Sam Brotman, JD, LLM, MBA October 2, 2020 16 min read

IRS Wage Garnishments: What You Need to Know

Fighting a wage levy involves taking the steps necessary to ensure your assets are protected. However, when there is an outstanding tax liability for which you are responsible and when you do not satisfy the debt, the IRS will pursue action that may involve attaching an interest in your paycheck — through a wage levy. 

With this in mind, a wage levy is a legal seizure of property to satisfy a debt. If you do not pay your taxes, the IRS may seize and sell any type of property belonging to you to satisfy the tax liability.

The process for attaching an interest to your wages is three-part. The agency first secures a claim (lien) on the taxpayer’s property and follows this up with a levy. The IRS “may seize and sell any type of real or personal property that you own or have an interest in” (IRS.gov, “Levy,” 5/31/2013). 

Second, the IRS then seizes and sells the property you hold; for example, your car, boat, and/or house can be sold. Last, the IRS levies against other types of property such as your “wages, retirement accounts, dividends, bank accounts, licenses, rental income, accounts receivables, the cash loan value of your life insurance, or commissions” (“Levy”). 

An employer has one full pay period to send any funds from the employee’s wages. The full pay period will come after the employer receives Form 668-W, Notice of Levy on Wages, Salary and Other Income from the IRS. At this point, the employee can still contact the IRS to discuss the release of the levy and to resolve their tax liability. These procedures are not exhaustive, but provide insight into how your wages may be affected in the face of an outstanding tax liability.

With all of this in mind, when it comes to wage levies, the most important strategy for avoiding the levy is to pay the taxes owed. When the IRS sends a Notice and Demand for Payment, respond to that notice with a payment. 

In addition, when the IRS sends the Final Notice of Intent to Levy and Notice of Your Right to a Hearing, which is the official and final levy notice, respond to the notice(s) to ensure levy proceedings do not commence against your wages.

In cases where a levy may be causing immediate financial hardship, the IRS allows for the releasing of a wage levy on a legal basis. For example, the IRS will submit a notice of levy to the taxpayer’s employer. However, “the taxpayer responds and shows that the notice of levy prevents her from paying for basic necessities for her family. Because the levy is causing an economic hardship, [the IRS allows the levy to be released immediately], so the employer will not send a levy payment on the next pay day” (IRS.gov, “Part 5. Collecting Process, Chapter 11. Notice of Levy, Section 2. Serving Levies, Releasing Levies and Returning Property,” 9/9/2013). 

However, a levy release does not imply exemption. A taxpayer would still be responsible for paying the tax balance owed. The IRS will just work with the taxpayer to pay off the balance (IRS.gov, “What if a levy on my wages is causing a hardship?” 9/9/2013).

Taxpayers eligible for wage levies may also avoid the levy by requesting a Collection Due Process (CDP) hearing with the IRS Office of Appeals. The request is filed with an IRS manager listed on the notice. “You must file your request within 30 days of the date on your notice” (“Levy”). The IRS allows some issues eligible for discussion at the hearing.

A notice of levy that violates IRS regulations is subject to be released. An example of a violation would be the issuing of a levy during the course of the taxpayer’s CDP hearing.

In addition, if you can prove that you paid the owed tax before the IRS sent the wage levy notice, then the presiding officer may determine the case in your favor.

You may avoid the tax levy by having the case decided in your favor if the officer determines that the IRS “assessed the tax and sent the levy notice when you were in bankruptcy” (“Levy”); there is an automatic stay[1] initiated during bankruptcy when an individual files the bankruptcy petition. 

“Section 362(a) of the Bankruptcy Code (Title 11) prohibits levy on the property of a taxpayer in bankruptcy. A levy on this property is generally illegal and must be released” (IRS.gov, “Part 5. Collecting Process, Chapter 11. Notice of Levy, Section 2. Serving Levies, Releasing Levies and Returning Property,” 9/9/2013).

Lastly, a collections due case may be decided in your favor if it is determined that the IRS made a procedural error in assessment, the time to collect the tax has expired before the IRS sent the notice of levy, you did not have enough time to dispute the assessed liability, you want to discuss collection options, and/or you wish to offer a spousal defense. It is at the conclusion of the hearing when the Office of Appeals issues a determination. For more information, refer to IRS Publication 1660, Collection Appeal Rights (CAP).

[1] Automatic stay, or automatic injunction, falls under section 362 of the U.S. Bankruptcy Code and it is defined as a process whereby actions by creditors against a debtor are halted as a result of the debtor filing for bankruptcy protection. The automatic stay provisions work to protect the debtor against judicial proceedings, actions to obtain the debtor’s property, actions that will enforce a lien against the property, and set-off of indebtedness that is owed to a debtor before the commencement of a bankruptcy proceeding.

