What Is a Tax Levy? Understand the Types, Process, and Purpose

what is a tax levyWhat is a Tax Levy?

A tax levy is when the IRS takes property or assets to cover an outstanding tax bill. This only happens in cases where you have failed to pay your tax debt and set up some sort of agreement with the IRS. A tax levy is the most powerful collection mechanism used by the IRS, and the IRS’s rights to subject you to a levy go far beyond the rights of any other creditors. Remember, the IRS is the most powerful debt collector in the United States.

Will the IRS Levy Your Assets?

By the time the IRS starts to levy your assets, you should have received numerous notices and demands. In particular, the IRS will only levy your assets if the following things have already happened.

  • The IRS sent you a demand for payment on your tax debt.
  • You ignored the notice or failed to make payment arrangements.
  • The IRS sent you a notice of the intent to levy and gave you 30 days to appeal or respond.

The IRS can start to take your assets at the end of that 30-day period. To avoid that, you need to contact the IRS to appeal, set up a payment plan, or make other arrangements.

What Property Can the IRS Levy?

Usually, the IRS starts the tax levy by reaching out to people or organizations who pay you. The IRS tells these entities to send future payments directly to the IRS rather than to you. In most cases, these entities or individuals comply because if they don’t, the IRS holds them personally responsible for those amounts. That includes the following:

IRS Wage Garnishment

This is the most common form of IRS levy. The IRS contacts your employer and instructs them to withhold a certain percentage of your wages. It is illegal for your boss to fire you over a wage garnishment, but it can be embarrassing and financially painful. Generally, the garnishment stays in place until the debt no longer exists or the taxpayer makes alternative arrangements.

IRS Bank Levy

With this form of levy, the IRS contacts your bank and requests the funds in your account. Usually, you have a 21-day grace period to address the situation. The funds are frozen in your account during that time period so you cannot withdraw or use them.

IRS Social Security Levy

The IRS can even demand the Social Security Administration send 15 percent of your payments.

IRS 1099 Levy

If an independent contractor is owed money by a business or individual, the IRS can demand any money owed to the contractor be sent to the IRS. The IRS can issue a series of 1099 levies to collect on 1099 income.

In addition to those items, the IRS can contact the holder of your retirement account, tenants who live in buildings you own, and nearly anyone else who pays you money.

Other Property the IRS Can Seize

The IRS can also seize real estate, land, cars, and boats. The IRS can take anything of value and sell it (auction it) to cover the tax debt. However, the IRS rarely seizes these types of property. In fact, the IRS will only do this in extreme situations.

How Can You Stop a Tax Levy?

If you are receiving notices from the IRS, you need to take action. A tax professional can help you get back into good standing with the IRS and/or State.  Generally, a taxpayer needs to get into filing compliance in order to set up a resolution with the IRS or State. Once the IRS seizes assets, it is difficult to get them back. Therefore, it is very important to take action quickly.