Tax Levy 101: What the IRS Can Take and How To Stop It

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Although paying taxes can be a burden, the alternative of having to deal with the Internal Revenue Service or your state’s Department of Revenue is even less enjoyable. If you owe back taxes, you may face serious consequences through a tax levy.

Owing back taxes isn’t something to take lightly because the IRS will inevitably get around to collecting them from you. Ignoring IRS tax liens and tax levies placed on your property could mean you lose it to the government due to your outstanding debts.

What Is a Tax Levy?

The IRS can impose a tax levy, which allows the agency to seize your property in order to collect unpaid tax debt.

What Can the Government Levy?

“The government can levy salaries, social security payments and bank accounts. Even accounts receivable owed to a business can be levied,” says Gary Massey of Massey and Company CPA.

While the IRS is the most common authority to impose a tax levy, state, county or local governments can also issue them. This guide focuses primarily on IRS levies.

A tax levy occurs when the government seizes your property to pay off outstanding taxes. It usually follows a Notice of Intent to Levy and can result in garnished wages, frozen bank accounts or the seizure and sale of physical assets.

Here are some key points to know:

• Tax levies are generally a last resort used to collect unpaid or back taxes.
• The IRS must assess the tax and send multiple notices before a levy takes effect.
• When the levy is enforced, the IRS may seize property equivalent to the debt you owe.
• Levied assets can include wages, bank accounts, real estate or other personal property.
• The IRS will sell the seized property and the proceeds will go toward your tax debt.
• A federal tax lien is a legal claim on your property, while a tax levy is when the government takes action on that claim.

Tax Levy vs. Tax Lien: What’s the Difference?

Here’s a quick comparison between a tax levy and a tax lien:

Tax Lien

• A lien is the first step before a levy.
• It establishes a legal claim to the taxpayer’s assets to satisfy a tax debt.
• It does not involve taking possession of the assets — just puts other creditors on notice.

Tax Levy

• A levy starts the process of actually taking possession of the taxpayer’s assets.
• The IRS uses it to seize property or funds in satisfaction of a tax debt.

3 Examples of Tax Levies

Tax levies come in several different forms. Here are the three types of tax levies the IRS can institute.

1. Wage Levy

The government can garnish your wages to recover what you owe in taxes.

After a wage levy is instituted, you might still receive a portion of your wages that is exempt from the levy based on the standard deduction and your personal allowance. However, any income in excess of that amount will be paid directly to the IRS.

The levy can continue until you’ve repaid your debt to the IRS.

2. Account Levy

The government can place a levy on your accounts, such as bank accounts or retirement accounts, for unpaid taxes.

After 21 days, the notice period for you to contest the levy or make other arrangements to pay the tax due will expire.

The bank or other financial institution will then turn over the money in the account to the government to pay down your tax debt.

3. Asset Levy

The government can take your assets, such as your house or car, and then sell them.

The proceeds of the sale, after paying off any debts on the property and the costs of the sales process, are applied to your tax debt. If there are excess proceeds, those will be returned to you.

Are There Limits on Tax Levies?

“Usually, the IRS cannot garnish more than 25% to 50% of wages,” says Mark Luscombe, of Wolters Kluwer Tax & Accounting.

The IRS cannot levy on:

• Unemployment benefits
• Worker’s compensation benefits
• Disability payments
• Some annuity and pension benefits

For example, if you earn $1,000 per week, the IRS might take $250 to $500 out of your paycheck each week until you’ve repaid your tax debt.

Luscombe also explains why and how the IRS could levy your home:

“The IRS will usually only levy on a personal residence as a last resort. The IRS will only levy to the extent necessary to collect the tax due, although the IRS might levy and sell an asset worth more than the tax due in order to secure the amount of tax due.”

Preventing Tax Levies: 3 Ways To Know

Besides the obvious answer of paying the taxes you owe on time, there are several ways to avoid tax levies.

1. Work Out a Repayment Plan

Preventing a tax levy starts with proactive communication with the IRS.

• Communicate with the IRS when trouble arises rather than ignoring the problem in hopes that it will go away.
• If you reach out to the IRS, you can often work out a way to repay what you owe in installments you can afford.

Generally, the IRS won’t levy your property if you have a current or pending installment agreement, offer in compromise or if the IRS agrees you can’t pay because of financial hardship. 

2. Update Your Mailing Info

Another key is ensuring your information with the IRS is up-to-date so that you receive and respond to all relevant communications.

Complete IRS Form 8822 to update the address and information for yourself and any dependents that you claim when filing your income tax return.

3. Contact a Tax Relief Company

If you can’t pay your tax bill, don’t ignore it and hope that the IRS won’t notice. Instead, seek help from tax relief companies.

Here are a few to consider:

• Tax Relief Advocates
• Anthem Tax Services
• CommunityTax
• Fortress Tax Relief
• Larson Tax Relief
• Precision Tax Relief
• Tax Defense Network

How To Remove a Tax Levy

Aside from paying your back taxes, there are other ways you can get rid of tax levies. Here are some paths to consider if you are experiencing financial difficulties and need help removing a tax levy:

• Request a payment plan:
  • If you can’t pay what you owe upfront, ask the IRS for a payment plan. Although you’ll need to keep up with the payments, it could offer a way to keep things under your control.
• Tax relief services: 
  • By evaluating your returns, tax debt relief companies can help to minimize your tax debt.
• IRS Fresh Start Program:
  • These initiatives can include payment options such as an offer in compromise, installment agreement, penalty abatement or Currently Not Collectible status.
• File an appeal:
  • You can ask the IRS Office of Appeals for a collection due process hearing.
• File for bankruptcy:
  • Though this would mean a lot of credit and financial rebuilding, it can remove tax debt. 

Use a Budget To Speed Up Tax Repayment

If you decide to accept a payment plan, make a realistic budget to stay on track. If you can pay off the tax debt on an accelerated timeline, you could even save on interest, reducing the overall amount of the debt.

Keep in mind that missing a payment could lead to a levy getting placed on your resources again.

Here are some basic steps to follow as you build a budget:

1. List all sources of income and essential expenses, such as housing, utilities and food.
2. Identify areas where you can cut costs, like dining out or subscriptions, to pay more towards tax debt.
3. Set a realistic monthly payment goal and automate it to ensure consistency.
4. Consider consulting a financial advisor or using budgeting tools for additional guidance.
5. Regularly review and adjust your budget in case of changes so that you continue to make progress.

Final Take 

No one likes paying taxes, but dealing with a tax levy is even less enjoyable. If you find yourself struggling to pay your taxes, there are plenty of ways you can alleviate your debt or establish more palatable payment options. Start by exploring IRS relief programs and repayment plans to avoid the worst-case scenario of a tax levy.

Aja McClanahan, Sarah Sharkey and Michael Keenan contributed to the reporting for this article.

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