I have written before how procrastination can be a killer when it comes to taxes. It is fair to say that in most cases, if the IRS considers itself compelled to use the enforced collection tool of issuing a levy, chances are it is the direct consequence of procrastination. Tax issues must be addressed as though they are a top priority. Anything less begs a disaster!
The IRS will send several notices to a taxpayer with a tax delinquency. The final notice will be a Final Notice of Intent to Levy and Notice of Your Right to a Hearing. Once the deadline in this final notice elapses, the IRS is free to commence enforced collection actions by levying on assets. Typically, they will levy on income and bank accounts.
Levies on wages are on-going in nature while levies on bank accounts are not. When a taxpayer’s employer receives a levy notification, they are required to withhold income at specified rates and pay that money to the IRS until the IRS is paid in full or the IRS agrees to release the levy. When a bank receives a levy on a taxpayer’s bank account, the levy is not ongoing. Only funds in the account at the time the levy is received by the bank are subject to the levy. The bank is required to hold those funds for a period of 21 days before it is required to turn it over to the IRS. If the taxpayer cannot obtain a release of the bank levy from the IRS, then the bank will remit those funds to the IRS. Any funds that go into an account after the bank levy is received by the bank are not subject to the levy and may be used by the taxpayer as normal.
If a taxpayer owes taxes, ignores notices to pay, and ends up with a wage or bank levy, they may be left with far less than what they need to cover basic expenses. The current IRS table of income exempt from levy can be found here. Clearly, taxpayers are not left with much following a wage levy. Any amount in excess of what is exempt will ALL be paid to the IRS. If a taxpayer avoids the IRS because they don’t think they can afford to make payments toward back taxes while maintaining current expenses, that same taxpayer may be in for a rude awakening when they realize the consequence of their procrastination is being left with a fraction of their usual take home pay. Combine this reduction in take home pay with a well-timed bank levy and it will not take long for the IRS to destroy a taxpayer’s ability to pay for basic necessities. There is no exemption from a levy for funds in a bank account like there is with a wage levy, so the IRS can wipe out an entire account with a single levy.
Levies can often be avoided by timely addressing a tax delinquency rather than ignoring the problem. There are options which include an offer in compromise, getting the IRS to agree to classify the account as “currently not collectible”, an installment agreement, and an extension of time to allow a taxpayer to make full payment of delinquent taxes.
Now, let’s say a taxpayer finds himself in the unfortunate position of having wages levied by the Internal Revenue Service. What should he do? Act quickly! Don’t hate the IRS as they are only trying to do their job. A taxpayer should consider this a wake-up call and an opportunity to finally address his tax problems. The exact steps to resolving a tax problem will depend on a number of variables. Generally, the first step is to become compliant with all filing requirements by preparing and filing delinquent tax returns. At the same time prepare a financial statement and compile the appropriate supporting documents like bank statements, paystubs, and proof of expenses. The second step will be to make a presentation to the IRS making a request for a levy release and proposing a resolution of the tax delinquency.
It’s rare, but the IRS does issue an occasional levy in error. In these cases, the taxpayer may seek reimbursement of their funds taken as a result of a mistaken levy.