If you owe the Internal Revenue Service (IRS) money and you haven’t taken any action on the Notice and Demand for Payment (CP501) and/or Final Notice of Intent to Levy (CP504) they send you, they’re legally allowed to seize your property to help pay off that debt.
This legal seizure is what’s called a tax levy. Although enduring one can be a stressful experience, it’s by no means the end of the world.
Here we’ll go over exactly what to expect when this happens, how having your assets levied differs from other actions the IRS might take, and how to get released from an IRS tax levy.
What is a tax levy?
A levy allows the IRS to legally seize your wages, money from your bank account, real estate, vehicle, personal property, or any other assets you own to help pay off your tax bill. Generally speaking, any assets on which the IRS has placed a federal tax lien can be levied. The IRS usually considers tax levies as an option of last resort, but that doesn’t mean they won’t enforce a levy if necessary.
What’s the difference between a tax lien and a tax levy?
Liens and levies are part of the same process, but they’re not the same thing. A lien is a legal claim that the IRS makes against property they intend to seize in the future, while a levy is used to actually seize that property.
The IRS will usually file a lien against your property after sending you a Final Notice of Intent to Levy (CP504). They’ll do so by filing a public document called a Notice of Federal Tax Lien, which tells all of your other creditors (i.e., other people and institutions you owe money to) that the government can legally seize your property.
Why am I subject to a tax levy?
Generally speaking, the IRS will only levy your assets after they’ve done the following:
- Sent you a Notice and Demand for Payment (CP501).
- Waited 30 days and received no response.
- Sent you several IRS notices, including a Final Notice of Intent to Levy (CP504), a Notice of Your Right to A Hearing (CP297A), and possibly also a Notice of Levy on Your State Tax Refund (Letter CP92 or CP242).
- Sent you a notice informing you that they might also contact third parties about your ability to pay your outstanding tax debt.
- Filed a public Notice of Federal Tax Lien.
What happens when my assets get levied?
Usually, it means the IRS seizes them and uses them to try to cover your tax debts. The assets that they seize might not necessarily be in your possession: they can seize your wages, money you have set aside for retirement, your company’s accounts receivable, and so on.
They won’t just go after cash assets, either: they can seize your vehicle, home, and other property you owe. These assets are then usually sold to pay off your tax liability.
In many cases, the IRS will first go after your state tax refund under the State Income Tax Levy Program (SITLP).
The State Income Tax Levy Program (SITLP)
Under the SITLP, the IRS can take your state tax refund if you’re an individual taxpayer in your state. Before this happens, you’ll receive a warning letter from the state. If the IRS hasn’t already sent you a CP504, they’ll send a letter as well.
A wage levy means the IRS will take a portion of each paycheck you earn to pay down your debts until you contact them to make alternative arrangements, you pay the overdue amount, or the levy is released for some other reason.
Usually, part of your wages will be exempt from the levy based on Publication 1494. This is a form the IRS will send to your employer to help them calculate how much of your wages you’re allowed to keep—the amount they land on is usually based on the number of dependents you have.
If this happens, you’ll also have to complete and give your employer a Statement of Dependents and Filing Status within three days. Otherwise, the IRS might calculate the exemption with the assumption that you have zero dependents and will garnish a higher proportion of your wages.
If the IRS decides to levy one of your bank accounts, they start by freezing the funds in that account. They then offer a 21-day waiting period before they seize the cash, during which you have the opportunity to contact and make arrangements with the IRS.
Some sources of funds, like child support and social security, are protected from bank levies. Your bank will determine which funds to hold back before they release any money to the IRS.
Keep in mind that a levy isn’t the only action the IRS might pursue against you. For example, if you’re seriously delinquent (meaning you owe more than $54,000 in back taxes), it might affect your ability to apply for or renew a passport with the State Department.
How do I get released from a tax levy?
This article is not legal or tax advice, and what exactly you should do after you’ve been levied by the IRS will depend on your particular situation. If you think the IRS has made a mistake in its decision or if the amount you owe is more than you can afford to pay, you’ll likely need to speak to an expert.
Luckily, specialized advisors are trained to handle situations like these. You may want to seek help from an enrolled agent at a tax resolution company, a CPA, or a tax attorney. These advisors can help with several aspects of your tax issues, including representing you before the IRS.
In most cases, the IRS is levying your assets because you’ve been ignoring their communications or otherwise neglecting your debts. Re-establishing contact with them and telling them you intend to resolve your tax liability (as well as requesting a levy release) is usually the first thing you’ll need to do to get back in good standing.
If the IRS turns down your request to release the levy, you can appeal that decision. You might also be able to appeal to have your assets returned to you if the IRS has already seized them. For a full rundown of your appeal rights, consult Publication 1660, Collection Appeal Rights (PDF).
The IRS might also release the levy if you enter into an installment agreement with them or if they determine that the levy is causing you financial hardship (i.e., preventing you from meeting basic, reasonable living expenses).
But remember: just because you’ve been released from a levy doesn’t mean you’ve been released from your unpaid taxes. You’ll still have to pay those.
How do I avoid an IRS levy in the first place?
The best way to avoid a levy is to file and pay your taxes on time or file an extension if you can’t meet certain deadlines. If you simply don’t have the resources to pay down your tax debt, the IRS expects you to pay as much as you can and contact them to arrange payment for the remainder.
You might be eligible for a payment plan, which involves paying lower installments over a longer period of time, or an Offer in Compromise, which involves settling your debt for less than the amount you owe. For a full rundown of available options if you fall behind on your taxes, consult the IRS’s Collection Procedures and Publication 594, or speak with a qualified professional.
Helpful resource: Tax Resolution: What You Need to Know
How Bench can help
Bookkeeping services like Bench’s Retro bookkeeping team can also help small business owners catch up on their books and make sure they’re tax-ready. Our Retro team specializes in helping small business owners who have fallen behind on their bookkeeping, and can help you identify hidden deductions that will lower the amount owed to the IRS.
Our Retro support includes a dedicated team of historical bookkeeping specialists to make sure your prior financial records are complete and accurate, putting you in a better position to respond to the IRS and move forward with your business.
If you need a bit more help dealing with the IRS, we can also put you in touch with our network of trusted tax professionals.
A tax resolution expert can help with a wide variety of issues, including explaining your options, clearing up any confusion around payments, double-checking to make sure the IRS hasn’t made any errors on their end, and even negotiating with the IRS on your behalf.