If the IRS wants to get their hands on a tax debt, they have dozens of ways to get the job done. Some are minor—even a simple notice or notification of an estimated tax bill can work. But when we think about IRS collections, we’re rarely thinking about those small, simple actions, right? Instead, we’re probably thinking about the big ones, severe IRS actions that can put a serious financial strain on your day-to-day life. And certainly among the the most infamous: IRS levies.
If the IRS has issued a levy on your property or a financial account, you know well that the impact is immediate and serious. For most taxpayers, an IRS levy will end up as the single worst financial experience of your life—including dealing with all the tax debt that got you there.
Trust us, we’ve seen it all. As a full-service tax representation firm with nearly 20 years fighting on the behalf of our clients, we know first hand the kind of impacts that IRS levies can have. Not only do they have the obvious impact on your finances and property, they take another toll. They add to the stress and overwhelm that come when you’re facing serious tax debt—or debt of any kind. They can make you feel like you’ve failed, that you can’t provide for your family, or that you’ve fallen too deep into debt and that you’ll never see the light.
Believe us when we say: You can beat this. Now, don’t get us wrong here. The IRS will give you the fight of your lifetime. But dealing with an IRS levy doesn’t have to be the end of the world.
What’s the first step to fighting your IRS levy and putting your tax debt behind you? Informing yourself. Knowledge will go quite a long way in helping you face your tax debt—and the IRS—with confidence. It will help you understand what you have to deal with, how you got there, and give you a roadmap for getting on with your life.
We’re here to provide that roadmap. We don’t believe we should only help people when they call. Instead, we regularly publish this type of info so that those who seek it can start the learning process on their own. So, read on to learn everything you’ll ever need to know about IRS levies. First, we’ll explain all the relevant terms. Then, we’ll help you understand what kinds of circumstances lead to IRS levy actions. We’ll address some other pertinent info before wrapping up with the IRS levy FAQs we hear from clients.
Let’s get started.
For a basic definition of IRS levy, we’ll look directly to the IRS. On their website, they provide the following definition:
“A levy is a legal seizure of your property to satisfy a tax debt.”
So, if you have tax debt, the IRS can legally take your property as a payment of sorts. Of course, like anything involving the IRS, it’s not quite that simple. The IRS can’t just come in after Tax Day and levy your car or your bank accounts because you owe $300 on your taxes. But we’re getting ahead of ourselves here. Instead, let’s roll back and understand the difference between levies and their close relative, liens.
Indeed, when it comes to tax debt, levies and liens are often spoken in the same sentence. While they closely relate to each other in legal terms, you should understand some key differences between the two. These differences will help you understand the timeline of IRS collections and may help you fight your tax debt down the line.
Here’s how the IRS defines the difference between tax levies and tax liens:
“Levies are different from liens. A lien is a legal claim against property to secure payment of the tax debt, while a levy actually takes the property to satisfy the tax debt.”
So, liens make the claim on property and levies take action on that claim. If you remember one thing about the difference between liens and levies, let it be that they imply an order. Liens prepare the dinner table and levies eat the meal. Or, liens set the volleyball and levies spike the ball. Understanding how liens and levies relate to each other can give you a sense of understanding your IRS notices as you receive them.
What can the IRS place a levy on? Well, quite a lot—the IRS can issue a levy on any property or right to property you may have. Here’s an extensive list.
The IRS will likely only issue a levy when you have significant unpaid tax debt. However, you might find yourself in a number of scenarios where you could rack up that amount of tax debt. In short, the only path to an IRS levy leads from tax debt. But there are many paths to that tax debt. Let’s go over a few of them.
When you make mistakes with your tax withholding, you can run the risk of facing serious tax debt down the line.
Here’s why: When you start a new job and fill out your W-4, you instruct your employer as to how much of your income to withhold and apply to your income tax. Based on the various deductions you check, your filing status, and your dependents, your employer will direct a portion of your income to the IRS and state tax agencies. If you withhold more income tax than you actually owe, the IRS will owe you a refund. But when you withhold too little, you will owe the IRS.
And for self-employed people, the calculation is the same, with the only difference that you don’t have an employer to save and direct your taxes to the IRS on your behalf. Instead, you estimate and pay your taxes to the IRS quarterly. Any overpayment or underpayment will result in, you guessed it, a refund—or a tax bill.
Tax withholding errors can lead to tax debt, plain and simple.
Why might the IRS choose to audit you? Well, for the full answer, check out our blog on the subject. But for our purposes here, the answer isn’t too terribly important.
Typically, the IRS will choose to audit you when they believe something might be off about your tax return. That doesn’t mean they think you’ve done anything untoward—in fact, most IRS audits trigger after a computer program finds something about your tax return that makes it different from most other similar tax returns. But regardless of the reason for your tax audit, it can result in the same thing: tax debt.
Most IRS are simple and straightforward, but they do run the risk of resulting tax debt. And because you haven’t planned for or expected this new tax bill, you may not be able to pay it all at once. And that means you’ve now found yourself in tax debt.
3. Unreported Income
Just started renting out a vacation home but forgot to report the income? It happens all the time. But regardless the type of income you failed to report—and why—unreported income can result in serious tax debt.
When you face that much unexpected debt, you might not be able to pay. And if you fail to respond to the IRS’s bills and notices, you might find yourself facing IRS levies in the near future.
The IRS doesn’t just levy property or accounts willy nilly. If the IRS issues a levy, it really shouldn’t come as a surprise. And in most cases, it won’t. Typically, most taxpayers who end up saddled with a tax levy have become aware of their tax debt long in advance.
