How levies operate

The two most common tools used by the IRS to collect back taxes are through wage levies and bank account levies:

Wage levy or garnishments: When you have back tax debt, the IRS can levy (garnish) your wages (also your bonuses, Social Security benefits, and retirement income). (Unlike most other creditors, the government does have to sue in order to garnish your paycheck.) A wage garnishment is served on your employer which is required to pay over a large percentage of your paycheck to the IRS until the tax debt is paid or the wage levy released. (If you are self-employed or an independent contractor, the folks that pay you -- called “payors”-- will turn over to the IRS all the money due to you.) Though you are left with some income, basically the IRS is the beneficiary of most of your paycheck. Refer to IRS Publication 1494 for the exact amounts.)

Bank accounts: The IRS can issue a bank levy to obtain all your cash in any account (i.e., savings, checking) under your name. The bank pays to the IRS whatever money is in that account on the day the levy is received by the bank. (For example, if the bank receives the IRS levy on Wednesday to attach your checking account, and you deposit your paycheck on Friday, the IRS does not have any rights to the funds deposited on Friday, unless they obtain other levy.) You have 21 days to get the IRS to release the levy; if you do nothing during this holding period, the bank sends the frozen funds, up to the amount you owe, to the IRS. The IRS can continue to clean out your bank accounts by issuing new bank levies.

Other property: The IRS can garnish more than your paycheck and bank account. The agency can also levy other assets such as your home, car, boat, personal property, ATVs, airplane, accounts receivable, insurance policies, antiques, collectables, jewelry, and so forth.

Release of a tax levy

The IRS will generally release a tax levy if: 1) the tax debt is paid; (2) the time for collection lapsed before the levy was serviced; 2) release of the tax levy would help collect the tax debt; 3) an installment payment agreement has been entered into between you and the IRS; 4) the tax levy is creating a financial hardship; or 5) the fair market value of the levied property exceeds the liability.

Payments exempt from levy

Not all property is fair game; some is exempt: --clothing and school books --fuel, furniture, and personal effects, up to a certain amount --unemployment benefits --books and tools of a trade, business, or profession, up to a certain amount --undelivered mail --Railroad Retirement Tax Act pension and annuity payments and certain armed forces service-connected disability payments --court-order child support payments --assistance under the Job Training Partnership Act of minor children --certain public assistance payments

When levy is issued

Once the government creditor gives you a notice of intent to levy, you have 30 days to request a hearing and challenge the action by the IRS. The hearing, known as the Collection Due Process (CDP) hearing, is held in the Appeals Division (see more below) (The IRS can freeze the assets during the waiting period). The tax notice must clearly describe the tax levy procedures, your options for avoiding the tax levy, such as beginning installment payments for overdue tax, and steps for redeeming property if it is seized by the IRS.

Appeal of levy

You can appeal levy actions. The two main procedures are Collection Due Process (CDP) and Collection Appeals Program (CAP). Both programs involve expedited conferences with the IRS Appeals Office. The crucial difference between these two programs is that the Collection Appeals Program does not allow further appeal if you lose; the Collection Due Process does (you have the right to file a lawsuit).

To request a hearing under the CDP process, use Form 12153, Request for a Collection Due Process Hearing, and send to the address shown on your lien or levy notice within 30 days. Check the IRS action(s) you disagree with, and explain why you disagree. If you received both a lien and a levy notice, you may appeal both actions. You will receive a written determination letter at the end of the hearing. If you agree, both you and the IRS must live up to the terms of the letter. If you don’t, you can file a lawsuit.

With the Collection Appeals Program (CAP), use Form 9423. You can appeal the collection action prior to or after the levy on your wages, bank account or other property. Collection action is normally stopped during the appeal process. You can file this only after an IRS employee (revenue officer, collections manager) has refused to accept your solutions to the tax problem.

For more information on both of these programs, read Publication 1660.

Related Topics

--Tax Liens
--Tax Audits
--Time to Partner With a Tax Attorney
--You Can Avoid Taxes, Just Don’t Evade or Outright Dodge Them
--Private Debt Collection Agencies