How to Handle an IRS Tax Levy or Wage Garnishment

Is there a difference between a tax levy and a garnishment?

A federal tax levy is the seizure of money or other property by the government to pay off back taxes.

A garnishment is a type of levy, where the IRS seizes wages to satisfy a tax debt.

Both a levy and a wage garnishment are one of the most powerful weapons in the arsenal of the IRS.  They gets the attention of the taxpayer like nothing else.

The Tax Levy Notice

An IRS levy is the end result of a series of IRS notices, letters and warnings. It should not come as a surprise. In fact, a levy is usually the result of a taxpayer ignoring or neglecting to respond to the notices, letters and warnings from the IRS.

It is crucial to respond promptly to an IRS bill titled final notice, as it indicates an impending levy and requires immediate action to discuss payment options or potential resolution of tax debt.

At any point along the way the taxpayer or their CPA can stop the process by contacting the IRS to work out a deal.

How Many Notices Does the IRS Send Before a Levy or Wage Garnishment Begins?

Before an IRS levy begins, the taxpayer will receive at least four letters or notices from the IRS over a period of about 5 months.  These letters are:

• CP-501 – You owe money to the IRS.  (Here is an example of a CP-501).
• CP-503 – We have not heard from you and you still owe money to the IRS.  (Here is an example of a CP-503).
• CP-504 – Intent to levy.  If you don’t pay the amount due immediately, the IRS will seize your assets in an attempt to pay the taxes due.  (Here is an example of a CP-504).
• Letter 11, Letter 1058 or CP-90 – Final notice of intent to levy.  Levy action will begin in 30 days.  (Here are examples of Letter 11 and CP-90). The final notice of intent to levy indicates a critical point where immediate action is required to prevent legal actions like wage garnishment or property seizure.

The last letter in the series will contain Form 12153, Request for a Collection Due Process Hearing or Equivalent Hearing.

The way to stop a levy is by requesting a hearing with Form 12153.  At this point, the taxpayer has 30 days to request the hearing to resolve the matter.

IRS Levy and Tax Lien

Many people get confused between a tax levy and a tax lien.

A federal tax lien comes first. It starts 10 days after the IRS demands payment on back taxes and the demand goes unanswered. The purpose of a tax lien is to protect the government’s interest in the taxpayer’s assets. A lien represents a legal claim the IRS asserts against an individual’s property to secure future tax debts and informs the public that the IRS will receive payment first when the property is sold.

A levy refers to the government seizing assets, such as bank accounts or wages. Levies generally start months after the lien is already in place.

Collection Due Process Hearing

The Collection Due Process 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, Enrolled Agent or tax attorney experienced in tax representation handle the entire hearing process on behalf of the taxpayer.

A Power of Attorney will be required.

Disqualified Employment Tax Levy (DETL)

Normally, a taxpayer has 30 days to request a Collection Due Process 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.

Levy Action Begins

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

The IRS levies include the legal seizure of wages, bank accounts and retirement plans. Financial institutions play a crucial role in this process, as they are required to comply with IRS levies and may be directly affected by legal actions against debtors.

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.

IRS Wage Garnishments, or IRS Levies on Wages

IRS wage garnishments are a form of levy imposed to collect unpaid taxes. A garnishment is called a continuing levy because it is used to take wages as they are earned, not on one specific date.

A garnishment stays in effect until the back taxes are paid and the levy is released. Garnishment includes both wages and commissions.

Why is There a Tax Levy on My Paycheck?

The government is allowed to levy your paycheck for a number of reasons.  If the levy relates to the IRS, then it is a result of back taxes owed.

An IRS wage garnishment or a levy on your paycheck starts with an IRS wage garnishment letter  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 who is counting on a regular paycheck.

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

How Much Can the IRS Garnish?

IRS wage garnishments are limited to the amount in excess of the taxpayer’s standard deduction on Form 1040.  You can verify this by checking the IRS wage garnishment letter.

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 or Warning?

We are sometimes asked if the IRS can garnish wages without notice or warning.  As stated above, the answer is no.  An IRS wage garnishment,  or any other kind of IRS levy, only starts after a series of warnings, in writing,  from the IRS.  These warnings 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 and the warnings begin to arrive to negotiate a deal with the IRS.  For example, you may be able to work out an installment agreement to avoid IRS wage garnishments.

