A tax levy is one of the most powerful enforcement tools the IRS can use to collect unpaid taxes. If you owe back taxes and have not responded to their collection attempts, the IRS can levy your assets, including your wages, bank accounts, and other property, to satisfy the debt. Understanding how the IRS executes a tax levy is essential for protecting your financial interests and knowing your rights.
This article will outline the process of how the IRS issues a tax levy, the steps involved, and what you can do if you’re facing a levy.
What Is a Tax Levy?
A tax levy is a legal action that allows the IRS to seize your property to collect on tax debt. Unlike a lien, which merely places a legal claim on your property, a levy results in the actual seizure of assets. The IRS may garnish wages, freeze bank accounts, or seize other property and sell it to pay off your tax debt.
A levy is typically the last resort after the IRS has made repeated attempts to collect the tax debt through less drastic means. The IRS will not levy your assets without following a series of legal steps, and you have opportunities to address the debt before the levy is enforced.
Steps the IRS Follows to Issue a Tax Levy
Before the IRS can take your assets, they must follow a specific set of procedures. These steps are designed to give taxpayers ample warning and the opportunity to settle their debts before a levy is executed.
1. Issuing a Tax Bill (Notice and Demand for Payment)
The process begins when the IRS identifies that you owe taxes. Once they determine that you have unpaid taxes, the IRS will send you a Notice and Demand for Payment. This notice details the amount you owe, including any penalties and interest, and requests payment in full.
At this stage, you have the opportunity to pay the debt or work out a payment plan with the IRS. Ignoring this notice can escalate the situation.
2. Sending a Final Notice of Intent to Levy
If you do not respond to the initial notice and fail to make payment arrangements, the IRS will send you a Final Notice of Intent to Levy and Notice of Your Right to a Hearing. This is the IRS’s final warning before they take action to seize your assets.
The Final Notice of Intent to Levy is typically sent by certified mail at least 30 days before the levy is executed. The notice informs you of the IRS’s plan to levy your property and outlines your right to request a Collection Due Process (CDP) hearing. The 30-day window provides a critical period during which you can resolve the situation or appeal the levy.
3. Giving You the Right to a Collection Due Process (CDP) Hearing
When you receive the Final Notice of Intent to Levy, you have the legal right to request a CDP hearing within 30 days. This hearing allows you to challenge the levy, negotiate with the IRS, or propose alternative resolutions, such as an installment plan or an Offer in Compromise.
Requesting a CDP hearing pauses the levy process while your case is being reviewed. It’s essential to act within this 30-day period if you intend to appeal or negotiate.
4. Enforcing the Levy
If you fail to respond to the Final Notice of Intent to Levy within the 30-day window, or if you do not successfully resolve the issue through a CDP hearing, the IRS will move forward with the levy.
The IRS can enforce a levy by seizing various types of assets, such as:
Wages: The IRS will notify your employer to withhold a portion of your paycheck and remit it directly to the IRS. This wage garnishment continues until your tax debt is paid in full or resolved.
Bank Accounts: The IRS can issue a levy to your bank, freezing your account and seizing the available funds. The bank typically holds the funds for 21 days before transferring them to the IRS. This gives you a small window of time to resolve the issue before the money is taken.
Social Security Payments: The IRS can levy a portion of your Social Security benefits, though they cannot seize the entire amount.
Other Assets: The IRS may seize property, such as real estate, vehicles, or other valuable assets. The IRS can sell the property and apply the proceeds to your tax debt.
What Happens After a Levy Is Enforced?
Once the IRS has enforced a levy, they will continue to collect money or assets until the tax debt, including interest and penalties, is paid off. For example, wage garnishments may continue for months or even years, depending on the size of the debt and the amount being deducted from your paychecks.
In the case of property seizures, the IRS may sell the seized assets, often at auction, to recover the tax debt. Any remaining proceeds, after covering the tax debt, may be returned to you, though in most cases, the full proceeds are applied to the debt.
How to Stop a Tax Levy
Even if the IRS has issued a levy, you still have options to stop or release it. Some of the most effective ways to halt a levy include:
1. Pay the Debt in Full
The most straightforward way to stop a levy is to pay the full amount owed, including penalties and interest. Once the debt is settled, the IRS will release the levy.
2. Set Up an Installment Agreement
If you can’t afford to pay the full amount upfront, you can negotiate an installment agreement with the IRS. Under this plan, you agree to make regular payments over time to settle the debt. As long as you adhere to the terms of the agreement, the IRS will suspend the levy.
3. Submit an Offer in Compromise (OIC)
An Offer in Compromise allows you to settle your tax debt for less than the full amount owed. The IRS may accept an OIC if you can demonstrate that paying the full amount would cause financial hardship or that you cannot reasonably pay the debt in full.
4. Prove Financial Hardship
If the levy would cause significant financial hardship, you can request that the IRS release the levy. You must demonstrate that the levy would prevent you from meeting basic living expenses. In these cases, the IRS may temporarily halt collection efforts and place your account in “currently not collectible” status.
5. File for Bankruptcy
Filing for bankruptcy can temporarily stop the levy through an automatic stay. However, certain tax debts may not be dischargeable in bankruptcy, and the levy could resume once the bankruptcy case is resolved.
Your Rights During the Levy Process
Throughout the levy process, you have rights designed to protect you from improper or unfair collection actions. These rights include:
Right to be Notified: The IRS must notify you before enforcing a levy and give you the opportunity to resolve the debt.
Right to a Hearing: You have the right to request a Collection Due Process (CDP) hearing to appeal the levy.
Right to Appeal: You can appeal the IRS’s decision to levy your assets or the outcome of a CDP hearing.
Right to Legal Representation: You can hire a tax attorney in Virginia or other professional to represent you in negotiations with the IRS or during hearings.
The IRS’s ability to issue a tax levy is a powerful tool, but it comes with a well-defined process that provides taxpayers with several opportunities to avoid it. By staying proactive and responding to IRS notices, you can often prevent a levy from occurring. If you’re already facing a tax levy, seeking professional assistance and exploring options like payment plans or appeals can help mitigate the financial impact and protect your assets.
If you receive a Final Notice of Intent to Levy, it’s critical to act quickly. Ignoring IRS notices will only escalate the situation, but with the right strategy and support, you can stop a levy and resolve your tax debt.