What Exactly Is a Tax Levy?

A tax levy is a method that the Internal Revenue Service (IRS) and local governments employ to collect the tax money owed to them. You may have money taken from your bank account, garnished from your salary, seized through your property, and other options if you have a tax levy placed against you. Eliminating financial obligations related to taxes is one of the most challenging types of debt. Even filing for bankruptcy won't eliminate all the back taxes you owe, and taxing authorities have more authority than other creditors to take assets from debtors. It is possible to have taxes levied against you without first taking legal action and obtaining a judgment against you. On the other hand, a financial institution such as a bank or credit card company would need to win a legal case against you and fulfill the other requirements. Find out more information about what a tax levy is, when it can occur, and how you can stop it if it is already in progress.

The meaning of a tax levy, along with some examples

A tax levy is a method that the Internal Revenue Service (IRS) and local governments utilize to collect money that is owed to them by taxpayers. Tax levies can collect monies in various methods, including collecting money directly from your bank account or taking a percentage of your income as a garnishment. The following are some of the most often used strategies:

Bank levies: The Internal Revenue Service (IRS) has the authority to demand that your bank suspend all withdrawals from your account for 21 days before taking monies out of your account. After that, the bank is obligated to send the money you owe to the IRS.
Wage garnishment: This occurs when the Internal Revenue Service orders your employer to withhold a percentage of your income and forward it to the agency until the back taxes you owe are paid in full.
Seizure of property: The Internal Revenue Service has the authority to seize the property you own (such as a house, boat, or automobile), sell it, and apply the proceeds from the sale to your outstanding tax liability.
Reduced tax refunds: This may happen because the Internal Revenue Service (IRS) may keep money that they would otherwise refund to you. The Internal Revenue Service (IRS) has the authority to place a lien on state and municipal tax refunds and federal tax refunds. This will cause the state to deliver the monies to the IRS rather than to you.
Alternate possibilities: Tax officials can collect money in a variety of unexpected ways. They may be able to identify other types of value, such as your Social Security income or your business assets, to settle your tax debts if you do not have cash available to pay them.

Creditors often prefer bank account levies because cash is the most convenient asset to deal with (from their perspective). Trying to get your hands on your automobile or any other assets could need extra effort. Because it is a government entity, the Internal Revenue Service (IRS) has more power than other creditors. Essentially, this gives it the ability to skip ahead in line. Suppose you owe money to several different creditors (such as the Internal Revenue Service, a mortgage lender, or an issuer of credit cards). In that case, the IRS has a strong probability of collecting the debt first.

How does the process of tax levy work?

A levy is always possible if you owe money to the Internal Revenue Service (IRS) or any other taxation entity. However, it is typically reserved for when exhausted from all other options. Creditors must give ample notice to the debtor before seizing any assets. In a perfect world, you'll figure out a means to avoid having to pay the tax altogether. Be sure to check your inbox regularly since the IRS is mandated to send you a letter in the mail if you owe any back taxes. Keep the Internal Revenue Service informed of any changes to your financial situation, and always use the most recent version of your mailing address. A tax levy may be near if you receive a document marked Final Notice of Intent to Levy and Notice of Your Right to a Hearing. The IRS could confiscate the funds or your property within 30 days of receiving the letter. When this occurs, it is prudent to get in touch with the Internal Revenue Service as soon as possible to clear things up. There are occasions when the Notice of Intent is delivered ahead of schedule. It may arrive in the mail before a tax bill, for instance, leaving you to wonder how you could have possibly missed any earlier notifications. There is no question that one should take this seriously. Still, as long as you make the payment promptly (or come to an agreement with the Internal Revenue Service), you should be able to avoid any issues.

Is it possible to remove a tax levy?

