What is a tax levy?

If you receive a tax bill from the Internal Revenue Service (IRS), neglect or refuse to pay your taxes, and don't make any arrangements to settle your tax liability, you could face the risk of a tax levy.

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. A tax lien is different from a tax levy:

• A tax lien lets you know that a 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.

The statute of limitations for the IRS to pursue unpaid taxes is generally 10 years from the date the tax was assessed.

The IRS will generally take certain steps before they levy. First, they will investigate the status of the property. By law, they must send a series of reminder notices and then a final reminder, "Notice of Intent to Levy." In addition, 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," explaining its intent to levy, the reason, and your options.

If you don't pay or make arrangements to pay your taxes 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.

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

What assets does a tax levy affect?

The IRS can levy 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.

The IRS can also levy property that is yours but is held by others, including 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 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.

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 hardship that would be caused by the levy.

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 have any questions or disagreements about the amounts you may owe.

If you don't agree with the intent to levy, you can file a form to request a Collection Due Process hearing within 30 days from the date of the IRS notice. There are exceptions for when the IRS doesn't have to offer you a hearing before seizing your property under a levy. In such situations, the IRS will send a letter explaining the process. 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.

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.

If you disagree with an IRS decision about a levy—whether before or after the IRS files a notice or seizes your property—you may be able to appeal under the Collection Appeals Program. There are different deadlines for the appeal depending on the type of asset. IRS Publication 1660 explains this process.

How to resolve a tax levy

The IRS may be required to release a levy under certain circumstances. These include:

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

Filing for bankruptcy can result in getting a tax levy released, 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.

An IRS levy can affect your ability to leave the country. Besides the serious economic consequences of a tax levy, under the FAST Act of 2015, the IRS must notify the State Department about taxpayers owing "seriously delinquent tax debt," defined as federal tax debt (including penalties and interest) of more than $51,000, for which a levy was issued. In this case, the State Department may revoke—or refuse to issue or renew—your U.S. passport.

IRS Publication 594 contains information about the IRS collection process, including tax levies and taxpayer rights. 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.