How to Deal With an IRS Bank Levy: Part One

When you owe a balance due to the IRS and fail to resolve that balance in a timely manner through one of the approved resolution methods, the IRS takes increasingly stern action to try and force compliance on your part. One of these avenues is through an IRS bank levy. 

An IRS levy is defined as, “a legal seizure of your property to satisfy a tax debt.”[1] In the case of an IRS bank levy, the IRS takes money from your checking or savings account in order to satisfy your outstanding tax liability. Although the IRS is required to send notice of its intent to levy under statute, it usually does not tell you when it plans to seize money out of your checking account. 

Sometimes this puts taxpayers in a precarious position because they count on funds being in these accounts that are no longer available due to the IRS levy.

The IRS bank levy process is initiated by a notice sent from the IRS to the bank that is holding your assets. Usually, the IRS will only send one levy notice at a time, but they will eventually get around to sending notices to every bank where they have reason to believe that you are holding assets in. 

From this point, the bank retains the money for 21 days prior to releasing the funds to the IRS. After this 21-day period, the bank, by law, must release the funds to the IRS. No further action is required on the part of the IRS to receive funds. Taxpayers will not have access to any funds levied during this period.[2] 

To add insult to injury, banks will usually charge an administrative processing fee to your account for handling the levy. Even if the levy is erroneous, getting this processing fee back from the IRS is not usually worth the time expended. 

Also, it is important to be aware that the IRS is not just limited to levying one source of assets. Taxpayers should be aware that the IRS can also go after wages, accounts receivables, merchant accounts, or almost any other asset in possession of the taxpayer to satisfy the liability.

How to Deal With an IRS Bank Levy: Part Two

IRS bank levies are a rather extreme, although sometimes necessary, measure to force compliance on the part of the taxpayer. However, there are some statutory safeguards in place designed to help protect the taxpayer against erroneous levies and to give them the opportunity to resolve the liability without the IRS having to resort to levy. Levies require administrative costs on the IRS’s part, thus they prefer voluntary compliance.[1]

Requirements of a Valid IRS Bank Levy

First, IRS bank levies cannot occur for any amount greater than the amount needed for the IRS to satisfy the liability in question. Furthermore, there are three procedural requirements that the IRS must follow in order to execute any levy. These are:

  1. The IRS must have assessed the taxes underlying the basis for the levy and have sent a Notice and Demand for Payment to the taxpayer. Keep in mind that receipt of this notice, or any IRS notice, by the taxpayer is not required. All that is required under statute is that the IRS sends its notice to the last address it has on file.
  2. The taxpayer must have neglected to pay the stated tax underlying the assessment. This includes penalties and interest.
  3. The IRS must send two more notices to the taxpayer: a Notice of Intent to Levy and a Final Notice of Intent to Levy. The Final Notice of Intent to Levy must be sent at least 30 days prior to an IRS levy in order to give the taxpayer time to work out a resolution and/or appeal the IRS levy. 

Generally, levies will not occur immediately after the 30-day period has expired because of the administrative approval that the IRS needs internally to begin the levy process. Taxpayers can generally count on being levied between two-to-three weeks after this 30-day period has expired. 

However, it is critical to note that all allowable taxpayer assets are subject to levy after this period has expired. Levies can and do occur immediately after, especially if the taxpayer has been assigned to a revenue officer or other senior collections agent.

The Best Way to Deal With a Bank Levy

IRS bank levies are a powerful collections tool used by the IRS meant to facilitate compliance on the part of the taxpayer. That said, they often cause great inconvenience and place extraordinary burden on the taxpayer. In addition, IRS bank levies can be issued erroneously or abused by some members of the IRS in certain circumstances.

