Here is the usual scenario: You just got a dreadful call from your boss or human resources person that they received a tax levy and they are legally required to garnish your paycheck.
Perhaps you just wrote a check and it bounced. You call your bank and that notice from the IRS that you ignored was really important!
This article from the IRS tax relief team at Flat Fee Tax Service, Inc., outlines what a notice of tax levy is; the 5 most common ways that the IRS can and will levy your assets and income; and how to go about stopping a tax levy.
A notice of tax levy is written legal notice to your employer or financial institution that you owe monies to the IRS and that it their legal obligation to forward that money to the IRS to satisfy your income tax debt obligation.
The Internal Revenue Service (IRS), unlike any other collection agency, does not have to go to Court to get a judgment so that it can issue a levy. Section 6330 of the Internal Revenue Code governs the tax levy process.
The IRS will begin the process by sending you a series of notices. The goal of each IRS notice is to get your attention. If the federal government is sending you notices about an income tax debt, that means the IRS wants you to communicate with them.
The IRS typically sends notices approximately 30 days apart until such time that you receive a Demand for Payment and then a Final Notice of Intent to Levy.
Although you will receive a number of notices from the IRS about your back tax liability, there are two notices that should take priority: CP 504 Letter
The first letter will be titled Notice of Intent to Levy. It will have CP504 in the upper right hand corner. The letter will state that the IRS has the intent to seize your state tax refund as well as other property. It will also state the amount due and for what years you owe back taxes.
The Notice of Intent to Levy (CP 504) will also tell you to call the IRS immediately as wages, commissions, bank accounts, and personal assets (car and home ) are subject to a wage and/or bank levy.
If this letter does not get you to call the IRS, the second and more important letter that you will receive is usually a letter that has LT11 or LT 1058 in the upper right hand corner. This letter will also state the intent of the IRS to levy your bank accounts, income, and assets.
The reason why this letter is more important is that it affords you Collection Due Process Appeal rights, that if properly exercised in a timely manner, can stop the tax levy.
The hearing is called a Collection Due Process Hearing and it must be requested within 30 days from receipt of the levy notice. A hearing will be held with the IRS Office of Appeals. Evidence must be presented that justifies a remedy to your tax debt.
Often, at the Collection Due Process Hearing, we are able to work out a reasonable payment plan or if you qualify, we can submit an Offer in Compromise (settlement).
You should act quickly and seek counsel from an experienced Tax Attorney once you receive this letter (if you have not already done so).
Always open your mail, especially mail from the IRS as soon as you receive it. Don't be afraid. You have rights and remedies.
Here are the most common ways the IRS can get to your money through a tax levy:
When the IRS issues a tax levy on your wages, also known as a wage garnishment, a substantial portion of your wages will be sent to the IRS each pay period until such time that:
1. A resolution of your tax liability is formally established,
2. You paid the taxes due, or
3. The garnishment is released by the IRS
A wage levy or garnishment is sent to your employer or if you are commission based, the company that issues you IRS Form 1099. Your employer has a legal obligation to follow the directives of the wage garnishment and will be subject to penalties for disobeying the IRS.
Why Did the IRS Levy Your Paycheck?
The short answer is that the IRS is looking for the easiest way to collect the tax debt and the information about your source of wages is easily accessible to the IRS. Here’s how:
Your employer is legally obligated under IRS tax law to send a W2 to the IRS for each employee. If you are self employed or work in sales, you are likely issued a Form 1099- MISC from the company that pays your commission.
These forms are sent to the IRS every year so that the IRS can cross check that the income that you report on your income tax returns is accurate. As such, the IRS knows where you work and it is the low hanging fruit to collect the tax debt.
If you want to know how much of your wages your employer will be legally obligated to send to the IRS, Publication 1494 will explain how much of your wages are exempt from the tax levy.
Upon receipt of the wage garnishment notice, your employer will give a Statement of Exemption and Filing Status, which will have to be completed and returned to your employer within 3 days.
If you fail to return the statement to your employer within 3 days, your amount exempt from the tax levy will be determined as if you are married filing separately with one exemption.
An experienced Tax Lawyer can help you determine your options and will review your financials to see if the wage levy can be released. In particular, if we can show to the Internal Revenue Service that the wage garnishment is creating an immediate economic hardship, then the wage levy can be released.
A notice to take money from your bank account as a result of a tax liability is called a bank levy. This type of tax levy must be re-issued to the bank or financial institution every time the IRS wants to take money from your bank account.
The IRS will commonly send a levy notice to your bank by mail. The IRS provides your bank a 21 waiting period before it sends the IRS the money in your bank account. The money in your bank account will be frozen during those 21 days.
During that twenty one day time period, it is essential that the best strategy to resolve your tax liability is determined and implemented or else the IRS will be entitled to the funds in your bank account.
Be warned that if you have a joint bank account with someone with a tax liability, your bank account will be subject to the IRS levy. You will then have to prove to the IRS that the monies in the bank account did not belong to the joint account holder.
