Complete IRS & State Tax Levy Guide to Resolving Levies
Understanding the potential penalties and actions associated with owed taxes can be confusing. Levies and liens are particularly overwhelming to taxpayers, often causing them to wonder whether their assets are at risk. Learn more about how levies work, how to avoid, and methods to stop them.
Table of Contents
- How a Tax Levy Works and What it is
- What is a State Tax Levy?
- What is a Tax Levy vs. a Tax Lien?
- IRS Tax Levy Process
- Understanding Your Notice of Intent to Levy
- IRS Tax Levy Types
- Assets Exempt from IRS Tax Levies
- Appealing/Disputing a Tax Levy
- How to Release/Stop a Tax Levy
- Help with an IRS Tax Levy
A tax levy is imposed by the IRS, permitting the seizure of your property to satisfy your tax debt. The IRS can impose a levy to garnish wages, withhold your tax refund, seize your real estate, personal vehicle(s), and other properties, and even take funds from your bank account or other financial accounts. Generally, the IRS will send a Final Notice of Intent to Levy before starting the levy (with some exceptions).
Requirements for IRS to Levy
Before the IRS can impose a levy, they must follow several requirements. The first is to assess the tax you owe and send a Notice and Demand for Payment. If you fail to pay what you owe, and you don’t take steps to resolve, the second requirement has been met. Finally, the IRS must send you a Final Notice of Intent to Levy and Notice of Your Right to a Hearing. The levy notice will be sent at least 30 days before the IRS imposes the levy. The IRS will usually send it to your last known address by registered or certified mail.
The IRS issues a levy when they determine that this is the next appropriate action to collect on what you owe. The levy will only happen if you do not pay the taxes you owe or make other arrangements to settle the debt. If you fail to pay, the IRS has the right to levy any property that belongs to you, including your personal assets, as well as property that is owned by another on your behalf. Examples include retirement accounts, wages, rental income, the value of a life insurance policy, commissions, dividends, accounts receivables, and licenses. The IRS can also issue a series of 1099 levies with collecting any income you’re owed as an independent contractor.
What is a State Tax Levy?
Tax levies are not limited to federal tax debt. States can also issue levies to collect on this type of tax debt. Many people who owe taxes to the federal government also owe taxes within the state where they reside. Each state has its laws and methods for collection, although many state agencies operate similarly to the IRS when issuing liens and levies. However, some states use their systems, so it’s essential to be aware of how your state will collect on any taxes you owe. It’s also important to note that you will need to fill out different paperwork and take action with a different agency to set up an installment plan, file an appeal, or submit an offer in compromise. Refer to our state tax relief section to resolve a tax levy in your particular state.
If you need tax forms for your state, you can get access to all the necessary forms in one place. Similar to the IRS, state governments can assess interest and penalties on any tax debt you owe. Additionally, states can revoke licenses issued by other agencies, such as driver’s licenses, hunting and fishing licenses, and even professional licenses. It’s rarer for a state’s government to revoke a professional license since that could impact a taxpayer’s ability to pay back their debt, but it is an option they have if the taxpayer is not responding to other methods of collection. Be aware of what consequences your state government can impose for failing to pay your tax debt.
What is a Tax Levy vs. a Tax Lien?
Many people confuse tax levies with tax liens. A levy is what permits the IRS or state government agency to seize your property to satisfy any tax debt you owe. A lien is a legal claim that can be made against your property to secure payment. A tax levy allows the IRS or state government to physically seize your property to satisfy that debt.
Before the IRS files a lien, you will receive a tax notice or bill. Failing to pay your owed taxes or set up a payment plan is considered neglect or refusal to pay, which allows for the next step in the collection process to be taken by the appropriate agency. If it’s federal tax debt, the IRS will file a Notice of Federal Tax Lien, a public document alerting creditors that the federal government legally has a right to your personal property. You can appeal this notice, which the IRS explains further in IRS Publication 1660.
If the IRS issues a tax lien against your property, you no longer have full ownership. For example, if you were to sell your home that has a tax lien against it, the IRS would be able to claim the profits of that sale to satisfy your debt before you would receive any funds. A tax lien can also impact your ability to obtain credit. Even though the credit bureaus no longer report tax liens, there are other reports that companies can obtain to see if the person trying to obtain credit has a tax lien filed against them.
IRS Tax Levy Process
Before issuing a levy, the IRS will go through several key steps. The first is assessing the tax you owe. This step usually occurs after you file your tax return, although if you fail to file a required return, the IRS can prepare a substitute for tax return (SFR) on your behalf. Either a filed tax return or an SFR can begin the levy process. If the IRS determines that you owe taxes, they will send a tax bill that demands payment.