 The best approach to dealing with an IRS bank levy is to deal with the problem as soon as possible. If you discover the levy within the 21-day holding period, you may be able to convince the IRS to release it. The IRS will be generally reluctant to do so, absent compelling reason, but once those funds are gone, there is basically no chance the IRS will surrender them.[2]

As with most IRS problems, the best defense is a good offense. Contacting the IRS, even if it is just to buy yourself time to resolve the issue, goes a long way towards preventing IRS bank levies or other adverse actions. If you have been already levied, you should be aware that they will keep coming after you until the liability has been satisfied in full. 

Once the steps outlined above have been completed, the IRS is not required to go through them again to initiate another bank levy. If you run into trouble or believe you have been levied erroneously, then you should contact a tax professional immediately to step in and handle the situation.

[1] Note that some funds are exempt from bank levy and may be restored to the taxpayer after the levy is initiated with proper substantiation. Here is some more information on property exempt from tax levies.

[2] Here is information from the IRS regarding levies, including some information on a bank levy.

How to Fight a Wage Levy

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.

Tax Levies and Property Exempt IRS Levy

Introduction to Tax Levies

The IRS can be fairly aggressive when it comes to adverse collection action. It uses certain tactics to push taxpayer compliance and to reduce the size of balances that are owed on taxpayer accounts. Tax levies are one of these collection tactics. 

The general rule with tax levies is that the IRS can levy all property that belongs to the taxpayer in order to satisfy the outstanding obligation. However, certain property is exempt from an IRS levy and cannot be seized by the IRS.[1]

Property Exempt From Tax Levies

This list of property is codified under Internal Revenue Code (IRC) § 6334. Here is a comprehensive list of the items that are exempt from tax levies:

  1. Clothes and educational books that are of necessity to the taxpayer and/or the taxpayer’s family
  2. Personal items, personal care items, fuel, furniture, and personal effects. Note that these items cannot exceed $6,250 in value
  3. Business and professional items, tools, or supplies including books and other tools of the trade that are necessary for the taxpayer’s production of income. Note that these items cannot exceed $3150 in value.
  4. Unemployment benefits, including those portions that allocated toward the taxpayer’s dependents
  5. Mail that remains undelivered
  6. Certain types of annuity and pension payments.[2]
  7. Workmens’ compensation
  8. Any portion of the taxpayer’s income or salary that is necessary for the taxpayer to comply with a court order or judgment granting support for children under the age of 18.
  9. Minimum exemption for wages, salary, and other income that is further governed by § 6334
  10. Certain disability payments, which are considered service connected.
  11. Certain public assistance payments including public assistance and public welfare payments from a government agency.
  12. Assistance that comes under the Job Training and Partnership Act.
  13. Residences are exempt from levy in small deficiency cases. Primary residences and certain business assets are also exempt, except barring special approval or in certain instances of jeopardy that is documented by the IRS.[3]

It is important to note that the dollar amount limits placed on the totals of certain items are subject to fluctuate from year-to-year. Furthermore, it is my professional opinion that a taxpayer should contact a tax professional immediately for assistance if any of the above items are levied or tax levies by the IRS threaten the economic stability of the taxpayer.

While it is possible to get tax levies released prior to them becoming final (the taxpayer usually has a 21-day window to get them released), doing so is fairly difficult and can require a fairly proactive approach when dealing with IRS collections. 

Furthermore, even if the property that you have is on the above list, it is nevertheless important to be vigilant when dealing with your collection issues. Quick and decisive action on the part of the taxpayer can help stop tax levies even before they are initiated by the IRS.

For help with tax levies or, if I can answer any additional questions, please contact me through the contact information listed on this website.

 [1] See IRM 5.17.3.4.1: http://www.irs.gov/irm/part5/irm_05-014-001.html

[2] For a full list of exempt annuity and pension payments, please see IRC § 6334(a): http://www.law.cornell.edu/uscode/text/26/6334

[3] Taken from IRC § 6334(a): http://www.law.cornell.edu/uscode/text/26/6334

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

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).

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Sam Brotman, JD, LLM, MBA

Owner and Director of Legal
Brotman Law

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