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Understanding IRS Levies on Tax Debts

The Internal Revenue Service (IRS) has a good number of tools at its disposal to collect unpaid taxes, as well as wage garnishments, bank levies, and property liens. This post will focus specifically on IRS levies, which allow the agency to seize a taxpayer’s property to satisfy outstanding tax debt. IRS levies can feel abrupt and stressful for taxpayers, but this guide aims to inform readers about the levy process, appeal options, and steps that can be taken to resolve tax issues with the IRS.

What is an IRS Levy?

An IRS levy refers to the legal seizure of a taxpayer’s property to pay overdue federal taxes. This property includes bank accounts, wages, commissions, bonds, stocks, and other assets. A levy gives the IRS the authority to take funds from these sources until the full amount owed is collected.

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There are a few different types of IRS levies:

Continuous Levy on Wages

With a continuous levy on wages, the IRS can take up to 15% of each paycheck to go toward the tax debt. This levy remains in place until the debt is paid off or the IRS releases the levy.

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Bank Levy

An IRS bank levy allows the agency to seize funds from a taxpayer’s bank accounts, savings accounts, or money market accounts. The bank must then send the seized funds to the IRS.

Levy on Property Other than Wages or Bank Accounts

The IRS can also levy individually owned assets like real estate, boats, jewelry, or artwork. These are sold to satisfy the taxpayer’s debt. Cars and other means of transportation may also be seized.

Hardship Exemptions from Levies

Taxpayers experiencing economic hardship can apply for exemptions from levies on wages or essential living expenses like food, rent, and clothing. The IRS will evaluate hardship exemption requests case-by-case.

Receiving a Notice of Levy from the IRS

Before taking action, the IRS must notify taxpayers in writing that a levy is imminent. This is typically done through:

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  • Notice of Intent to Levy (Letter 3172)
  • Notice of Levy on Wages, Salary, and Other Income (Letter 668-W)
  • Notice of Levy (Letter 668-A)

These notices provide important details like the amount owed, enforcement actions that will be taken if unpaid, and appeal rights. Taxpayers only have 30 days to respond before the IRS can levy assets.

Appealing or Stopping an IRS Levy

Taxpayers who happen to receive a Notice of Intent to Levy or actual Notice of Levy have several options to appeal or prevent the levy from occurring:

Request a Collection Due Process Hearing

Within 30 days of receiving the levy notice, taxpayers can request a Collection Due Process (CDP) hearing with the IRS Independent Office of Appeals. This presents an opportunity to discuss payment options or other concerns before the IRS takes enforcement actions.

Pay the Full Amount Due

Paying the entire tax debt, including any interest and penalties, will immediately stop the levy process. Taxpayers struggling to pay in full can look into installment agreement options.

Submit Form 12277 to Temporarily Delay Enforcement

Filing Form 12277, Application for Withdrawal of Filed Notice of Federal Tax Lien or Notice of Levy, within the 30-day period, may temporarily delay enforcement for up to 30 business days while other resolution options are explored.

Request a Hardship Exemption

As mentioned above, taxpayers facing economic hardship can submit Form 656-B, Offer in Compromise Booklet, along with supporting documents to request the IRS not to levy essential living expenses or wages.

Other Circumstances Preventing Levy Action

There may be situations where a levy can’t be enforced yet, such as an open Taxpayer Assistance Order application or a currently pending offer in compromise. Taxpayers should provide details of any relevant circumstances on the levy appeal form.

Work with a Tax Professional

Enlisting help from an Enrolled Agent, CPA, or tax attorney can ensure all options are reviewed, and the strongest case is made to resolve issues with the IRS. Professionals also ensure correspondence and deadlines are properly handled.

Potential Consequences of Not Addressing an IRS Levy

If levy notices aren’t promptly addressed, the IRS has authority to take the following actions:

  • Seize bank accounts or up to 15% of paychecks through continuous wage levy
  • Levy retirement accounts like 401(k)s and IRAs
  • Place liens on real estate and other assets
  • Return refunds to pay down the debt
  • Refer unpaid balances to private debt collection agencies

Additionally, failing to address the notices or levy may cause the tax debt to increase with added fees, penalties, and interest charges. Taxpayers risk damaged credit or if debt remains unpaid after exhausting collection efforts, the IRS can sue for enforcement in federal tax court.

IRS Levy Process Timeline

Here is a typical timeline for the IRS levy process:

  • Notice of Intent to Levy mailed (30 days before actual levy)
  • The taxpayer has 30 days to respond/appeal
  • Levy action starts if there is no response
  • Levy notice mailed (bank levy, wage levy, or property lien)
  • 15 days to request a collection due process hearing
  • Property seized or wage levies begin if no action
  • Tax debt balance reduced through levied assets
  • Levy released once the debt was paid in full

This timeline can vary based on specific taxpayer circumstances and various factors like existing payment plans or offers in compromise with the IRS. Keeping careful records and documenting all correspondence is important for resolving issues through the appeals process.

Options if a Levy Has Already Been Issued

Even after receiving a Notice of Levy, taxpayers still have options to either stop the current levy action or come to an agreement on paying back taxes:

Submit Form 656, Offer in Compromise

This allows proposing a repayment plan for less than the full amount owed, typically when full payment would cause economic hardship. It requires applicable filing fees and submission of financial records.

Request Currently Not Collectible Hardship Status

Taxpayers unable to pay necessary living expenses may qualify to have their collection halted through the Currently Not Collectible status. Medical issues or other circumstances causing long-term hardship can apply.

Submit Form 9465, Installment Agreement Request

Rather than a lump sum, taxpayers can propose monthly payments, which, if accepted, would halt additional penalties and stop current levy action. User fees apply.

Pay Amount Due in Full

Immediate full payment of taxes owed including all assessed penalties and interest will cause the IRS to un-levy assets and close accounts.

Contact the Taxpayer Advocate Service

This independent department of the IRS can help with Economic Hardship cases or other situations where taxpayers have tried but failed to reach a resolution with the IRS.

FAQs about IRS Levies

Here are some common questions about IRS levies answered:

How can I release an IRS levy on my wages or bank account?

To stop an ongoing wage or bank levy, pay the full amount due or arrange a payment plan through an installment agreement. You can also get levied funds returned by qualifying for Currently Not Collectible hardship status.

Am I required to claim exemptions from a levy on my paycheck or bank account?

No, taxpayers are not required or obligated to claim exemptions from an IRS levy. However, it’s a good option to consider if you would face economic hardship from the levy amount being enforced on your earnings or assets.

Can my tax debt be wiped out entirely through an Offer in Compromise?

In some cases where you cannot fully pay, the IRS may accept an OIC to settle for less than the full amount if they determine collecting the entire balance would create economic hardship or doubt as to collectibility. A CPA can help determine your eligibility.

What if I don’t have enough money now but need more time to pay?

You can propose a Short-Term Extension by filing Form 1127 requesting a delay of 120 days for wage levies or 60 days for other assets to allow time to secure funds, sell property, or otherwise obtain payment for the IRS. User fees apply.

What property is exempt from IRS levy or seizure?

Some exempt items may include clothing, school books, fuel, provisions, furniture, personal effects, books and tools necessary for business. Homes and vehicles can also have value limits when it comes to levy exemptions depending on state law. Consult the relevant IRS Publication for your location.

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