Tax Levy

When we hear the word “levy”, we automatically think of it as something that is imposed or legally required. And while it is true that it’s an imposition, there is more to tax levy than what is commonly thought. 

What is a “tax levy”? 

A tax levy is a term that refers to the collection or seizure of an individual’s property so that unpaid taxes can be settled. When it comes to the different forms of a tax levy, the Internal Revenue Service (IRS) can impose tax levies by seizing various kinds of assets such as: 

• Bank accounts
• Wages
• Social Security
• Investment accounts
• Pensions
• Insurance policies
• Account receivables
• Rental income
• Dividends
• Retirement accounts
• Commissions
• Other physical assets such as car, house, boat, etc.

Is tax levy the same as a tax lien? 

Although a tax levy and a tax lien are related, these two are different from each other. When we say tax lien, this is a legal claim the federal government makes on a taxpayer’s property, assets, and real estate when they have tax debts. Concerning this, a tax levy is an actual act of taking or seizing the property, asset, or real estate to pay for the tax debt. 

Are there different types of tax levies? 

Yes, there are several tax levy types which include the following: 

• Wage garnishment. In wage garnishment, the IRS collects a debt by contacting the taxpayer’s employer and legally requiring them to withhold a determined percentage of the taxpayer’s wages to pay unpaid taxes. This will be in place until the debt, along with applicable interest and penalties, are satisfied.
• 1099 Levy. The IRS can seize 1099 payments that are currently owed to the taxpayer. Please note that this is only for current payments and not future payments. 

• Bank levy. When the IRS issues a bank levy, they will contact the taxpayer’s bank to hold the funds from the taxpayer’s bank account. No withdrawals can be made for 21 days. Once the 21-day period is over, the bank will then deduct the amount due and forward it to the IRS. In case the fund is not enough to pay the debt owed, the IRS may ask to repeat the process until such time that the debt is fully paid. 

• Property seizure. Any property owned by the taxpayer can be seized by the IRS. This can be auctioned and the proceeds will be used to satisfy the debt. 

• Other assets seizure. Other assets of the taxpayer that can be taken by the IRS are Social Security, investment accounts, pensions, insurance policies, account receivables, rental income, dividends, retirement accounts, commissions, and other sources of income. 

• Reduced tax refunds. If the taxpayer has a tax refund after taxes are filed, the IRS can opt to keep the federal and state tax refunds to pay for the taxpayer’s debt. 

• Passport seizure. For taxpayers who have an outstanding debt of $50,000 in back taxes, the IRS is authorized to request the State Department to revoke or deny their passports. 

What does the Internal Revenue Service (IRS) have to do before a tax levy can be enforced? 

As in all things, the IRS follows a set of strict procedures and requirements before imposing a tax levy on anybody. A thorough assessment of taxes will be carried out and the IRS will send the taxpayers a “Notice and Demand for Payment,” a tax bill that requires payment. If the taxpayer neglects or refuses to pay the required amount, the IRS will send several letters with a warning of the consequence for refusal to pay. 

The IRS will then send a “Final Notice of Intent to Levy” and “Notice of Your Right to A Hearing” at least 30 days before the levy is to take place. This can be given to the taxpayer, leave it at their home or usual place of business, or sent to the last known address by certified or registered mail with return receipt requested. During this time, the taxpayers are given 30 days to satisfy the debt or resolve the taxes owed.

 If the IRS levies the taxpayer’s tax refund, a “Notice of Levy on Your State Tax Refund, Notice of Your Right to Hearing” will be received after the levy. Additionally, the IRS will send the taxpayer a notification in advance of any Third Party Contact to let them know that the IRS can contact third parties for the collection of unpaid taxes. 

How can a tax levy be avoided? 

It is no secret that the best way to avoid a tax levy from ever happening is by timely filing returns and paying taxes when they are due. Taxpayers can request an extension for more time to file. In case that they cannot pay the full amount due, contact the IRS to resolve the remaining balance. Taxpayers can set up a payment plan, for example. Another important thing to remember is to always respond to billing notices from the IRS. They are not something that you can simply sweep under the rug. If you receive a “Final Notice of Intent to Levy”, please contact the IRS as soon as possible.