The Federal Tax Levy

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Posted by: Gary Massey Comments: 0

What is a Levy or Garnishment?

A federal tax levy is the seizure of money or other property by the government to pay off back taxes. It is sometimes called a garnishment, as in the case of a wage garnishment.

Before levies begin, the taxpayer will receive at least 4 letters or notices from the IRS over a period of about 5 months. Then, the IRS will send a written notice to the taxpayer that it intends to levy (CP504). They will also send a notice of the taxpayer’s right to a Collection Due Process (or CDP) Hearing. This notice is called IRS LT11 or Letter 1058 and comes by certified mail.

At this point, the taxpayer has 30 days to request the hearing to resolve the matter.

The hearing may be in person or over the telephone. Emotions can run strong at a hearing. And the rules are complex. Therefore, we strongly recommend that a CPA experienced in tax representation or a tax attorney handle the entire hearing process on behalf of the taxpayer. A Power of Attorney will be required.

If the taxpayer ignores all of these warnings, as well as the opportunity for a hearing, the IRS will start levy action. This process does not require a court judgment.

The IRS will use the levy to seize wages, bank accounts and retirement plans. Sometimes, the IRS will use the levy to seize personal and business assets like homes, cars, and equipment. However, this is rare and is generally reserved for the more extreme cases of tax fraud or egregious payroll tax violations.


Wage Garnishment


A wage garnishment is a form of levy. It is called a continuing levy and is used to grab wages as they are earned. The levy stays in effect until the back taxes are paid and the levy is released. Garnishment includes both wages and commissions.

Wage garnishment starts with a written notice to the employer, stating that they must stop all future payments from being deposited into the bank account of the employee. The employer should tell the employee that they have received a notice of garnishment. This is usually embarrassing and frequently disastrous to the wage earner.

The employer is required to submit the wages to the IRS to cover past-due taxes owed. The Wage Garnishment Notice instructs employers how much they should submit to the IRS each per pay period.

The IRS will not garnish wages up to the amount of the taxpayer’s standard deduction on Form 1040. The standard deduction for 2022 is $25,900 for married couples filing joint returns and $12,950 for single taxpayers. This amount increases every year


Can the IRS Garnish Wages Without Notice?


We are often asked if the IRS can garnish wages without notice. As stated above, the answer is no. Garnishment of wages, or any other kind of IRS levy, only starts after a series of warnings, in writing, from the IRS. These warning include a Notice of Intent to Levy and then a notice of your right to a Collection Due Process Hearing. There is plenty of time to work out the matter before it get to this stage. It should not be a surprise.

Use the time when the notices start to arrive to negotiate a deal with the IRS. For example, you may be able to work out an installment agreement to avoid wage garnishments.

If you get letters or notices from the IRS about a delinquent tax debt, don’t ignore them. Call the IRS as soon as possible, so you can deal with it. Or call your CPA, provided that he or she has experience with IRS negotiation and tax problem resolution. Let the CPA represent you under a Power of Attorney. We do it all the time for our clients. Generally the fee you pay the CPA is well worth avoiding the aggravation you will have by doing it yourself.


Other Levies, Including the Bank Levy


The IRS uses a levy to seize bank accounts. It only applies to what the taxpayer has in their bank account at the time of the levy. Unlike a wage garnishment, it does not impact assets acquired in the future.

Similarly, levies are also used to seize payments due to the taxpayer from their customers or clients (accounts receivable). This is usually highly embarrassing and can seriously harm the reputation of your business.

Offsetting tax refunds to pay back taxes is another form of levy. We see this all the time.


Federal Tax Levy on Retirement Accounts


The IRS is able to levy certain types of retirement accounts, such as an IRA, a 401(k) and a 403(b) plan. However, tax levies are only allowed if the taxpayer is able to liquidate their funds in the retirement account, even with an early withdrawal penalty.

For example, levies are not allowed if the plan prohibits liquidating distributions. However the IRS is able to levy the assets in a self-directed IRA.

When faced with a tax levy, the taxpayer should check the plan documents to see whether or not a tax levy will be allowed.

Defined benefit pension plans are not subject to levy.


Can the IRS Garnish Social Security Payments?


The IRS can garnish up to 15% of Social Security benefits paid to senior citizens. This will be subtracted from the senior’s social security check before they receive it.

Once again, resolve your tax debt as soon as possible before it gets to the stage where Social Security payments are subject to garnishment. For people on social security with a limited income, an offer in compromise might be a good solution.


Release of a Federal Tax Levy


Banks will hold levied funds for 21 days before sending them to the IRS. If you move quickly, you may be able to have the money released. You or your representative should contact the IRS, get them what they need and ask for the levy to be released by the bank. The IRS usually agrees if it is the taxpayer’s first time. This approach will not work once the 21-day period has expired.

Once levied assets are in IRS hands, options are fewer, but they do exist. You or your representative needs to contact the IRS as soon as possible and ask them to release the levy. If the IRS refuses to cooperate, ask for a “partial release” to cover necessary expenses, such as rent, mortgage or health insurance. Good negotiation skills help at this point, along with a realistic proposal to resolve the tax debt.

The IRS requires “tax compliance” as a prerequisite for negotiating a tax levy. This means that the taxpayer has filed the last six years of tax returns. It also means that the taxpayer is current with their tax payments. Tax payments include withholding on wages for employees and quarterly estimated tax payments for business owners or independent contractors.


Disqualified Employment Tax Levy (DETL)


Normally, a taxpayer has 30 days to request a Collection Due Process (or CDP) Hearing before levy action begins. However, there is an exception when it comes to payroll taxes, allowing the IRS to levy immediately.

This exception relates to a taxpayer who has had a Collection Due Process (or CDP) Hearing about payroll taxes in the past. If the taxpayer incurs another payroll tax debt within two years, then the IRS does not have to wait 30 days to levy. In such case, they can levy immediately.

This is called a Disqualified Employment Tax Levy, or DETL. This rule illustrates the fact that the IRS is very aggressive when it comes to payroll taxes, more so than any other kind of tax. IRS management is urging their staff members to make greater use of the DETL, in order to protect the significant revenue stream to the government from payroll taxes.


Wrapping Up


A federal tax levy hurts like nothing else in the arsenal of the IRS.

If you open and read your IRS letters and notices, and cooperate with the IRS, you should not have to worry about a levy in the first place.

But if you do find yourself at the levy stage, work with a CPA who is experienced with tax representation, levies and wage garnishments. Let the CPA negotiate a deal for you. Meet all IRS deadlines. Show a sincere willingness to cooperate. And propose a collection alternative (sometimes called a Tax Relief option) to resolve the tax.

Collection alternatives include the offer in compromise, installment agreement or uncollectible status. The proposal for a collection alternative needs to be carefully crafted to satisfy a dizzying array of IRS rules and regulations. But fear not, it can be done.

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Massey and Company CPA is a boutique tax and accounting firm serving individuals and small businesses in Atlanta, Chicago and throughout the country. Our services include tax return preparation, tax planning for businesses and individuals, IRS tax problem resolution, IRS audits, sales taxes, and small business accounting and bookkeeping.

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