A federal tax levy is the seizure of a taxpayer’s property used by the IRS to resolve a back tax debt. However, before the IRS is permitted to levy a taxpayer’s assets the taxpayer must be sent written notice and the right to a Collection Due Process hearing. The hearing provides the taxpayer an opportunity to resolve the outstanding taxes with a collection alternative.
Therefore, levies will only occur after the IRS has issued notices to the taxpayer seeking payment and they have either gone unanswered or the taxpayer has failed to fulfill his/her agreed upon payment arrangements.
A Notice of Federal Tax Levy will be issued to the institution or person holding property of the taxpayer, with copies sent to the taxpayer.
There are two types of tax levies: regular and continuing, both of which could result in serious financial problems for you.
The Regular Tax Levy & the Continuing Tax Levy
Regular Levy – A regular levy is a one that seizes what the taxpayer owns at that moment. For instance, assume that Stephanie has $500 in the bank on Wednesday. On the same day at 4:00pm, her bank receives an IRS levy in the amount of $5,000. On Thursday, not having realized the account was levied on Wednesday afternoon; she deposits $3,000 in the account. How much will the IRS get? $500, $3,000 $3,500 or $5,000?
The IRS would get $500 which is what she had in the bank on Wednesday at 4:00pm – the moment the levy was received. The federal tax levy does not reach the money that was deposited on Thursday morning since this is after the bank received the levy.
Tip: Your bank is required to hold the money in your account for 21 days before sending it to the IRS. So, if you act fast and contact the IRS, it may be possible to have the federal tax levy released and you’ll be able to keep your money. This may be accomplished by entering into a payment plan or proving economic hardship.
Continuing Levy– Unlike a regular levy that only reaches what the taxpayer owns at a particular point in time, a continuing federal tax levy operates just as its name suggests. The continuing levy remains in force and continues to take what the taxpayer earns until released by the IRS. Continuing levies are typically used on wages and routinely paid commissions.
The reason for continuing levies is that it would be an administrative nightmare for the IRS to send out levies to garnish a taxpayer’s wages and commissions every pay period.
Continuing levies on wages and commissions create real economic hardship for taxpayers because they seize the taxpayer’s take home pay less an exempt amount. The exempt amount is based on your standard deduction and number of dependents.
Example: In 2020, Nicholas, a single taxpayer with no dependents has gross monthly wages of $6,000. His take-home-pay after taxes and health insurance is S4, 533. The annual standard deduction for a single taxpayer is $12,400, which equals $1.033 a month ($12,400/12).This results in the IRS getting $3,500 (take home pay of $4,533 less exempt amount of $1,033), leaving Nicholas with only $1,033 for his monthly living expenses.
The continuing levy remains in place until the IRS is paid in full, payment arrangements are made, or the IRS releases the levy.
As you can see, the continuing federal tax levy is meant to make it financially painful so that it forces taxpayers to deal the IRS and resolve their back tax problems. Don’t forget by this time taxpayers have been contacted by the IRS on numerous occasions and have chosen to ignore the problem.
The IRS knows that a continuing levy which takes most of a taxpayer’s income is usually enough motivation for a taxpayer to work out an arrangement.
East Coast Tax Consulting Can Help Resolve Your Federal Tax Levy
If you’re facing a federal tax levy you need tax representation from professionals who deal with this issue on a regular basis. Call us at 561-826-9303 to schedule an appointment to meet with one of our CPAs and put an end to your tax problems.