The IRS has the power to levy and seize taxpayers' property both directly and indirectly held by a third party. The IRS must follow internal procedures prior to taking property, but once the IRS has given proper notice to a taxpayer, the IRS can levy and seize property until it collects the entire unpaid tax balance. This may cause significant financial disruption or hardship, including missed mortgage or rent payments, car payments, student loan payments and other necessary living expenses. The IRS may also garnish your wages, which may adversely impact your employment upon notification to your employer. Further, the IRS may seize property directly, sometimes without prior warning.
Taxpayers have the ability to stop this collection process. Read on to understand the IRS procedures for initiating collection enforcement using a levy and what you can do about it. Importantly, the IRS provides taxpayers with a short period of time to respond and take action. Taxpayers who do not respond may lose valuable rights to appeal subsequent IRS enforcement activities.
How does the IRS levy process begin?
The IRS may levy any taxpayer property which has an IRS lien attached to it, except exempt property. An IRS lien is a statutory lien that arises and becomes effective when the IRS has assessed tax against a taxpayer, demanded payment and provided notice of the assessment and demand to the taxpayer. The lien gives the IRS an ownership interest in the taxpayer's current and future property and is created automatically upon the occurrence of assessment, demand and notice without any other action required by the IRS. Many taxpayers mistakenly believe that the IRS must file a notice of federal tax lien to levy against property, but a notice of federal tax lien is filed for the purpose of providing notice to and obtaining priority against other creditors.
What is the difference between an IRS levy and seizure of property?
The IRS levies property held by third parties, like taxpayer's bank accounts held by financial institutions, or wages held by the taxpayer's employer. The IRS seizes real or tangible personal property held by the taxpayer. The IRS can also seize tangible personal property held by third parties. A levy applies to property held by third parties that the IRS can easily take by requesting the third party to write a check to the IRS. Given the inherent difficulties encountered when attempting to collect and sell other physical assets, the IRS attempts to levy and collect the tax debts by requesting third parties to transfer the taxpayer's money to the IRS. If any tax debts remain after third parties satisfy the levy requests, the IRS then will generally move to collect the debt using enforcement strategies against the taxpayer's other physical assets.
How Does the IRS Determine Who Should Be Levied?
The IRS evaluates the use of a levy on a case by case basis by reviewing the facts and circumstances surrounding a tax debt. A revenue agent must consider the taxpayer's financial circumstances including the tax liabilities, ability to pay and the ability to provide information. The IRS should also attempt to determine the taxpayer's sources of income and cooperation with prior notices, tax compliance, and effort to pay current taxes and back taxes. The IRS generally attempts to levy on available assets held by third parties before attempting to foreclose on real estate or other property of the taxpayer.
What Kind of Notice Must Taxpayers Receive?
Once the IRS determines that a levy is an appropriate enforcement tool, it must serve proper notice on the taxpayer before levying property. A notice and demand for payment is the first requirement (which gives rise to a federal tax lien if unpaid within 10 days after the date of the notice), followed by a notice of intent to levy and a notice of Collection Due Process rights. Collection Due Process is an important right for taxpayers who plan to challenge the levy.
Must the IRS Send Notice to a Taxpayer Before the Third Party?
The IRS may contact a third party after serving Collection Due Process notice on the taxpayer without giving notice to the taxpayer that third party contact is imminent. This may catch a taxpayer off guard and create a heightened sense of urgency. Failing to respond may limit a taxpayer's ability to stop or reduce the levy.
What Kind of Property Is Subject to a Levy?
Many different types of property are subject to levy including wages, bank accounts, retirement accounts and other financial accounts. The IRS does provide exemptions for specific types of property defined in the Internal Revenue Code. Exempt property includes unemployment benefits, specific types of pension and annuity payments, workers compensation, certain public assistance payments and other military disability payments.
There are other non-income specific exemptions including a standard deduction and percentage of non-exempt income that relate to wage garnishment. Other issues arise related to levying spousal income. Based on the above exemptions, the IRS can and will take the entire balance of a bank account when possible unless a taxpayer takes action to stop the bank levy. For wage garnishment, these exemptions may not leave a lot left over to pay other bills after withholding for taxes.
What Is the Effect of a Levy?
The type of property levied impacts the duration of a levy. A levy on a bank account, for example, relates to the value of the bank account at the time of the levy. Money added to the account after the levy is not subject to the levy. The IRS would have to issue another levy to collect funds added after the prior levy.
A levy on a taxpayer's wages, however, is a continuous levy and will subject future wages to the levy until the tax debt is paid in full or the taxpayer takes action to resolve the tax debt.
Can a Levy Be Released?
Under certain circumstances, a levy can be released. Examples include when a taxpayer is protected by the automatic stay in bankruptcy, when a taxpayer has requested a Collection Due Process Hearing that is pending, a taxpayer that can show economic hardship would result from the levy, improper notice, expiration of the collection period, or when a taxpayer can show that a levy release would prevent collection of the tax. Importantly, a taxpayer should make efforts to schedule a Collection Due Process hearing and prepare for it in cases where immediate levy implementation would cause economic hardship like missed mortgage or car payments, that could result in a loss of property and employment.
How Can a Taxpayer Stop a Levy?
Taxpayers can take action to stop a levy in many cases. Taxpayers facing economic hardship may request relief prior to levy enforcement. Taxpayers may also request relief if the IRS does not follow its internal protocols or a hearing is pending. Other taxpayers may propose an installment agreement or offer in compromise to take control of their finances as they pay the debt over time on their terms or a reduced tax debt under an offer in compromise plan. There is also levy relief available during the time the IRS reviews the plans for reasonableness and completeness.
If you have received an IRS tax notice threatening immediate levy or seizure of property, contact Michigan tax attorney Andrew M. Steiger at Steiger Tax Law for a free consultation to discuss your options to prevent financial disruption to your life. Take action when you receive a levy notice to minimize the disruption to your life.