This is not an easy task as the IRS may not be willing to release the bank funds. You will likely have to seek counsel as the tax levy will have to be appealed administratively or you may need to seek relief in Tax Court.
If you receive interest from a bank account, the bank is required to file IRS Form 1099- INT with the IRS under the tax law. Once again, this allows the IRS to cross check the income that you are reporting on your income tax returns with its internal records.
As well as keeping you honest on your income tax returns, it also serves as a point of “ data collection” for IRS collection personnel.
Retirement savings plans are governed by Section 5.11.62 of the Internal Revenue Manual. The following retirement assets are subject to a tax levy:
1. Qualified Pension, Profit Sharing, and Stock Bonus Plans under ERISA
3. Self Employed Retirement Plans
You have worked hard and have contributed to your 401(k), IRAs, as well as Social Security. You may have been looking forward to enjoying your retirement but if you have an IRS tax debt, there is a wrinkle to the comfortable golden years that you may expect.
Once you are vested in your retirement vehicles, it is possible that the IRS can levy theses accounts to satisfy any tax debt you accrued, plus penalties and interest.
Generally, the IRS cannot levy your retirement account until you are vested. In fact, the Internal Revenue Service would rather levy another asset or enter into a payment arrangement with a taxpayer.
The IRS has set forth a 2 part threshold test before issuing a tax levy on a retirement asset:
1st : Is there an asset other than retirement assets that can be used to collect the tax debt liability? If there is an asset other than a retirement asset to levy or a payment arrangement that can be established, the IRS will want the Revenue Officer to investigate those alternatives first.
2nd: Has your conduct been flagrant ? If your conduct was not flagrant, it will not levy your retirement asset.
When the IRS looks at flagrant conduct, it is looking at how you accrued the tax liability and it is done on a case by case basis.
Common example of flagrant conduct are tax evasion, a tax liability based upon illegal income, and pyramiding unpaid trust fund taxes. A tax attorney can analyze whether your conduct rises to the level of flagrant activity under the tax law.
The above two part tax levy test refers to the retirement asset itself. However, with regard to your retirement income, the IRS will look to see if you are obtaining income from the particular retirement account or whether you are able to borrow from the retirement account.
Generally, the IRS cannot require that you borrow money from your 401(k) if you are either still employed or you are not age 59 ½ . In other words, if you cannot access the money, neither can the Internal Revenue Service with a tax levy.
If you are at the age where you are receiving Social Security and you owe back taxes, the IRS can levy up to 15% of your monthly social security benefits until such time that the income tax liability is paid off.
In order to have the IRS stop the tax levy on your social security, you will have to show that the tax levy is creating a hardship. You will have to show documentation of income and expenses in order to prove the hardship. A tax attorney can help you present your case in the most favorable light.
If successful, the Internal Revenue Service will likely place your tax debt matter in what is called currently uncollectible status and stop the tax levy. You may also be a candidate for a reduction of the overall liability if warranted by your assets, income, and expenses.
Asset Seizure or Levy
Although it does happen in extreme circumstances, the seizure of assets like a home or car is not high up on the “IRS tax levy priority list”. The IRS will first attempt to obtain back taxes owed through such means as garnishments and bank levies as detailed above.
With regard to looking to obtain assets, the IRS will look to see if there is equity in the asset and your ability to borrow from the asset as a means to obtain back taxes.
There are various strategies to stop a tax levy. The notices that you have received from the Internal Revenue Service have deadlines that will permit you appeal rights if they are properly exercised in a timely manner.
Here are the steps that your tax attorney at Flat Fee Tax Service, Inc. will take to determine the best strategy to stop your tax levy.
When you become our client, we will want the fax number and name of your human resources person so that we can provide that information to the IRS personnel that we speak to. We want to make sure that your IRS wage levy release is sent to the right person.
Our team will review when you received your Final Notice of Intent to Levy so that we can see if you have certain appeal rights. If you do not have that notice or don’t know where it is, we will request your account transcript from the IRS to determine the date when it was issued.
If you have unfiled tax returns, our team will work as quickly as possible to get them filed. The IRS is going to request that if you are not in compliance (tax returns not filed), that we file all your past due tax returns as quickly as possible,
We will analyze your financial data to determine your income and expenses so that we can present the best possible resolution option to the IRS on your behalf.
We will work with the Internal Revenue Service (IRS) to resolve your tax levy under the best possible terms, taking over all communication with the IRS throughout the process.
The IRS will submit the tax levy release to your employer. These are the steps to stop your tax levy. If this makes sense to you or you have questions about your tax levy, they are there to help. Take action to stop the IRS from ruining your financial and personal life.
What if the time to appeal has expired ?
A timely and properly filed appeal can possibly stop your tax levy. If you are beyond the required deadline to appeal your tax levy, there are other remedies available to resolve your tax debt problem under the best possible terms.
An experienced tax attorney can guide you through the maze of stopping your tax levy as well as resolving the underlying tax debt problem.
Based upon a detailed review of your financials, your options may include reducing your overall tax liability through an offer in compromise, partial pay installment agreement, or penalty abatement.