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The Federal Tax Levy: A Harbinger of Exaction
The IRS has sweeping powers in the form of the federal tax levy to collect when you don’t pay your taxes. The IRS can take a significant portion of your paycheck, freeze then seize the funds in your bank account, take a portion of your retirement benefits, and even take your home or your car. If you have back taxes and have ignored IRS notices demanding payment, you are vulnerable to an IRS tax levy.
Federal Tax Levy Basics
Internal Revenue Code section 6331 authorizes the IRS to issue levies to collect delinquent tax. A federal tax levy involves the legal seizure of property to satisfy a tax debt. There are many types of tax levies involving seizure of different kinds of property including but not limited to wages, bank accounts, social security benefits, real property, physical assets, brokerage assets, and accounts receivables.
A tax levy differs from a tax lien in that a lien is a legal claim against your property to secure a tax debt whereas a levy actually takes your property to pay the tax debt. To learn more about tax liens, please read our article, “The Federal Tax Lien: A Staple of IRS Enforcement Action.”
Prerequisite to an IRS Tax Levy: Notice
Thankfully, the IRS usually cannot issue a levy without notice in accordance with taxpayer due process rights.
The IRS will usually pursue a levy once the following four requirements have been met:
- The IRS assessed the tax and sent a Notice of Demand for Payment to the taxpayer.
- The taxpayer neglected or refused to pay the tax.
- The IRS sent a Final Notice of Intent to Levy and a Notice of Taxpayer’s Right to Hearing at least 30 days before the hearing.
- The IRS sent the taxpayer advance notice of Third-Party Contact informing the taxpayer that it may contact third parties to determine whether the taxpayer has property or assets to repay the debt.
A Final Notice of Intent to Levy can be served on the taxpayer in person, left at the home or usual place of business, or sent via certified mail with return receipt requested. It is often in the form of IRS Letter 1058 or LT11, both of which give the taxpayer a specified time period within which to challenge the levy via IRS administrative appeals.
Challenging an IRS Tax Levy
A taxpayer can challenge the IRS’ attempt to levy property via a Collection Due Process Hearing. This has the effect of taking your case before the IRS Office of Appeals for review and hearing. You must file your request within 30 days from the date of the final notice. A skilled tax attorney can obtain release of the levy and resolution of the outstanding tax liabilities on appeal.
If you are outside the 30-day time period, you are still eligible to file for an Equivalent Hearing to challenge the levy before the IRS Appeals however you must do so within one year from the date of the final notice.
A tax attorney can help you challenge a federal tax levy via the IRS administrative appeals process with a view to obtain a release of levy and set up a resolution of your back taxes to prevent future tax liens and levies.
Property Subject to an IRS Tax Levy
Typically, any property or right to property that belongs to the taxpayer, or on which there is a federal tax lien, can be levied. Certain exceptions apply to property that is exempt from levy, subject to a few exceptions.
The IRS can levy property that is yours, but which is held by someone else such as your wages, retirement accounts, dividends, bank accounts, licenses, rental income, accounts receivable, the cash loan value of your life insurance, or commissions. The IRS can also seize and sell property that you own such as a car, boat, or house.
Wage and bank levies are the most common type of levy; however, the IRS may issue a levy for physical assets if that is the only way to recoup unpaid taxes.
Wage Garnishment Levy: This type of levy directs an employer to withhold a specified amount out of an employee’s paycheck each pay period. A significant portion of the employee’s paycheck can be subject to levy, including any amounts of wages, commissions or bonuses that are not exempt as per the standard deduction. The withheld funds are applied toward the employee’s back taxes. Employers who fail to comply with a wage garnishment levy can be liable to the IRS for the amount that could have been collected from the levy.
Bank Account Levy: This type of levy directs the financial institution where you keep your bank accounts to freeze the funds in your account up to the amount of the tax lien and hold them for a 21-day waiting period during which the taxpayer can contact the IRS to make payment arrangements. If you fail to make the necessary arrangements, the funds will be seized after the 21 days and applied to your back taxes. Generally, funds deposited in your account after the date of the levy are not subject to seizure.
Social Security Benefits Levy: Under the Federal Payment Levy Program the IRS can garnish up to 15% of Social Security benefits.
Retirement Income Levy: This type of levy is less common and requires that the IRS first determine the taxpayer has engaged in flagrant conduct before attempting to seize retirement income. Examples of flagrant conduct include: 1) taxpayer justifies the failure to pay on frivolous arguments, 2) taxpayer continues to make voluntary contributions to retirement accounts yet claims inability to pay taxes, 3) taxpayers is convicted of tax evasion, and 4) taxpayer has placed assets outside of the country beyond the reach of the IRS.
Property Seizure Levy: This type of levy is the least common and only pursued after the IRS has exhausted all other methods to collect from an uncooperative taxpayer. Physical property assets that may be subject to property seizure include houses, cars, boats, business equipment, and anything in physical form that is owned by the taxpayer.
How to Resolve a Tax Levy
If you ignore the tax levy and do nothing, the IRS will continue to garnish your wages, levy your bank accounts, and seize your property until the entire liability is paid in full. For most taxpayers, this is an untenable situation.
Once the IRS has seized property subject to a tax levy, it may be difficult to recover it. For that reason, if you owe back taxes you will want to respond to any Final Notice of Intent to Levy by challenging the levy on appeal with the help of counsel, as discussed above.
Once a levy has been issued, you will need to get it released to stop the collection action that is underway or poised to occur. The IRS will release a levy if:
- You pay the amount you owe in full.
- The period for collection ended prior to the time the levy was issued.
- Releasing the levy will help you pay your taxes.
- The value of the property is more than the amount owed and will not hinder the IRS’ ability to collect the amount due.
The IRS will also release a levy if you can demonstrate that the levy creates a financial hardship or if you make arrangements to pay the back taxes via settlement or installment arrangement. Obtaining a release of tax levy in these situations does not excuse the taxpayer from paying the underlying tax that remains due.
A tax attorney can help you avoid, appeal, and resolve any tax levy to which you may find yourself subject.
Do You Need a Tax Attorney?
If you have unpaid taxes and have been ignoring IRS notices, you should consult with a tax attorney to avoid a tax levy. If you have already received a final notice of levy, a tax attorney can help you file an appeal to challenge any property seizure. Lastly, if you are the subject of an active levy, a tax attorney can help you make arrangements with the IRS to get the levy released quickly.
The experienced attorneys at Segal, Cohen & Landis have successfully represented hundreds of clients with federal tax levies as a result of back taxes. We can help you avoid, appeal, or release a tax levy. Some of the services we provide in this regard include:
- Interface with Revenue Officer or IRS Collections to avoid a tax levy
- IRS Appeals: Request a Collection Due Process Hearing
- IRS Appeals: Request an Equivalent Hearing
- Offer in Compromise
- Installment Agreement
- Partial Pay Installment Agreement
- Currently Not Collectible
- Innocent Spouse Relief
If you are interested in having a complimentary consultation with one of our partner attorneys regarding your tax matter, please feel free to contact us at 866-505-1872. We would be happy to speak with you and will advise you how we can resolve your case and how much it will cost.