Upon receiving a tax bill, it is your responsibility to take action by paying your owed taxes or looking into other options. If you are unable to pay the full amount, you can set up an installment plan, if you meet the requirements, or submit an offer in compromise. You can also appeal if you do not believe that the amount of tax debt is correct.
If you don’t take any action, this is considered to be a failure to pay the owed taxes. The IRS now has the right to levy your property in an attempt to collect. In most cases, you will receive a Final Notice of Intent to Levy and Notice of Your Right to a Hearing 30 days before seizing your assets. After sending that notice, the IRS then has the legal right to seize any funds in your financial accounts, your personal vehicle(s), real estate, wages, and other funds and assets.
If you receive a Notice of Intent to Levy from the IRS, this experience often brings worry and fear. You may not know what to do next, or how to prevent your assets from being seized. You usually only receive this notice if your tax debt is severely delinquent and you haven’t made any attempts to resolve it. The IRS will send a notice for each period and tax amount you owe. In most cases, the IRS doesn’t have the legal authority to seize your property unless they send a notice to you.
This notice states that the IRS is taking action against you in an attempt to collect on a debt you owe. The action they can take is seizing your personal property and income, potentially leaving you with enough to cover the bare essentials. For more information on how much of your income is exempt from a federal tax levy, review IRS Publication 1494.
If you receive a notice in the mail from the IRS, it’s important to know what your rights are as a taxpayer. If you can pay the full amount you owe, doing so will resolve this issue quickly and efficiently. However, if you are unable to do so, you do have other options.
Upon receiving a Notice of Intent to Levy, it’s important to act quickly. The IRS can begin seizing your assets 30 days after sending the notice, which can impact your financial situation dramatically. By taking action, whether you’re filing an appeal, setting up an installment agreement, or paying your taxes in full, you can reduce the risk of the levy happening to you.
Types of Intent to Levy Notices
The most common notices and letters used by the IRS in a tax levy include:
This is the formal notification used by the IRS stating they can start levying your personal assets within 30 days of sending the notice.
CP 297 is the formal notification most often used by the IRS stating that they can start levying your company assets within 30 days of sending the notice. It is nearly identical to CP 90, although the IRS uses this notice for businesses rather than individuals.
CP 504 notice informs you that the IRS plans to seize your state tax refund. It also outlines the rights held by the IRS to levy your property or rights to property and apply the funds generated from seizing your assets. Additionally, CP 504 may warn you that the IRS could file a tax lien against you if the refund you are owed is not enough to cover the full amount you owe in tax debt. If you receive this notice, you will also receive LT 11 or LT 1058, which informs you of your right to appeal.
LT 11 is a letter notification from the IRS that it plans to issue a levy against your property. If you receive this letter, it will usually come with Form 12153, which is the form you need to complete and file if you want to appeal. You will also see a deadline on the letter, and if you don’t take any action by that date, the IRS can start seizing your assets.
This letter serves as a final notice from the IRS, informing you of your unpaid tax debt. It explains in detail why the IRS is contacting you and what action you need to take to prevent further collection efforts. The letter will also include a table that outlines how much you owe, as well as the tax return you filed and the last date of the tax period for which you owe taxes.
If you receive any of these notices in the mail, it’s important to act quickly. Failure to respond can impact your financial situation and even negatively impact your credit history, making it more difficult to qualify for loans in the future.
Exemptions to the 30-Day Rule
Certain exceptions do exist for the IRS to impose a levy and take action prior to the 30-day period.
- The first exception is a jeopardy levy. A jeopardy levy when the IRS feels that their ability to collect on your tax debt is in jeopardy. Examples of this include if a taxpayer is planning to leave the country or attempting to move assets out of IRS reach. Even if a taxpayer’s financial solvency “is or appears to be imperiled,” this can qualify as a jeopardy levy and the IRS can take immediate action.
- Another exception is called a disqualified employment tax levy. The IRS can serve this type of levy to collect employment taxes that an employer hasn’t paid. This situation usually only occurs if you requested a Collection Due Process appeal on employment or payroll taxes for other periods in the past two years.
- Federal contractors are also exempt from the requirements. The IRS can begin a tax levy on a federal contractor without sending the required notices and without offering hearing rights 30 days before starting the process of seizure.
- If the state owes you a tax refund, the IRS can also seize this without giving you notice of a levy.
IRS Tax Levy Types
The IRS has the right to levy just about any of your assets, income, and property to satisfy a debt. Some of the most common types of levies are outlined below.
