Dangers of Tax Levies. What You Need to Know.
A federal tax levy is the seizure of money or other property by the government to pay off back taxes.
Before levies begin, the taxpayer will receive at least four notices from the IRS, two of which are sent by Certified Mail.
After 5-6 months of notices, the IRS starts the levy process. First, the IRS will send a written notice to the taxpayer that it intends to levy and that the taxpayer has a right to a hearing. The IRS will then start to seize assets by issuing a Notice of Tax Levy to banks or other institution or individuals holding property of the taxpayer.
From our office in Atlanta, Georgia, we see a growing numbers of clients struggling with the serious impact of tax levies.
Regular Levy and Continuing Levy
The IRS uses a regular levy to seize what the taxpayer owns at the moment when the levy is received. It does not impact assets acquired in the future.
Regular levies are used to seize bank accounts.
They are also used to seize payments due to the taxpayer from their customers or clients. In a business context, this is usually very embarrassing.
The IRS uses a continuing levy to garnish the taxpayer’s income that is earned at any time until the back taxes are paid and the levy is released. This includes wages and routinely paid commissions above the amount of the taxpayer’s standard deduction. The standard deduction for 2021 will be $25,100 for married couples filing joint returns and $12,550 for single taxpayers.
The IRS may also 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.
Levy on Retirement Accounts
The IRS is able to levy retirement accounts, such as IRAs and 401(k) and 403(b) plans, in certain situations. The only retirement accounts subject to a tax levy are those accounts where the taxpayer is allowed to liquidate the funds, even with an early withdrawal penalty.
Dealing with a 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 or mortgage. Good negotiation skills help at this point, along with a realistic proposal to resolve the tax debt.
A federal tax levy hurts like nothing else in the arsenal of the IRS. If you or your representative 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, make sure to work with the IRS to get them what they want. Meet their deadlines. Cooperate. And propose a collection alternative to resolve the tax. This proposal will need to be carefully crafted to satisfy IRS demands.
Founded by Gary Massey, CPA, Massey and Company is a boutique CPA firm located in Atlanta, GA, serving the needs of small businesses, business owners and individual taxpayers. Our services include tax preparation, tax planning, taxpayer representation, IRS audits, monthly bookkeeping and accounting.