Absolutely - this means the IRS is about to take your stuff.
Let’s back up a bit. A levy is the seizure of your property. This property can be real or personal - your home, land, a vehicle, money in your bank account, etc. This sounds like a dramatic step for the IRS to take - and it is. However a tax collection case to getting to this stage generally involves a lack of action being taken by you (those notices that the IRS keeps sending that end up in the trash), or you’ve been contacted the IRS, they have requested information and you haven’t responded.
Before property can be levied the IRS must provide to the taxpayer:
- Notice and Demand
- Notice of Intent to Levy
- Notice of the Right to a Hearing
The IRS can’t just start taking your property because you owe taxes. In most situations our experience is that a levy can be avoided by working with the IRS. This may involve setting up a payment plan, compromising the tax debt (paying less than is owed), suspending collection actives (where current income is not sufficient to pay taxes), etc.
Moral of the story: to avoid losing your assets communicate with the IRS and respond to their requests. A levy is truly the last step in the tax collection process - it’s a step the IRS would prefer to avoid. This is the area that receives most of the negative publicity - “the IRS just cleaned out my bank account”, “the IRS is taking my house”, “the IRS is forcing my employer to hand over most of my paycheck”, etc.
Again we stress that in the vast majority of situations this can absolutely be avoided.
Let’s review the types of actions that can be taken by the IRS. There are two types of levies: continuing and regular.
A continuing levy is one that remains in place until it is released by the IRS. The typical continuing levy is against wages. The IRS sends notice of the levy to your job. Your employer is legally required to send a portion of your take home pay to the IRS until notice is given to discontinue withholding. The continuing levy can also be applied to routinely paid commissions - i.e. outside salesmen.
For a continuing levy the IRS allows for a standard allowance for the taxpayer - any amount over the allowance is required to be paid to the IRS. As an example the allowance for a single taxpayer with no dependents is currently $249 per week. The IRS takes any excess over this allowance. Since a levy is a tool of last resort it’s intended to be painful to the taxpayer. It’s intended to force the taxpayer to contact the IRS.
A regular levy seizes property held at a specific point in time. This typically apples to bank accounts. The IRS directs your bank to take any funds in your account at a particular point in time.
This type of levy is also used to seize retirement plan assets. A common misconception is that a levy does not apply to retirement funds. The IRS “steps into the shoes” of the taxpayer. So if you have access to the funds the IRS has access - notwithstanding tax or penalties that may apply to a withdrawal of the the funds. The ERISA rules that apply to third-party creditors do not apply to the IRS.
A regular levy can also apply to businesses that have paid non-employee compensation to a taxpayer (I.e. 1099 recipient). This levy is common in the construction industry - the general contractor receives a levy with respect to one of its subcontractors. Since this is a regular levy it applies only to amounts currently due the taxpayer. If no payment is due there are no funds subject to the levy.
Penalties for not withholding amount to 50% of the amount the IRS should have received. If you receive a levy notice - comply!
Once in place a levy can be withdrawn - through communication / action of the taxpayer - including filing missing tax returns, providing the IRS with a summary of current income and expenses, etc.
The best advice to avoid a levy is to communicate with the IRS. Levies are a last resort in the collection process - the IRS would prefer not to use them but they will if the taxpayer is unresponsive.
In our next blog post we’ll discuss Installment Agreements.
Link to Outline Slides: Levies Outline
Link to Video: Levies Video
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