Wage garnishment is a common type of levy issued by the IRS. If they choose to take this action against you, they will send Form 668-W to your employer. The notice to your employer will require them to withhold your wages or salary, including any bonuses, fees, and/or commissions you receive. This form also provides an intent to levy any retirement or benefit income held by the employer. Upon receiving Form 668-W, an employer usually has one full pay period before they must send any of the employee’s wages to the IRS. Employers will usually inform employees that they have received Form 668-W and encourage employees to contact the IRS to resolve the debt.
Form 668-W allows for continuous levies of salaries, wages, retirement income, pension income, and other forms of income, which means that this type of levy will be in effect until it is released. Employers must use IRS Publication 1494 to determine how much to withhold from the employee’s wages, as the individual will still receive some income to cover their necessary expenses. This publication is a table that outlines how much income is exempt from a levy, based on the taxpayer’s filing status and the number of dependents.
A bank levy allows the IRS to seize funds from your personal and/or business bank account(s). The Internal Revenue Code requires the IRS to provide a 21-day waiting period for you to comply with the levy, which provides time for you to contact the IRS and either pay the tax debt, file an appeal, or set up an installment agreement. Although you have 21 days before the IRS will start seizing your funds, the bank will freeze the funds in your account(s) as of the day and time you receive the levy. If you add additional funds to your account (s), these funds would not be impacted by the levy in most cases.
Social Security Levy
As of 2002, Social Security benefits paid under Title II (Federal Old-Age, Survivors, and Disability Insurance Benefits) are subject to a 15% levy under the Federal Payment Levy Program (FPLP) to satisfy the tax debt. However, any lump sum death benefits and benefits paid to children are not included under the FPLP. Supplemental Security income and payments with partial withholding that are repaying a Social Security debt are also not eligible to be levied under the FPLP.
In 2011, new restrictions under the FPLP also restrict levying on taxpayers who receive Social Security payments but have income that falls at or below levels established under the Department of Health and Human Services poverty guidelines. Before the IRS can levy your Social Security payments, you will receive a Notice of Intent to Levy in the mail. The process to begin the levy is the same as it would be if you were earning a regular income at a job.
If you’re an independent contractor who receives 1099 income, the IRS can levy this income as well. Additionally, the IRS can issue a set of levies that allows them to continue to collect on any 1099 payments you receive until you pay the full amount of the debt off.
Any tax refund you qualify for can also be used to offset your tax debt. Even if you are in an installment agreement and making your payments each month, your refund amount would still be applied as an offset to the total debt. The Department of Treasury’s Bureau of the Fiscal service handles the offset program, not the IRS.
If your refund qualifies for the offset program, you will receive a notice in the mail outlining how much of your refund is being applied and the total refund you are owed. The notice will also state which agency received the funds, as your refund can be used to pay off federal agency debts (such as student loans), child and spousal support, unemployment compensation debts, and state income tax obligations. You can dispute the offset by contacting the agency that received the offset amount from your refund.
In addition to seizing the funds in your financial account(s), your wages, and your tax refund(s), the IRS can seize miscellaneous assets from you under a levy. Some of these include your vehicle(s), boat(s), real estate properties, and funds in accounts managed by third parties on your behalf.
Assets Exempt from IRS Tax Levies
Although the IRS can seize many of your assets as part of the levy process, some assets are exempt from seizure. These include:
- Unemployment benefits.
- Income from court-ordered child support payments.
- Minimum exemption for salaries/income.
- Tools necessary for profession, business, or trade (up to a certain value).
- Worker’s Compensation.
- Assistance under the Job Training Partnership Act.
- Certain pension and annuity payments.
- Principal residence (in most cases, a U.S. District Court Judge must approve the sale of a principal residence).
- Household items and furniture (up to a certain value).
You have the legal right to appeal a tax levy, but you must act quickly as the IRS can start seizing your assets within 30 days of sending the notice. To begin the process of an appeal, call the phone number listed on the notice. You can also file an appeal, which will put your case on hold until the appeal process is complete.
Reasons to Appeal a Tax Levy
Some of the most common reasons for appealing include:
- The IRS made a mistake and you don’t owe the amount the IRS is imposing on you.
- You have an installment agreement set up and are making regular payments.
- There is no balance owed. You have paid taxes in full.
- You submitted an offer in compromise.
- Your spouse or ex-spouse is solely liable for the tax debt.
- You are filing bankruptcy. (Note: Although bankruptcy doesn’t eliminate tax debt, the process of filing does halt collection activity until the steps are complete. If this applies to you, make sure to request assistance from your bankruptcy or tax attorney to file an appeal on this basis.)
