Tax Levy Basics

You can Stop or Prevent Tax Collection by Levy

IRS Collection
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A tax levy is a collection tool for the IRS and local governments. Using a levy, these entities are allowed to take possession of your assets, including cash in your bank account, your future earnings, or other assets that can satisfy the tax debt.

Fortunately, it’s possible to prevent a levy from happening (or stop one that’s in progress).

Tax Levy Basics

Tax debts are among the most difficult debts to eliminate.

They don’t always go away in bankruptcy, and taxing authorities have more power than other types of creditors.

The best example of that power is a tax levy: the IRS seizes property to satisfy your tax debts without taking you to court and winning a judgment against you. A bank or credit card company, on the other hand, would have to bring a lawsuit against you and jump through more hoops to collect.

In addition, the IRS can jump to the front of the line. If you owe money to multiple creditors (such as the IRS, a mortgage lender, and a collection agency), the IRS has the power to get paid before anybody else.

What Happens with a Tax Levy?

A levy gives the IRS the ability to take your property. That can happen in several ways, including:

  • Bank levy, where money is withdrawn from your bank account and sent to the IRS
  • Wage garnishment, where your employer is required to send a portion of your pay to the IRS until your debt is satisfied
  • Seizure of property, where the IRS takes property you own (such as a house or automobile), sells it, and applies the sales proceeds to your tax debt
  • Taking tax refunds, including state and municipal refunds due (the state will send funds to the IRS instead of to you)

Those are just a few of the most common examples, but there are other ways to levy your assets.

Levy vs. Lien

As an alternative to a levy, the IRS can also place a lien on property that you own. A lien is different from a levy because a lien gives creditors the ability to potentially take and sell your assets. With a levy, your assets are actually taken.

A lien secures the debt by giving the creditor an interest in your asset (for example, there might be a lien on your home). To create a lien, the IRS files documents at local government offices, making a public record of the event. A lien can cause problems if you want to sell or refinance an asset because the tax debt will need to be paid or settled before you have free-and-clear control of the asset. Lenders don’t want to get in line behind the IRS.

Getting a Tax Levy

If you owe money to the IRS or any other taxing authority, a levy is always a possibility. However, it’s usually an option-of-last-resort: before your assets are seized you should have plenty of warning, and ideally you’ll find ways to prevent the levy.

The IRS will send several letters before using a levy, so be sure to open your mail, keep your mailing address up-to-date, and communicate with the IRS if you’re having financial problems. If you receive a document titled Final Notice of Intent to Levy and Notice of Your Right to A Hearing, a levy may be imminent, and it’s a good idea to contact the IRS and clear things up as soon as possible.

Don't panic: all that said, sometimes the Notice of Intent arrives early – it may come in the mail before a tax bill, for example. This is definitely something to take seriously, but as long as you pay quickly (or work out an arrangement with the IRS) you should be able to avoid major problems.

Creditors generally prefer bank account levies, because cash is the easiest type of asset to deal with (from their perspective).

Releasing a Levy

Obviously, you’re not going to be happy about a tax levy. So what can you do to get the levy released? You have the right to appeal the action and prevent a levy from moving forward. You can even request that levied assets be returned to you after the fact. To complete an appeal, ask the IRS for guidance and see Publication 1660.

Levies are generally released when your debt is paid off.

However, in some situations, the IRS will release a levy while you still owe – especially when the action would create an extreme financial hardship.

Avoiding a Levy

Pay in full: paying taxes due, on time, is the best way to avoid problems. But that’s not always possible. When you’re having trouble with your taxes, speak with the IRS and find out what your options are. Visit a local nonprofit credit counselor and a local attorney if you need more information and advice.

Payment over time: you don’t always have to pay 100% your tax bill in April. If you’ve fallen on hard times, it may be possible to set up a payment plan that allows you to pay taxes over a longer period of time. Formalizing this plan with the IRS keeps them from assuming that you’ve simply decided not to pay.

Make an offer: you can also negotiate and try to settle your tax debts with the IRS. An offer in compromise allows you to show that you’d be unable to pay what you owe, given your income, expenses, and assets. If successful, the IRS will allow you to pay less than your full tax bill.