Levy vs. Garnishment

A quick aside here is to mention a levy versus a garnishment as the two terms frequently are confused. With a levy, an entity, usually the government, freezes your assets, including your wages, if you are employed. ALL of your earnings will go directly from your employer to the IRS. With a garnishment, a certain percentage of your wages will be deducted each pay period until the debt is satisfied. In both cases, the IRS (or other creditor) must notify you.

IRS Wage Garnishment Protocol

Wage garnishment is the most common type of garnishment, or attachment to earnings and/or assets. Wage garnishment is defined as the process of deducting money from an employee’s wages, or monetary compensation, as a result of a court order or related equitable procedure. 

A wage garnishment will continue until the entire debt is paid. There are common examples of different types of debts that result in wage garnishment. These types include child support, defaulted student loans, taxes and unpaid court fines.

When employers receive a notice to withhold part of an employee’s wages, the garnishment becomes a part of the payroll process. Employers are required to make the deductions until the debt is satisfied. Title III[1] of the Consumer Credit Protection Act (CCPA) is an administrator of the Wage and Hour Division (WHD). The statute “protects employees from discharge by their employers because their wages have been garnished for any one debt, and it limits the amount of an employee’s earnings that may be garnished in any one week” (DOL.gov, “Wages and Hours Worked: Wage Garnishment,” 8/16/2013). 

Title III applies to those employees receiving earnings for personal services; earnings are specific to “wages, salaries, commissions, bonuses and period payments from a pension or retirement program, but ordinarily does not include tips” (“Wages and Hours Worked: Wage Garnishment”).

For example, employers can only deduct the lesser of 25 percent of disposable earnings “or the amount by which disposable earnings are greater than 30 times the federal minimum hourly wage prescribed by Section 6(a)(1) of the Fair Labor Standards Act of 1938” (“Wages and Hours Worked: Wage Garnishment”). As of July 24, 2009, the federal minimum wage is $7.25 per hour. 

According to the Department of Labor, disposable earnings are defined as the amount (of earnings) legally left over after required deductions, which include the standard following:

  • Federal, state, and local taxes
  • Social Security
  • Unemployment insurance
  • State employee retirement

The deductions above are required by law. The deductions that are not required by law include union dues, health and life insurance and charitable contributions (“Wage and Hours Worked: Wage Garnishment”).

However, Title III allows for the garnishment of wages at a greater amount when it comes to child support, bankruptcy and/or federal or state tax payments (“Wages and Hours Worked”). Fifty percent of an employee’s wages can be garnished for child support, provided the “employee is supporting a current spouse or child, who is not the subject of the support order, and up to 60 percent if the employee is not doing so. 

An additional five percent may be garnished for support payments over 12 weeks in arrears” (“Wages and Hours Worked: Wage Garnishment”). Title III is not applicable to certain bankruptcy court orders. Title III doesn’t affect voluntary wage assignments, which are defined as those activities where the employee voluntarily turns over their earnings to a creditor. 

With this in mind, wages and assets are never safe because they can be attached legally to satisfy a tax liability.

[1] Title III, Consumer Credit Protection Act (CCPA) (15 USC §1671 et seq. (PDF); 29 CFR Part 870).

Releasing a Levy While in Currently Not Collectible Status

A levy can be released while a taxpayer is in currently not collectible status. Section 6343(a)(1) of the Internal Revenue Code requires a levy to be released if the IRS determines that the circumstances are appropriate based upon policy. The IRS will require “supporting documentation as is reasonably necessary to determine whether a condition requiring release exists” (IRS.gov, “Part 5. Collecting Process, Chapter 11. Notice of Levy, Section 2. Serving Levies, Releasing Levies and Returning Property, 8/18/2013).

The IRS allows the release of a notice of levy when it is clear that circumstances will prevent the taxpayer from making payments and the IRS from receiving payments.

An example of this might deal with an employer receiving a notice of release of levy.

“After a notice of levy has been sent to a taxpayer’s employer, the taxpayer responds and shows that the notice of levy prevents them from paying for basic necessities for their family. Because the levy is causing an economic hardship, release it immediately, so the employer will not send a levy payment on the next pay day” (“Section 2. Serving Levies, Releasing levies and Returning Property”).

There are additional legal bases for release of levy. “Section 362(a) of the Bankruptcy Code (Title 11) prohibits levy on the property of a taxpayer in bankruptcy” (“Section 2. Serving Levies, Releasing levies and Returning Property”). A levy on a bankruptcy filer’s property is illegal and is therefore formally released. Lastly, a notice of levy that violates the provisions and regulations of the Internal Revenue Code must be released also

(“Section 2. Serving Levies, Releasing levies and Returning Property”).

[1] The first category is $25,000 or less. The second category is $25,001 to $50,000.

[2] For more information about this type of agreement, visit the IRS website here: http://www.irs.gov/irm/part5/irm_05-014-010.html

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Sam Brotman, JD, LLM, MBA

Owner and Director of Legal
Brotman Law

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