- The statute of limitations has expired. (In most cases, the IRS has ten years to collect a tax debt. If your debt is beyond this statute of limitations, you can appeal based on the fact that the IRS no longer has the right to levy.)
How to Appeal a Tax Levy
To appeal, there are two main methods. First is to file IRS Form 12153, which is the Request for Collection Due Process or Equivalent Hearing. Second method is to file IRS Form 9423, which is the Collection Appeals Request. Below are the differences between the two options. If you choose to appeal, you should also request a hearing. If you’re able to resolve the tax issue before the hearing date, you can always cancel it. As long as your appeal is in pending status, the IRS cannot garnish your wages or take your assets.
- Request for Collection Due Process (CDP): You can file this type of appeal before or after the levy. This type of appeal gives a bit more flexibility if you don’t agree with the outcome of the appeals decision. This appeal allows you to it in Tax Court if you don’t agree with the outcome. To request this type of appeal, you must complete IRS form 12153, Request for a Collection Due Process or Equivalent Hearing.
- Request for Collection Appeals (CAP): You can file for this type of appeals before or after the levy. Before submitting the filing, you will need to discuss your case with a Collections manager at the IRS. After your conference with the Collections Manager, you will have two days to submit IRS Form 9423 (Collection Appeals Request Form). Unlike the CDP request, with a CAP request, you can’t contest their decision. Therefore, the decision of appeals is binding. This type of appeals process is much faster than going through the CDP process.
You can get a tax levy released by taking one of the following actions:
Pay in Full
The fastest way to stop an IRS levy is to pay the amount you owe in full. However, depending on what you owe in tax debt, you may not be able to pay it all in a lump sum. It’s always best to understand what options are available to you if you can’t pay the full amount.
The IRS allows taxpayers to set up installment agreements. If you choose this option, you will be able to make monthly payments on your tax debt. Setting up an installment agreement can reduce a failure to pay penalty imposed by the IRS, but you will still be responsible for interest accrued over the length of the installment plan. However, as long as you make your payments on time and pay the required amount each month, the IRS rarely engages in collection activities, such as imposing liens or levies.
You can choose to submit an offer in compromise. According to information released in the 2018 IRS Data Book, the IRS accepted 40.7% of offers in compromise during the 2018 fiscal year. However, submitting an offer in compromise can be complicated. It is a good idea to consult with a tax professional before taking this action. The IRS most likely will not levy assets while they are reviewing an offer in compromise application. However, you must submit the offer before the levy starts. If you submit the offer after the levy has started, it will not stop the levy. If the IRS accepts your offer, all collection activity will cease.
Another option is to file for Innocent Spouse Relief. This only applies if the tax debt is the sole responsibility of your current or former spouse. The IRS has strict qualifications for this option, which you can read more about in IRS Topic 205.
If paying your taxes would create an extreme hardship, you may qualify for Currently Not Collectible (CNC). Pursuing this option requires you to submit all necessary documentation. The information needed will include financial records, that show that paying the full amount owed would create a financial hardship.
Identify theft is a common problem, especially in today’s digital world. In 2018, the IRS, state agencies, and many in the tax industry enacted new safeguards to protect tax-related identity theft, but it can still happen to anyone. If someone used your stolen Social Security number to file a tax return, you need to take immediate action. You may be unaware of this until you file a return and your return. If you receive a tax levy for a tax return that you did not file, you could be facing identity theft.
If this happens to you, it’s important to file your accurate tax return on time and pay any taxes you do owe. You may have to file by mail since the e-filing process will likely reject a second return with the same SSN. Next, you will need to file a complaint with the Federal Trade Commission and contact the major credit reporting agencies to report fraud. It is also a good idea to change your bank account information to protect your assets.
If you do receive a fraudulent tax levy, you need to respond to any IRS-issued notices you receive by calling the number listed. You will then need to complete IRS Form 14039, which is the Identity Theft Affidavit. After taking all the necessary steps, the IRS will work with you to remove the levy.
It’s clear that an IRS or state tax levy is confusing and overwhelming to you as a taxpayer. At TaxDebtHelp.com, we’re here to assist if you receive a Notice of Intent to Levy or a notice from your state tax agency. We start by providing you with a free consultation, where we’ll collect information about your levy and your financial situation. From there, we can give you a proposed plan of action to release or stop the levy, as well as give you information about any associated fees you can expect to pay. We can also work with you to provide or complete any necessary IRS forms.
A tax levy is the most powerful action the IRS can take to collect what you owe. The IRS has more rights than other creditors, so they can take more serious action against you. The only way to stop a tax levy is to work with the IRS. We can help you figure out the next steps to remove the levy and free yourself from the burden of tax debt.