Of course, we don’t think that means you deserve for any of your property to be seized. Instead, we think that this can give you an added edge when dealing with your tax debt and avoiding a levy. Ultimately, understanding the steps that lead to an IRS levy can help you avoid one in the first place.
Generally, the IRS will only issue a levy after these four requirements are met:
When the IRS suspects you owe them money, their first step is to assess your tax and to send you a Notice and Demand for Payment. In other words, they calculate how much they think you may owe, and they send you a tax bill. This doesn’t mean their estimated tax total is correct! But based off the information they may have from your employer or other financial institutions, they will send you an official copy of that estimate and instruct you to pay it.
As with most things relating to the IRS, upon receiving this notice, you should enlist the help of a tax professional and make a swift response. For one, the longer you wait, the more any potential tax penalties will continue to pile up. Additionally, your decision not to respond only forces the IRS to proceed further down its chain of collections actions, which will ultimately result in serious consequences.
We’re never here to judge, because we know a million reasons might cause you to neglect to pay your tax bill, even after receiving a Notice and Demand for Payment. Possibly you don’t have the money to cover the total and you don’t know about their repayment options. Perhaps you hope they sent your letter in error. Of course, you might think that ignoring it will help the problem go away—or that they won’t follow up. And in some cases, you might just be wracked with guilt or shame or other bills. To those who have never faced the IRS, doing so for the first time can feel nearly impossible.
Whatever gets you to this point, you should always try to respond. When you don’t pay and don’t respond, the IRS will move to the next step.
If the IRS has sent you a bill and you haven’t paid or responded to them, they’ll end up sending you a Final Notice of Intent to Levy and Notice of Your Right to A Hearing. Don’t get bogged down in the name; it’s a levy notice. But this notice will outline the fact that the IRS intends to issue a levy and give you options for contact or appeal.
The IRS can present this notice to you in a number of ways. They might give it to you directly and in person, or they may leave it at your business or at home. In some cases, they may send it to your last known address by certified mail with return receipt requested.
(If the IRS plans to levy your state tax refund, you might receive a slightly different notice: a Notice of Levy on Your State Tax Refund, Notice of Your Right to Hearing.)
What does this mean? Essentially, this notice informs you that the IRS may reach out to third parties to gain information or attempt to collect your tax liability. For example, the IRS might reach out to your employer with the plan to garnish your wages. Or, the IRS may reach out to your bank to determine the amount of equity you have in your home. The IRS may also simply reach out to your bank or brokerage firm to begin the process of levying your savings or stocks directly.
Once the IRS issues a levy, the really severe consequences for tax debt start to kick in and everything gets a bit more complicated. So your best plan to stop an IRS levy should be to avoid it altogether. So that means paying your taxes, paying your tax bill, or arranging for repayment—and not ignoring messages from the IRS.
But should your situation progress to this stage, there are a few ways to get rid of that IRS levy and get back on the right path. Namely, the IRS must release the levy in the following circumstances:
Like with most IRS actions, you can always file an appeal. Here’s how that process works, according to the IRS:
How does the IRS determine to issue a levy on your home rather than on your wages? Typically, this determination will fall on a couple of factors. But usually it boils down to what information the IRS has and which property or accounts the IRS thinks it can get its hands on.
The IRS has relatively wide access to your financial information, especially if you’ve filed your taxes over the years. When you haven’t, the IRS is left to guess. That’s one reason that they sometimes assess tax debts that far exceed what taxpayers actually owe. When you don’t file your taxes, they instead work through information reported by other entities: your work, your broker, your bank, and so on.
Through this information (and sometimes through in-person scouting via tax audits or other investigations), the IRS may determine that a boat or RV stored on your property would serve as the best option to levy. Or, when this kind of information is unavailable, levying your wages through a wage garnishment might be the surest bet.
It should go without saying that the IRS doesn’t levy properties like homes or cars just to hold onto them. It needs to liquidate the property if it wants to get its hands on the money. So, one way or another, they’ll need to turn the properties they levy into cash.
Much like banks which might repossess a home after a borrower fails to pay their mortgage, the IRS may choose to auction your property. Unfortunately, this can have an adverse impact on the amount of money applied toward your tax debt. As the IRS describes, “If the proceeds of the sale are less than the total of the tax bill and the expenses of levy and sale, you will still have to pay the unpaid tax.”
On the other hand, if the proceeds from the sale of your property exceed the amount you owe, the IRS will notify you and you may request a refund. The irony of the IRS seizing property to pay a tax debt and giving you a refund isn’t lost on us here; this outcome should serve as yet another reason to avoid an IRS levy as best as you can.
If you receive a levy notice, consider that your sign: It’s time to get help.
Of course, we’d recommend you reach out to a professional tax team long before that, but let us share a secret that evades much of the dialogue around tax relief. There’s no wrong time to get started. Getting started with tax relief as soon as you learn about it grants you some flexibility, brings other advantages, and can save you money. But the second best time to get started is now.
While we’ve offered up quite a bit of info about IRS levies, you should never take the next step alone. A tax professional can help you navigate your specific tax situation and understand what options you may have in front of you. You may learn that the best course of action involves filing your past tax returns. Or you may learn that a recent coronavirus-related layoff might help you apply for economic relief that removes your IRS levy and might help with repayment. The truth is, you simply won’t know until you get in touch with a professional tax team who can help you choose the best path forward to save money and make things right with the IRS.
We’d be happy to be that tax team. Because, well, helping our clients get back on the path to a brighter financial future? That’s what we do.
Facing IRS levies or other notices from the IRS? Don’t go it alone, and don’t hesitate. Get the information and help you need today—simply reach out via our free live chat.
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