How a Tax Levy Works

Man worried about an IRS tax levy from his paycheck
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Tax debts are among the most difficult debts to eliminate. Even bankruptcy can’t wipe out all of your taxes owed, and taxing authorities have more power than other types of creditors to seize assets.

For example, the IRS can use a tax levy to take property without the need to take you to court and win a judgment against you. A bank or credit card company, on the other hand, would have to successfully bring a lawsuit against you and meet other requirements.

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

What Is a Tax Levy?

A tax levy is a procedure that the IRS and local governments use to collect money that you owe. Tax levies can collect funds in several different ways, including taking funds from your bank account or garnishing your wages. Some of the most common strategies include:

  • Bank levies: The IRS can require your bank to prevent withdrawals from your account for 21 days and then withdraw funds from your account. The bank must then forward the money you owe to the IRS.
  • Wage garnishment: Your employer is required to hold back a portion of your pay and send it to the IRS until your debt is satisfied.
  • Property seizure: The IRS can take the property you own (such as a house or automobile), sell it, and apply the sales proceeds to your tax debt.
  • Reduced tax refunds: The IRS may hold money that would otherwise come to you via a refund. What’s more, the IRS can affect state and municipal refunds (the state will send funds to the IRS instead of to you).
  • Other options: Taxing authorities can collect in surprising ways. If you don’t have liquid cash to satisfy debts, they may be able to find other forms of value.

As a government body, the IRS has more power than other creditors, so the IRS can effectively jump to the front of the line. If you owe money to multiple creditors (such as the IRS, a mortgage lender, and a credit card issuer), the IRS has a good chance of collecting.

What to Expect

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 seizing assets, creditors should provide plenty of warning. Ideally, you’ll find ways to prevent the levy from taking place.

The IRS sends 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. At that point, it’s wise to contact the IRS and clear things up as soon as possible.

Don't panic: Sometimes the Notice of Intent arrives early. It may come in the mail before a tax bill, for example, making you wonder how you missed any previous notifications. 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). Going after your vehicles or other assets takes more effort.

How to Release a Tax Levy

Clearly, 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 event and prevent a levy from moving forward. You can even request that creditors return levied assets to you after the fact. To complete an appeal, ask the IRS for guidance and see Publication 1660. If you need additional help, ask a CPA, Enrolled Agent (EA), or local tax attorney how to proceed.

Levies are generally released when you pay off your tax debt. But in some situations, you can appeal and have the IRS release a levy. If the levy would create an extreme financial hardship for you, the IRS may hold off on collecting. But the debt still exists, and you need to deal with it eventually. In some cases, an innocent spouse who unwittingly gets dragged into tax debt can find relief.

How to Prevent a Tax Levy

There are methods you can employ to limit the chance of having a tax levy placed on your assets. If you can’t prove that the levy is unfair, you may still be able to prevent a levy with the approaches below.

#1. 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.

#2. Payment Over Time

You don’t always have to pay 100 percent of 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 more extended period. You may still owe interest and penalties, but formalizing an installment plan with the IRS prevents them from assuming that you simply decided not to pay

#3. 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.

Levy vs. Lien

As an alternative to a levy, the IRS can also place a lien on the 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 at some point in the future. With a levy, the creditor follows through with taking your assets.

Liens give creditors interest in your assets, helping them secure a future payment. For example, there might be a lien on your home, giving the IRS interest in that asset. To create a lien, the IRS files documents at local government offices, making a public record of the interest.

A lien can cause problems if you want to sell or refinance an asset because the tax debt needs 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, so they’re typically reluctant to approve a loan on a property with outstanding liens.