IRS Levies and Wage Garnishments

An IRS levy is a legal collection action that allows the government to take a taxpayer’s property or rights to property to satisfy an unpaid federal tax debt. Depending on the circumstances, a levy may reach money in a bank account, wages and other income, certain federal payments, accounts receivable, investment assets, or other property belonging to the taxpayer.

A levy is different from a federal tax lien. A federal tax lien establishes the government’s legal claim against a taxpayer’s property when a tax liability remains unpaid. A levy goes further: it is an actual collection action against property or income.

For many taxpayers, the first time an IRS collection problem becomes urgent is when a bank account has been frozen or an employer receives a levy against wages. By that stage, however, the collection process has usually been underway for some time. The IRS generally must assess the tax, send a Notice and Demand for Payment, and provide the required notice of its intent to levy before taking most levy actions.

A Final Notice of Intent to Levy and Notice of Your Right to a Hearing is particularly important. Depending on the circumstances, a taxpayer may have the right to request a Collection Due Process hearing and ask the IRS Independent Office of Appeals to review the proposed collection action. Because these rights are subject to deadlines, IRS levy notices should not be ignored.

Even when a levy has already been issued, there may still be options to obtain a release and address the underlying tax liability.

Bank Levies and Wage Levies Work Differently

Although both are IRS collection tools, a bank levy and a wage levy operate differently.

When the IRS serves a levy on a bank or similar financial institution, the levy generally reaches funds in the account at the time the bank receives it. The bank freezes the amount subject to levy and generally holds the funds for 21 days before sending them to the IRS. This waiting period can provide an important opportunity to address an error, request a levy release, demonstrate economic hardship, or make other arrangements with the IRS before the funds are transferred.

A bank levy ordinarily does not continue automatically against money deposited after the levy was received. If the IRS wants to reach additional funds deposited later, another levy may be necessary.

A levy against wages or salary is different. Wage levies generally have a continuous effect. Once an employer receives the levy, it can continue to attach to future wages until the levy is released, the tax liability is satisfied, the collection period ends, or another event terminates the levy.

This is why a wage levy can create an immediate and continuing financial problem. Instead of affecting a single account balance, it may reduce paycheck after paycheck.

However, the IRS does not necessarily take the taxpayer’s entire paycheck. Federal law provides an amount that is exempt from levy, and the exempt amount depends on factors including filing status and dependents. The taxpayer generally provides the employer with the information needed to determine the applicable exempt amount. Amounts above the exempt portion may then be remitted to the IRS while the levy remains in effect.

Certain other payments can also be subject to continuous levy rules. Depending on the circumstances, this may include certain federal payments, retirement income, and other payments subject to federal levy procedures.

Can an IRS Levy Be Released?

Yes. A levy does not necessarily have to remain in place until the entire tax debt is collected.

Federal law requires the IRS to release a levy in certain circumstances. For example, a release may be appropriate when the tax liability has been paid, when the legal collection period expired before the levy was issued, when releasing the levy will facilitate collection, or when the taxpayer enters into an Installment Agreement whose terms do not permit the levy to continue.

Economic hardship can be particularly important for individual taxpayers. If a levy prevents a taxpayer from meeting basic and reasonable living expenses, the taxpayer may be able to request a release based on immediate economic hardship.

Determining hardship generally requires more than simply telling the IRS that the levy is financially difficult. The IRS may request information concerning income, housing, transportation, medical expenses, assets, available cash, and other aspects of the taxpayer’s financial condition. In some cases, a Collection Information Statement and supporting documentation may be necessary.

A levy can also be released when it was issued improperly. Depending on the circumstances, this can include situations where required procedures were not followed, the property was exempt from levy, or another legal restriction prevented the collection action.

Importantly, release of a levy does not eliminate the underlying tax debt.

This distinction is critical. Stopping a wage levy or obtaining the release of a bank levy addresses the immediate enforcement problem, but unless the underlying liability is resolved, the IRS may pursue collection again later.