Bank Account Levies

The Internal Revenue Service may also use a levy to seize bank accounts. The bank levy only applies to money in your bank acccount at the time of the levy, as part of the property to satisfy tax debts. Unlike a wage garnishment, it does not impact assets acquired in the future.

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 CPA 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.

Federal Tax Levy on Retirement Accounts

The Internal Revenue Service is able to legally seize certain types of retirement accounts, such as an IRA, a 401(k), and a 403(b) plan, as well as personal property. 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.

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 IRS Garnish Social Security Payments?

Similar to IRS wage garnishments, the government can also seize social security payments to cover back taxes.  The IRS is allowed to 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.

Other Types of Tax Levies

An accounts receivable levy is where the IRS seizes amounts due to the taxpayer from their customers or clients to pay off a tax bill. This is usually highly embarrassing and can seriously harm the reputation of your business.

Another type of tax levy is the tax refund reduction levy. Here, the IRS keeps your income tax refund and applies it to your back taxes. We see this all the time. Additionally, under the State Income Tax Levy Program (SITLP), the IRS can seize your state tax refund to satisfy tax liabilities, often after sending warning letters.

CPA Tax Tip: Check out our article on Separation of Liability Relief: Injured Spouse, which talks about what do to when the IRS seizes a tax refund relating to taxes or other debts of your spouse that were incurred before your marriage.

Release of a Federal Tax Levy

Once levied assets are in IRS hands, options are few, but they do exist. You or your CPA needs to contact the IRS as soon as possible and ask them to release the levy by agreeing to pay taxes owed. If the IRS refuses to cooperate, ask for a “partial release,” based on a claim of hardship, 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.

Can the Georgia Department of Revenue Issue a Tax Levy?

The Georgia Department of Revenue, or GA DOR, can most certainly levy assets to satisfy a tax debt, including overdue income taxes. They can also garnish wages.

The GA DOR may also issue Notice of Deficiency. This is used to direct a third party to hold property until the Department of Revenue seizes the property by means of a levy or garnishment. The Notice of Deficiency will be released when the tax is paid, either by the taxpayer or by the levy itself.

Filing for bankruptcy stops a Notice of Deficiency.

Can I Get a Passport if I Owe Taxes?

If you owe significant tax to the IRS, you may be in for a surprise.

The State Department will revoke your passport, or not issue you a new passport, if you owe a significant tax debt to the IRS.  If you owe taxes to the IRS and you have international travel plans, contact your CPA as soon as possible to see if these rules impact you.

CPA Tax Tip:  Resolve your tax debt and protect your passport.

Check out our article on Passports and Back Taxes for more details.

Do Not Ignore IRS Letters!

The best advice we can give you to avoid an IRS levy or lien is: If you get letters or notices from the IRS about a delinquent tax debt, don’t ignore them.

It is crucial to respond to an IRS bill, especially one titled ‘Final Notice – Notice of Intent to Levy and Your Right to A Hearing,’ to avoid severe consequences like property seizure. Options such as payment plans or settlements can help manage the situation.

By dealing with IRS letters and notices proactively, you will not get to the stage of a tax levy or an IRS wage garnishment.

And the same is true for the state Department of Revenue.

In summary, a federal or state tax levy hurts like nothing else in the arsenal of the IRS or the state taxing authorities. If you open and read your tax letters and notices, and cooperate with the government, you should not have to worry about a levy in the first place.

Who Do I Call about a Tax Levy or an IRS Wage Garnishment?

The best person to call about a tax levy or wage garnishment is a CPA or Enrolled Agent who has experience with Internal Revenue Service (IRS) negotiation, tax settlements, and tax problem resolution. Let them represent you under a Power of Attorney. At our CPA firm, we do this all the time for our clients. Generally, the fee you pay your CPA is well worth avoiding the aggravation you will have by trying to do it yourself.

Let your CPA or Enrolled Agent negotiate a deal for you. Meet all IRS and state tax deadlines. Show a sincere willingness to cooperate. And propose a collection alternative (sometimes called a Tax Relief option or settlement) to resolve the tax.

Tax settlement alternatives include the offer in compromise, installment agreement or the IRS hardship program (currently not collectible status). The proposal for a collection alternative needs to be carefully crafted to satisfy a dizzying array of tax 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 tax, and small business accounting and bookkeeping.