The IRS has ways to collect taxes from delinquent taxpayers, one of which is through a tax levy.
Although this method is among the best ways for the IRS to collect tax debt, it can be a pain to deal with if you’re on the receiving end. So, what is a tax levy? Read on to find out what it is and how to avoid this collection method.
What is a Tax Levy?
The IRS tax levy is a legal seizure of your assets to satisfy your outstanding tax debt. It’s different from a lien, as liens are only legal claims to secure debt payment. Levies are the actual collection of assets, including wages, personal and business bank accounts, vehicles, houses, social security benefits, and even tax refunds.
In issuing a levy, the IRS will have to assess your tax and send you a Notice and Demand for Payment. If you neglect or refuse to pay, you’ll receive a Final Notice of Intent to Levy and a Notice of Your Right to a Hearing. Lastly, you’ll be notified that the IRS can contact third parties about your tax liability. Once you meet all of these requirements, you’ll be liable for a tax levy.
Why a Tax Levy is Bad News for You
1. The IRS can garnish your wages
Wage garnishment is the most common form of tax levy. It is when your employer must hold back a percentage of your paycheck to send to the IRS. Usually, your employer will withhold your paycheck following one full pay period from the receipt of the notice. This will remain in effect until the debt is fully paid. However, employees are safe from layoffs due to wage garnishment based on the Consumer Credit Protection Act.
2. Your tax refund will be reduced
The IRS can withhold or deny paying your tax refund, which will go toward repaying your tax debt. This tax levy also applies to other state tax refunds. Meaning, the state shall remit your refunds to the IRS to satisfy your debts.
3. The IRS can also take from your Social Security
The automated Federal Payment Levy Program (FPLP) enables the IRS to make a continuous levy of up to 15% on your federal payments, including your Social Security benefits. In some cases, the agency may withhold your Social Security benefits entirely until you’ve repaid your debt or have made payment arrangements.
4. Your bank accounts will be frozen
When you fail to pay your outstanding taxes, the IRS will contact your bank with an order to freeze your accounts. The bank will then hold your available funds for 21 days. Once those days are up and you fail to repay or arrange a payment plan with the IRS, the bank will give your funds to the IRS for the money you owe.
5. Tax levy can put your properties and automobiles in jeopardy
Other tangible assets like boats, vehicles, or real estate properties are also applicable for tax levies. The IRS can seize and sell your properties to settle outstanding tax debts. A public post will be made at least 10 days before the sale. You’ll receive a notice regarding the sale, as well. Once your tax debts are paid, any leftover funds from the sale will be refunded to you.
How to Avoid Getting a Tax Levy
Pay your taxes on time (or even when it’s late)
The surest way to avoid a tax levy is to pay your taxes on time. However, this may not always be an option. Still, you should pay your taxes even if it’s late. Otherwise, you’ll incur interest rates and penalties. If you’re unsure what to do, you can ask the IRS or consult a tax lawyer to know your options.
Request for an installment agreement
Tax levies take effect once the IRS determines that you are neglectful or refusing to pay your taxes. You can avail yourself of the IRS installment agreement to show the agency you’re willing to pay and avoid the risk of a tax levy. Under this agreement, you’ll make monthly payments toward your tax debts based on your income.
Make an offer in compromise
If you can’t make monthly payments, you can also negotiate with the IRS for an offer in compromise (OIC). Upon the IRS’ approval, OIC allows you to pay less than the full tax bill. You’ll need to give a realistic offer reflecting your income, expenses, and assets to show you can’t pay the full amount.
Apply for non-collectible status
Another option you have is to apply for a non-collectible status, which temporarily stops the IRS’ attempts for tax levies. You can apply for this if you have difficulty paying or have little to no room for tax debt payments after your expenses.
However, tax liens remain on your record, obligating you to apply for this annually. Nevertheless, this approach will give you more time to find a way to pay off your tax debt without the IRS seizing your assets.
File Chapter 7 or Chapter 13 bankruptcy
Apart from the non-collectible status, you can also file for bankruptcy using Chapter 7 or Chapter 13 to stop creditors from collecting debts, including tax levies. Keep in mind that this will only stop collection actions as long as the petition is in effect.
Filing for Chapter 7 may require you to give up personal assets to get rid of unsecured debts and protect those that are deemed exempt. Meanwhile, Chapter 13 focuses on a repayment plan, allowing you to catch up on secured debts and discharge unsecured ones.
Keep Your Assets Free from a Tax Levy
The IRS takes tax debt collection seriously by employing several collection methods as the world’s most powerful collection agency, including tax levies. Although this method is an effective way for the IRS, this can spell trouble for you, especially if you have a hard time paying your tax dues. If that’s the case, it’s best to show your willingness to pay so there’ll be no need to seize your properties.
If you have a tax problem and need an expert to help you settle the issue, reach out to us at Peace of Mind Tax Help. Our tax negotiation services and mediation are handled by leading experts, helping you minimize your tax liability. Contact us today to know more!