For that reason, an effective levy-resolution strategy should usually address two separate questions: how can the immediate levy problem be resolved, and what will prevent the taxpayer from returning to the same collection situation?

Resolving the Tax Debt Behind the Levy

Once the immediate enforcement issue has been evaluated, the next step is to determine an appropriate resolution for the underlying tax liability.

For a taxpayer who can pay the debt over time, an Installment Agreement may provide a structured method of resolving the balance. A taxpayer who currently cannot pay without being unable to meet necessary living expenses may qualify for Currently Not Collectible status. In other circumstances, an Offer in Compromise may be considered if the taxpayer meets the applicable requirements.

Before many collection alternatives can be approved, the taxpayer generally needs to be in filing compliance. If tax returns are missing, those returns may therefore need to be prepared before a long-term resolution can be completed.

The correct approach depends on more than the amount shown on the levy notice. We need to understand which tax periods are involved, whether the balances are accurate, how much time remains for IRS collection, whether required returns have been filed, the taxpayer’s current financial condition, and what collection actions have already occurred.

In some cases, there may also be administrative appeal rights. A taxpayer who receives the appropriate Final Notice of Intent to Levy may be able to request a Collection Due Process hearing. Other circumstances may permit review through the Collection Appeals Program or another available procedure.

The stage of the case therefore matters. A taxpayer who contacts the IRS before funds have been transferred or before multiple paychecks have been affected may have a very different situation from someone who waits until collection activity has continued for months.

What Should You Do If Your Bank Account Has Been Levied?

A bank levy requires prompt attention because of the 21-day holding period.

The first step is to determine exactly which liability caused the levy and whether the collection action is valid. The taxpayer should also determine whether the levy creates an immediate economic hardship, whether the funds include money belonging to another person, and whether an existing collection agreement or other legal circumstance affects the IRS’s right to levy.

This period should not be viewed simply as 21 days to find enough money to pay the entire tax balance. Depending on the case, it may provide time to communicate with the IRS, establish the facts, provide financial information, and request an appropriate release before the bank transfers the funds.

If the money has already been transferred to the IRS, the analysis changes, but remedies may still exist in certain circumstances. A levy release and a return of levy proceeds are separate concepts, and the appropriate procedure depends on what has already occurred.

What Should You Do If Your Wages Are Being Garnished?

Because an IRS wage levy is generally continuous, resolving it quickly can be particularly important.

The taxpayer should first confirm the tax periods and balances involved and review the notices that preceded the levy. We also need to understand the taxpayer’s household finances because a levy that prevents the taxpayer from paying necessary living expenses may support a request for release based on economic hardship.

Obtaining a release, however, should not be the end of the process. Without a longer-term collection resolution, the taxpayer may remain exposed to future IRS enforcement.

The objective should therefore be to move from active enforcement to a sustainable collection arrangement.

How PLUS/AUDIT Can Help

When we review an IRS levy or wage garnishment case, our first priority is to determine the current collection status and whether immediate action is necessary.

With proper authorization, we can obtain and review available IRS account information, identify the tax periods and balances involved, examine relevant collection notices, and communicate with the IRS on the taxpayer’s behalf. If a bank levy or wage levy is already active, we can evaluate whether grounds exist to request a release and what financial or supporting documentation may be required.

Once the immediate collection issue has been addressed, we evaluate the underlying liability and available resolution alternatives. Depending on the taxpayer’s circumstances, this may involve an Installment Agreement, Currently Not Collectible status, an Offer in Compromise, an administrative appeal, filing delinquent tax returns, or another appropriate collection strategy.

Our objective is not simply to obtain temporary relief from one levy. The goal is to understand why enforcement occurred, address the immediate problem when possible, and develop a resolution that reduces the risk of the same collection action occurring again.

If you have received a Final Notice of Intent to Levy, your bank account has been frozen, or your employer has received an IRS wage levy, the situation should be reviewed promptly. Deadlines and the stage of collection can materially affect the options that remain available.

PLUS/AUDIT TAX P.C. assists individuals and businesses in Colorado and throughout the United States with IRS levies, wage garnishments, and related federal tax collection matters.