It is possible to get a tax levy removed from your account. You can file an appeal over the incident, which will stop any further action regarding a tax levy. You can even request your creditors to return any assets they levied against you after that. Contact the Internal Revenue Service (IRS) as soon as possible to make arrangements to settle your tax obligation and to request that a tax levy release be issued. When you appeal, you will be working with the Independent Office of Appeals of the Internal Revenue Service (IRS), a different office from the Collections office. Ask a certified public accountant (CPA), an Enrolled Agent (EA), or a local tax attorney how you should go if you require additional assistance in appealing a tax levy to get it released. When you pay up your tax debt, usually speaking, they will release the tax levy. However, depending on the circumstances, you may be able to file an appeal and have the IRS discharge a levy for another reason. A levy is required to be released by the IRS in the following situations:

You have settled the debt that you owed in full.
The collection period was already over when the levy was finally distributed.
If the charge is lifted, you will be able to make your tax payments on time.
You decided to go with an Installment Agreement. However, the terms of the agreement do not permit the levy to be collected.
Since the amount you owe is less than the property's value, the Internal Revenue Service will continue to pursue collection of the debt even if the levy is lifted.

The Internal Revenue Service may decide not to collect the tax debt from you if doing so would put you in a challenging financial position. You will, however, have to deal with the tax liability at some point in the future as long as it is outstanding.

Tax levy vs. tax lien – what is the difference?

Tax levy

Property or assets seized legally
Not recorded publicly
Makes no impact on the credit report

Tax lien

A claim made legally against property for future payment
Recorded publicly
Is likely to make an impact on the credit report

In addition to levying your bank account or wages to pay back taxes, the Internal Revenue Service (IRS) may also file a tax lien against any property you own. A lien is distinct from a levy. It grants creditors the authority to potentially seize and sell your assets at some point in the future. On the other hand, a levy does not grant creditors this authority. Through a levy, the creditor makes their intention to seize your assets. Creditors are granted an interest in the assets they own, which helps to ensure that they will be paid in the future. For instance, the Internal Revenue Service (IRS) can have an interest in your home since there's a lien on it. The Internal Revenue Service (IRS) files documentation at local government offices to establish a tax lien and a public record of the interest. Since it is a public record, it may affect your credit report. Your credit report should not be affected by a tax levy because it is not a public record. Suppose you ever wish to sell or refinance an asset. You may run into complications if the asset is subject to a tax lien since the tax liability must be paid off or settled before you can have complete control of the asset. Lenders are often hesitant to authorize a loan on a property with outstanding liens because they don't want to wait in line behind the Internal Revenue Service (IRS).

How to avoid being charged for taxes

You can reduce the chances of having a tax lien placed on your property by using one of the many available strategies. Even if you cannot provide evidence demonstrating that the tax is discriminatory, you may still be able to avoid paying the tax by utilizing the strategies outlined in the following paragraphs.

Make sure you pay your tax bill on time and in full

The most excellent approach to stay out of legal hot water is to stay current on whatever tax obligations you have. But unfortunately, that's not always the case. Talk to the Internal Revenue Service when you are having issues with your taxes to find out what your choices are. Suppose you require additional information and/or advice. In that case, you may also opt to see a local attorney or a credit counselor who works for a non-profit organization.

Make installment payments on your tax bill

Suppose you've recently found yourself in a difficult financial situation. You are not always required to pay the total amount of your tax due in April. In that case, the Internal Revenue Service (IRS) may be willing to work with you to establish a payment plan that spreads your tax obligations out over a more extended period of time. Suppose you formally establish an installment plan with the Internal Revenue Service (IRS). In that case, they won't automatically assume that you've chosen to ignore your tax bill and the interest and penalties that come with it.

Make an offer

You might also try to negotiate a settlement with the IRS for your tax debts and pay them off. You can demonstrate that you would be unable to pay what you owe by making a compromise offer, which considers your income, expenses, and assets. If your appeal to the IRS is successful, they will allow you to pay an amount that is less than the total amount of your tax obligation.

Key takeaways

The Internal Revenue Service will go through a legal process known as a tax levy to collect the back taxes you are responsible for paying.
If you fail to pay your tax debt, the Internal Revenue Service (IRS) has the authority to garnish your earnings, confiscate money from your bank account, seize your property, and take other collection actions.
You have the right to contest a tax levy and make an effort to get it lifted. Still, ultimately, you will be responsible for paying the tax burden assessed against you.
You can avoid a tax levy by paying your tax bill in full and on time, by setting up a payment plan with the Internal Revenue Service (IRS), or by considering an offer in compromise if your current circumstances suggest that you cannot afford to pay your tax bill in full.