What is a Tax Levy?
An IRS tax levy can be a frightening thing. If you’ve received a notice of an impending levy, you may justifiably be confused, scared, and resentful…maybe even a little embarrassed. However, the good news is that even if you’ve gotten to the place where you receive a tax levy, you still have several options before you lose property.
What Is a Tax Levy?
A tax levy is a step in the IRS collection process that begins the steps toward seizing your property in order to settle your outstanding tax obligation. Ideally, you pay your taxes when they are due or make arrangements with the IRS to pay your obligation over time. If you fail to do this, or if you neglect to make your arranged payments on time, the IRS will send you a notice of further action, usually a letter requesting that you pay your tax debt.
If you ignore the notice, you’ll eventually receive notice of a tax lien, which is a claim against your property or other assets in the amount of your tax debt. If you still fail (or are unable) to comply with the request after several notices, the next step is a tax levy. A tax levy begins the process of seizing your assets to pay your tax debt. The IRS can take action starting at 30 days after your notification.
How Can the IRS Collect a Tax Levy?
Property isn’t necessarily your home, although it can be. The IRS prefers more liquid assets like your bank accounts and your paycheck.
Garnishing Your Wages
The IRS can instruct your employer to withhold a percentage of your wages to send to the IRS to help settle your debt. While the garnishment doesn’t show on your credit report, it can obviously make it difficult to pay your other bills…and that will definitely impact your credit score. One positive note, the Consumer Credit Protection Act prohibits your employer from firing you over first-time wage garnishments by the IRS.
Levying Your Bank Accounts
If you have a sizable balance in your savings or checking account, the IRS may opt to levy your bank account to pay your past tax balance. In such cases, the IRS tells the bank to freeze your account, up to the value of the tax obligation, and after 21 days has the bank send the funds to the IRS. Your bank may or may not notify you of this action, depending on their individual policy. Some types of funds, such as Social Security and Child Support payments, are not subject to IRS tax levies.
Seizing Your Property
The IRS also has the authority to seize your house, boat, car, RV, or other physical asset and sell it to settle your tax debt. The good news is that this type of tax levy is the least commonly used. Typically, physical property seizure is only used in cases of tax fraud.
Reducing Tax Refunds
Probably, the least painful of the IRS tax levy options is for them to tax your future tax refunds and apply them to your tax debt until it is settled. Obviously, if you are self-employed or work in a tipped or gig job where taxes aren’t collected, you don’t have a tax refund and this isn’t an option for you. (Not having taxes deducted is likely how you ended up in this mess.)
What Are My Options if I Receive a Tax Levy?
Now that we’ve caused your blood pressure to spike, here are the things you can do if you receive an IRS tax levy.
1. Pay Your Tax Bill.
The easiest, and the most obvious, method of solving your tax levy issue is to pay your IRS tax obligation in full. However, we understand that it’s likely, if you’ve managed to get a tax levy, you don’t have the funds to satisfy your tax debt. If you are able to pay the IRS, make sure that your balance due is zero and that you’re not working off of an older statement. Even a balance of a few dollars, at this stage, can trigger further collection action.
2. Appeal Your Tax Levy.
You have 30 days from the date of your notification letter to appeal your tax levy. A formal appeal will halt any collection action until a decision is made on your file. To file a formal appeal, you’ll need to complete and submit IRS form 9423. Reasons for an appeal include if you believe (and can prove) that there’s an error in the IRS tax calculation or if the tax levy will cause you extreme financial hardship.
3. Make Arrangements to Pay Your Tax Debt in Installments.
Even if you’ve ignored all the notices you’ve received from the IRS, you’ll still likely be able to negotiate payment arrangements with them. An installment agreement will halt any further action on your tax levy as long as you make your payments. The amount of your monthly payments is based on your income.
4. Make an Offer in Compromise.
An Offer in Compromise (OIC) is something of a counter-offer, which, if accepted, allows you to settle your IRS debt for less than you owe. Make your offer realistic as you’ll have a limited window of time to pay off the OIC amount. Once your mutually agreed-upon amount is paid, the tax levy will be released.
5. File for Bankruptcy.
As a last resort and/or if you have a lot of other outstanding debts, you can halt collection action by the IRS by filing for Chapter 7 or Chapter 13 bankruptcy. Chapter 7 bankruptcy is liquidation bankruptcy and may allow you to reduce the amount you owe the IRS, assuming that you’ve filed all of your past returns on time. Chapter 13 is reorganization bankruptcy and will generally allow you to fold in your IRS debt into your other debt repayment plan. Chapter 13 bankruptcy gives you up to five years of monthly payments to pay off your past debts.
How We Can Help
To learn more about tax levies and what to do if you are facing one, contact Eco-Tax at 1-866-968-4848. We’ve been helping small business owners from all 50 states with their tax issues for more than 20 years.