What Is a Tax Levy and How Can You Prevent It?

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No one enjoys paying taxes, but the alternative of having to deal with the Internal Revenue Service or a state department of taxation is even less enjoyable. Owing back taxes isn’t something to take lightly, and the IRS will inevitably get around to collecting them from you. If you ignore tax liens placed on your property, you could lose it to the government.

What Is a Tax Levy?

A federal or state tax levy occurs when the government seizes your property to pay off taxes that you owe. It’s generally a last resort used to collect the taxes you owe or back taxes you still haven’t paid off. When the levy takes effect, the property is taken by the IRS and the amount seized, or the proceeds from the sale, are used to pay down your debts. An IRS tax levy is serious. Usually, it’s only used after the tax has been assessed, a bill has been sent, the taxpayer didn’t pay the bill and additional notices have been sent stating the IRS’ intent to levy your property.

Read: How To Minimize Tax Debt

Types of Tax Levies

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

  • Wage Levies: The government can levy 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.
  • Account Levies: The government can place a levy on your accounts, such as bank accounts or retirement accounts, for unpaid taxes. After a 21-day notice period for you to contest the levy or make other arrangements to pay the tax due, the bank or other financial institution will turn over the money in the account to the government to pay down your tax debt.
  • Asset Levies: The government can take your assets, such as your house or car, and then sell it. 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.
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How To Prevent Tax Levies

Besides the obvious answer of paying the taxes you owe on time, another key to avoiding an IRS tax levy is to communicate with the IRS when trouble arises rather than ignoring the problem in hopes that it will go away. 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 economic hardship. For example, if you can’t pay your tax bill, don’t ignore it and hope that the IRS won’t notice, or blow off letters that you receive from the IRS stating that IRS’ intent to levy your assets. If you’re in that situation, seek tax help, such as from an IRS Taxpayer Assistance Center.

Don’t Forget: The 6 Most Important Tax Deductions You Need To Claim


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    About the Author

    Michael Keenan is a writer based in the Kansas City area, specializing in personal finance, taxation, and business topics. He has been writing since 2009 and has been published by Quicken, TurboTax and The Motley Fool.
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