Levy

A levy allows a government agency or authorized creditor to collect a debt by taking a person’s or business’s property, money, wages, bank account funds, or other assets, as permitted by law. In tax matters, a levy often refers to the IRS’s legal seizure of property to satisfy an unpaid tax debt.

A levy differs from a lien. A lien gives a creditor a legal claim against property as security for a debt, while a levy can actually take the property or funds to help pay the debt.

Levy rules depend on the type of debt, the creditor, and applicable federal or state law. Taxpayers and debtors may have notice rights, appeal rights, or other options before or after a levy, depending on the circumstances.

Common types of levies

Levies can apply to different assets and debts, depending on the authority involved:

• IRS tax levy: The IRS issues this against a taxpayer with an unpaid federal balance who has not responded to collection notices. The IRS may seize wages, bank accounts, or Social Security benefits through the Federal Payment Levy Program.
• State tax levy: A state tax agency may use a levy to collect unpaid state taxes, such as income, sales, or payroll taxes. State rules and notice procedures vary.
• Judgment levy: After winning a lawsuit, a creditor may be able to use court-approved collection tools, such as a writ of execution, to collect from wages, bank accounts, or other property.
• Bank levy: A bank levy freezes money in a bank or financial account and may later transfer funds to the tax authority or creditor, subject to applicable rules and exemptions.
• Property tax levy: Local governments impose levies on real estate owners; failure to pay can result in a lien and, eventually, a forced sale.
• Wage levy or garnishment: A wage levy directs an employer to send part of a person’s wages to the tax authority or creditor. IRS wage levies are usually continuous until released or resolved.

How a levy works

A tax levy usually begins after a taxpayer receives notices and fails to pay or arrange payment. For an IRS levy, the IRS generally must assess the tax, send a Notice and Demand for Payment, receive no full payment, and send a Final Notice of Intent to Levy and Notice of Your Right to a Hearing at least 30 days before the levy. Some exceptions and special notice rules apply.

Once active, the issuing authority contacts third parties directly. A bank levy freezes funds up to the amount owed freezes funds in the account as of the date and time the bank receives the levy. A wage levy, also called wage garnishment, instructs an employer to withhold part of each paycheck and send it to the creditor or tax authority. The levy remains in effect until the debt is paid, the levy is released, the parties make another arrangement, or the legal collection period ends.

Key characteristics

A levy has specific legal properties that distinguish it from other collection tools.

• Legal authority is required. A levy can be issued by a government agency with statutory authority or, in civil debt cases, through court-approved collection procedures.
• It involves actual seizure. Unlike a lien, which creates a claim against property, a levy takes property, money, or rights to property to pay a debt.
• Some assets are exempt. Federal and state law protect certain assets. The IRS exempts a portion of wages under Publication 1494, unemployment benefits, and some public assistance payments.

Levy vs. lien

A lien is a legal claim placed on property as security for a debt. It does not, by itself, take money or transfer property. A levy is the enforcement action that actually seizes property, money, or rights to property.

In tax collections, a lien may come before a levy. A tax authority may first establish or record its claim against property, then use a levy if the taxpayer still does not pay or make arrangements to resolve the debt.

Why it matters for business owners

For businesses, a levy can quickly disrupt operations. A frozen business bank account can affect payroll, vendor payments, rent, tax deposits, and daily cash flow. A levy on accounts receivable can also redirect customer payments to the tax authority or creditor instead of the business.

Prompt response to any notice of intent to levy is critical. Options may include requesting a Collection Due Process hearing, submitting an offer in compromise, or arranging an installment payment plan. These options are time-sensitive and generally must move forward before the levy takes effect.

Related terms

A levy connects to several related concepts in tax compliance and business standing that determine a business's vulnerability to enforcement action.

• Tax lien: A tax lien is the government’s legal claim against property when a taxpayer fails to pay a tax debt.
• Delinquent status in business: Delinquent status on a tax account is a common precursor to levy action.
• Legal notice: Levy proceedings begin with formal legal notices that establish the creditor's intent and the debtor’s right to respond.
• Offer in compromise: An offer in compromise is an agreement that may allow a taxpayer to settle a tax debt for less than the full amount owed.
• Collection due process hearing: A collection due process hearing lets a taxpayer challenge or discuss certain IRS collection actions, including some levies.

FAQs about levy

What is the difference between a levy and a tax?

A tax is an obligation imposed by a government authority. A levy, in an enforcement context, is the legal mechanism used to seize property when that obligation, or any other debt, goes unpaid.

Can a levy be reversed after it has been executed?

Yes, but only under specific conditions: paying the debt in full, entering into an installment agreement, or demonstrating immediate economic hardship. A dispute over the amount owed alone is not sufficient to reverse a levy.

How does a private creditor obtain authority to issue a levy?

A private creditor must first file a lawsuit, win a court judgment, and then obtain a court order that authorizes the levy. Unlike the IRS, a private creditor has no independent authority to seize assets solely on the basis of an unpaid debt.