What Is a Tax Levy and How Do You Resolve It?

Tax levy vs. tax lien

The IRS defines a tax levy as "a legal seizure of your property to satisfy a tax debt." In the event of a tax levy, the IRS is legally permitted to garnish wages, pull from bank accounts, and seize vehicles, real estate, and other property of a delinquent taxpayer to satisfy the amount owed. Before the IRS carries out a tax levy, they alert you and creditors of their legal claim to your property. This claim is a public document called a Notice of Federal Tax Lien.

In short, the difference between a tax lien and a tax levy is as follows:

• A tax lien lets you know that the government is planning to take certain property of yours if you do not pay the taxes you owe.
• A tax levy is when the government actually takes and sells the designated property to settle your tax liability for you.

According to the Internal Revenue Code, you have the right to appeal a tax lien both before and after the IRS notice is filed to prevent a tax levy.

What assets can the IRS levy?

The IRS commonly uses the following methods to satisfy delinquent tax debt.

Property seizure

The IRS can levy (collect) property or rights to property you own, like your car, house, or boat. When the IRS seizes assets, they sell them at fair market value and apply the net proceeds to your tax debt. Any money left over is refunded to the taxpayer. Property seizures are typically reserved for serious situations such as tax fraud.

Asset account levy

The IRS can also levy property that is yours but is held by others, such as a bank or employer. For example, they may levy wages, commissions, bank accounts, retirement accounts, dividends, rental income, accounts and promissory notes receivable, and the cash surrender value of your life insurance policy. The holder of the assets may be obligated to send the money in your accounts to the IRS, and you will not be able to access them until your taxes are paid.

Wage garnishment

Wage garnishment is a common type of tax levy, where employers must send a specified percentage of each paycheck to the IRS. Banks may put a hold on available funds. Retirement accounts that can be seized include IRAs, self-employed retirement plans, military retirement pay, private pensions, thrift savings plans, profit-sharing plans, and stock bonus plans. The IRS can also apply any future federal or state tax refunds to past taxes you owe.

Levies against employers

Levies also apply to business taxes. The IRS can also take levy actions against employers if they don't make federal tax deposits (these include Social Security, Medicare, unemployment, and federal income taxes withheld from employees). In this case, the IRS can apply a failure-to-deposit penalty of up to 15% of the undeposited employment taxes.

Protected accounts

The IRS may not seize the following payments: unemployment, worker's compensation, child support, and certain public assistance and disability payments. The IRS also may not levy retirement accounts that you cannot access.

Before placing any levy, the IRS takes into consideration the egregiousness of the failure to pay as well as the immediate economic hardship that the levy would cause. The statute of limitations for the IRS to pursue unpaid taxes is generally 10 years from the date the tax was assessed.

The tax levy process

The IRS will generally take three steps before they levy.

Step 1. Notice and demand for payment

Before the IRS can carry out a tax levy, by law, they must send a series of reminder notices that inform you of your outstanding tax debt. Once the IRS has assessed the tax, you'll receive an initial bill called a "Notice and Demand for Payment." If you don't pay this bill, you'll receive a final notice.

Step 2. Final notice of intent to levy

At least 30 days before they plan to seize any assets, the IRS must send a "Final Notice of Intent to Levy" and "Notice of Your Right to a Hearing" (Internal Revenue Code, section 6331[d]). These notices explain the intent to levy, the reason, and your options, including your right to appeal in court.

Step 3. Collection Due Process (CDP) hearing

If you decide to appeal, the IRS Independent Office of Appeals will hold a Collection Due Process (CDP) hearing where you can dispute the amount you owe or discuss alternatives to enforced collection.

If you don't pay, make arrangements to pay, or request a hearing within 30 days of receiving the final notice, the IRS may levy and sell your property to pay off the taxes you owe.

Exceptions to the process

There are exceptions where the IRS doesn't have to offer you a hearing before seizing your property under a levy. These exceptions include levies to collect taxes from state tax refunds, levies on a federal contractor's tax debt, or levies where tax collection is determined to be in jeopardy. In such situations, the IRS will send a letter explaining the process.

A “jeopardy levy” is one where the IRS believes urgent action is required because the taxpayer is attempting to either hide assets, flee the country, or otherwise conceal themselves or their property. A jeopardy levy allows the IRS to seize assets without going through all of the traditional collection proceedings.

How to avoid a tax levy

The best way to avoid a tax levy is to file tax returns on time, pay taxes when they are due, and communicate timely with the IRS if you need an extension or have any questions or disagreements about the amounts you owe. You may be able to set up a payment plan for tax bills you're unable to settle right away if you communicate with the IRS proactively. 

If you don't agree with the intent to levy, file a form to request a Collection Due Process hearing within 30 days from the date of the IRS notice. Make sure you mail your protest to the IRS address listed on your CPD notice to avoid processing delays. There are different deadlines for the appeal depending on the type of asset. IRS Publication 1660 explains this process in detail.

How to resolve a tax levy

The IRS may be required to release a levy under certain circumstances, such as the following:

• You pay the amount you owe
• The statute of limitation expired before the levy was issued
• The levy would create an economic hardship so that you can't meet your basic and reasonable living expenses
• Releasing the levy will help you pay your taxes
• You enter into an installment agreement with the IRS whose terms don't allow the levy to continue

Filing for bankruptcy can result in certain tax levies being released to a certain extent, but you should consider this option as a last resort as it will severely impact your credit. Bankruptcy may end up costing more than you would otherwise have owed, after considering court fees and discounted fire sale proceeds.

The IRS generally uses levies as a final solution, so it is advisable to work with them to resolve payment of your tax debt rather than letting a levy occur. If you need help dealing with an IRS bill, requesting an installment agreement, or resolving a tax levy, reach out to a qualified tax professional.

FAQs

How long does a tax levy last?

The length of a tax levy depends on the circumstances of your case. Once you receive the "Final Notice of Intent to Levy," you have 30 days to pay off or protest your tax liability. Even after a bank levy is issued, you have another 21 days to address the debt. If you apply for an appeal, it may take several weeks to a few months to schedule a hearing and process your case. If a levy goes forward, it will last until your tax debt is paid or you set up an alternate payment plan with the IRS.

Does a tax levy affect my credit score?

Yes, depending on the amount you owe, a levy can affect your credit score. That said, a lien (notice of intent to levy) will not directly impact your credit score. Your credit score will only be affected if you don't resolve your outstanding tax debt. 

What are my rights if I receive a levy notice?

In most cases, you have a right to appeal collection actions to the IRS Independent Office of Appeals both before or after the IRS files a "Notice of Federal Tax Lien" or seizes your property. This means that you still have the right to appeal even if the IRS has begun collection actions. 

Who do I call about a tax levy?

If you receive a levy notice (tax lien) from the IRS, call the number listed on the notice to either resolve or dispute your tax liability. Don't hesitate to address the lien, as there are multiple ways to resolve this issue before and after the IRS issues a levy, including establishing a payment plan, applying for an Offer in Compromise, or disputing the charges.

Maria L. Murphy contributed to this article.