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.
What Is a Tax Levy?
The IRS defines a tax levy as "a legal seizure of your property to satisfy a tax debt." A levy is different from a lien because a levy actually takes the property to satisfy your tax debt, while a lien is a legal claim against your property and current and future rights to property as security for payment of the tax debt.
The IRS will generally take certain steps before they levy. By law, they must send a series of reminder notices and then a final reminder, "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," 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 from the Final Notice, the IRS may levy your property or rights to property and apply any amounts it collects to the taxes you owe.
The IRS can also take levy actions against employers if they do not pay federal tax deposits—the federal income taxes, Social Security and Medicare taxes, and unemployment taxes it withholds from employees. The IRS can also apply a failure to deposit penalty up to 15% of the amount of employment taxes not deposited.
What Assets Does a Tax Levy Affect?
The IRS can levy property (or rights to property) you own, like your car, house, or boat. If the IRS seizes assets, they sell them at fair market value and apply the net proceeds to your tax debt. You would get any money left over as a refund. The IRS can't seize this type of property unless they expect sufficient net proceeds to pay your tax obligation. There are also limits on seizing a primary residence and certain business assets. Property seizures are usually for serious situations like 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, qualified pension, profit-sharing, and stock bonus plans under ERISA, self-employed retirement plans like SEP and Keogh plans, and thrift savings plans. The IRS can also apply any future federal or state tax refunds to past taxes you owe.
The IRS can't seize the following payments: unemployment, worker's compensation, child support, certain public assistance and disability payments, and certain annuities and pension benefits.
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 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. These include levies to collect taxes from state tax refunds or to collect a federal contractor's tax debt, or if tax collection is determined to be in jeopardy. In these situations, the IRS will send a letter explaining the process.
If you disagree with an IRS decision about a levy, before or after the IRS files a notice or seizes your property, you may be able to appeal it 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 must release a levy under certain other circumstances. These include:
- If you pay the amount you owe
- If the levy creates 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 because of its other implications on your business and credit going forward.
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.
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 will generally not issue or renew, and may revoke, 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.