A tax levy is a process that the IRS and local governments use to collect the tax money that they're owed. Through a tax levy, you may have money taken from your bank account, garnished from wages, seized through the property you own, and more.
Tax debts are among some of the most difficult debts to eliminate. Even bankruptcy can’t wipe out all of the taxes you owe, and taxing authorities have more power than other types of creditors to seize assets. A tax levy can happen without taking you to court and winning 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.
Learn more about what a tax levy is, when it can happen, and how to stop one that’s in progress.
Definition and Examples of 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 tax debt is satisfied.
- Property seizure: The IRS can take the property you own (such as a house, boat, or vehicle), 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 tax refund. The IRS can levy state and municipal refunds as well as federal refunds so that the state will send funds to the IRS instead of to you.
- Other options: Taxing authorities can collect money in surprising ways. If you don’t have liquid cash to satisfy tax debts, they may be able to find other forms of value, such as your Social Security benefits or business assets.
Creditors generally prefer bank account levies because cash is the easiest type of asset to deal with (from their perspective). Going after your vehicle or other assets may take more effort.
As a government agency, 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, or a credit card issuer), the IRS has a good chance of collecting first.
How Does a Tax Levy Work?
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 tax levy from taking place.
The IRS is required to notify you by mail of any tax that you owe, 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 tax levy may be imminent; the IRS could seize the funds or your property in 30 days. At that point, it’s wise to contact the IRS and clear things up as soon as possible.
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.
Can a Tax Levy Be Released?
It is possible to get a tax levy released. You have the right to appeal the event and prevent a tax levy from moving forward. You can even request that creditors return levied assets to you after the fact.
To complete an appeal, contact the IRS immediately to arrange to pay your tax bill and request a tax levy release. When you submit an appeal, you are working with the IRS Independent Office of Appeals, which is separate from the Collections office.
If you need additional help appealing a tax levy in order to get it released, ask a certified public accountant (CPA), Enrolled Agent (EA), or local tax attorney how to proceed.
Tax 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 for other reasons.
The IRS must release a levy if:
- You paid the amount you owe
- The collections period ended before the levy was issued
- You will be able to pay your taxes if the levy is released
- You set up an Installment Agreement and the terms do not allow for the levy to continue
- The value of the property is greater than what you owe and releasing the levy wouldn't stop the IRS from collecting the amount owed
If the tax levy would create an extreme financial hardship for you, the IRS may hold off on collecting. However, as long as the tax debt still exists, you will need to deal with it eventually.
Tax Levy vs. Tax Lien
|Tax Levy||Tax Lien|
|Legal seizure of property or assets||Legal claim against property for future payment|
|Not a public record||Public record|
|Should not impact your credit report||Will likely impact your credit report|
As an alternative to a tax levy, the IRS can also place a tax 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 tax lien, the IRS files documents at local government offices, making a public record of the interest. Because it's a public record, it could impact your credit report. A tax levy is not a public record and should not impact your credit report.
A tax lien can cause problems if you ever 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.
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 by using the approaches below.
Pay Your Tax Bill in Full and on Time
Paying any taxes you owe 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. You can also work with a nonprofit credit counselor or a local attorney if you need more information and advice.
Pay Your Tax Bill Over Time
You don’t always have to pay your full tax bill in April. If you’ve fallen on hard times, it may be possible to set up a payment plan with the IRS 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.
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.
- A tax levy is a legal process that the IRS takes in order to seize the money you owe in taxes.
- The IRS can garnish wages, take money from your bank account, seize your property, and more if you fail to pay your tax debt.
- You can appeal a tax levy and try to get it released, but you will still need to pay the tax debt eventually.
- To prevent a tax levy, pay your tax bill in full and on time, set up a payment plan with the IRS, or consider an offer in compromise if your current situation means you're unable to afford your tax bill.