedural improprieties and build a case for the return of assets.
- The seized asset is required as a source of revenue to aid the taxpayer to pay the debt (this typically applies to real estate, but can extend to means of transport if they are needed to get to one’s place of employment)
- The taxpayer settled with the IRS after the levy, and agreed to an installment plan (typically mediated by a tax attorney)
The bottom line
The bottom line is tax levies should be avoided at all costs by engaging in a dialogue with the IRS proactively.
Asset seizures are operationally difficult for the IRS, and create a bad reputation, so it would much rather receive the taxes it feels it is owed directly from the taxpayer. For this reason, the IRS will in most cases agree to payment plans before proceeding with a tax levy.
Fortunately, few people simply ignore the IRS’s warnings, so tax levies are relatively rare.
Should you find yourself facing one, however, you must engage in dialogue with the IRS rapidly, and potentially consider professional help.