Tax Levy: What It Is, How It Works and How to Stop One
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People often get behind on their taxes because they don’t have enough withheld from their paychecks during the year. If you end up owing back taxes, a tax levy could be a serious consequence. Here’s how a tax levy can affect you, as well as how to remove one.
What is a tax levy?
A tax levy is the seizure of property to pay taxes owed. Tax levies can include penalties such as garnishing wages or seizing assets and bank accounts. Tax levies typically show up after the government has placed a tax lien.
A tax lien is a claim the government makes on your property, including real estate and other assets, when you’re past due on your income taxes. A tax levy is the exercise of that claim.
When will the IRS issue a tax levy?
The IRS will typically issue a tax levy after it has failed to collect the outstanding tax from the taxpayer or after a tax lien has been ignored. The agency will give a warning that a tax levy is imminent before it issues one. These four things generally occur before the IRS issues a tax levy:
The agency calculates the outstanding tax and sends the taxpayer a "Notice and Demand for Payment."
The taxpayer fails or refuses to pay the outstanding tax.
The agency then sends the taxpayer two additional documents — a "Final Notice of Intent to Levy" and a "Notice of Your Right to a Hearing" — at least 30 days before the levy is issued. These documents are either transmitted in person or sent to the taxpayer's home, last-known address or place of business. If the agency levied a state refund, these notices might be sent after the levy is issued.
The IRS sends the taxpayer advance notice that it may begin contacting third parties (i.e., employers, banks, friends, neighbors) to collect information about the taxpayer's tax liability.
How a tax levy can affect you
Here are a few things that could happen if you’re hit with an IRS levy.
Your paycheck may shrink. Wage garnishment is a common tactic. If your wages are garnished as a result of a tax levy, this means your employer must submit a portion of your earnings to the IRS every payday.
Your bank accounts could be frozen. Bank accounts are prime targets for recouping back taxes. Typically, the IRS contacts your bank and places a 21-day hold on your account. If you haven’t worked things out with the IRS after that time, the bank may send some or all of your money to the IRS.
Your house could be in jeopardy. The IRS can also seize certain personal properties, such as a home or a car. Some items can’t be seized, though. For example, the IRS says it can’t seize unemployment benefits, certain annuity and pension benefits, certain disability payments, workers’ compensation, some public assistance payments or child support payments. Undelivered mail, some items necessary for school or work, and certain furniture and household items are generally off the table, too.
» Make sure your withholdings are correct: Learn how to manage your withholdings via your W-4.
How to get rid of a tax levy
In most cases, the easiest way to get rid of a tax levy is to pay your back taxes. There are a few other options on the table, too:
Get on an IRS payment plan. Your tax balance will still accrue interest and penalties until it’s paid off, but if you allow the IRS to take at least three consecutive payments right out of your bank account (called a direct debit installment agreement), you might persuade the IRS to withdraw the lien from public record. (You’ll still have to pay your tax debt, of course.) You aren’t required to hire someone to get you on a payment plan — you can apply on the IRS website. Fees run from $0 to $225 depending on the plan and your income
Ask for an offer in compromise. An OIC, or offer in compromise, is a request to settle your back taxes for less than the full amount you owe. Beware: The IRS typically accepts fewer than half of the applications it gets in a year. To even be considered, you need to have filed all of your tax returns, plus make required estimated tax payments for the current year. You also won’t be considered if you’re in bankruptcy or are being audited.
File an appeal. You can ask for a collection due process hearing from the IRS Office of Appeals if you want a review of a lien or levy notice. Also, if you disagree with an IRS employee’s decision about a lien or levy, you can ask for a conference with the employee’s manager. If you disagree with the manager, you can ask the Office of Appeals to review your case.
File for bankruptcy. It’s not a pretty option, but in some cases, it can get rid of tax debt.
