March 25 update: The IRS has announced that new automatic, systemic liens and levies will be temporarily suspended between April 1, 2020, and July 15, 2020, as part of the government’s ongoing coronavirus response. For more details, see the IRS guidelines.
Tax levies (and their cousins, tax liens) are serious business if you owe back taxes. Here’s how they can affect you, as well as how to remove a tax levy.
What is a tax levy?
A tax levy is the seizure of property to pay taxes owed. Tax levies can include penalties such as garnishing wages or seizing assets and bank accounts.
Tax levies typically show up after you’ve gotten a tax lien. A tax lien is a claim the government makes on your property, including real estate and other assets, when you’re past due on your income taxes, and a levy is the exercise of that claim. (If you’re wondering how long it might be before the IRS notices you haven’t paid your taxes, read this.)
How a tax levy can affect you
Here are a few things that could happen if you’re hit with an IRS levy.
- Your paycheck shrinks. Wage garnishment is a common tactic. It means your employer must fork over a portion of your earnings every payday.
- Your bank accounts are frozen. Bank accounts are prime targets for recouping back taxes. Typically, the IRS contacts your bank and places a 21-day hold on your account. If you haven’t worked things out with the IRS after that time, the bank may send some or all of your money to the IRS.
- Your house could be in jeopardy. “They generally don’t want to go for your house because it’s bad publicity,” says David Klasing, a CPA and tax attorney in Irvine, California. “That’s a last resort, but I have seen it happen.”
Some items can’t be seized. For example, the IRS says it can’t seize unemployment benefits, certain annuity and pension benefits, certain disability payments, workers’ compensation, some public assistance payments or child support payments. Undelivered mail, some items necessary for school or work, and certain furniture and household items are generally off the table, too.
» Make sure your withholdings are correct: People often get behind on their taxes because they don’t have enough withheld from their paychecks during the year. Learn how to manage your withholdings.
How to get rid of a tax lien or tax levy
- Pay your tax bill. Sounds obvious, but in most cases paying your back taxes is the only way to stop a tax lien or tax levy. “The most important thing I can tell you is, cooperate with the collection action. If they ask for something, you give it to them. If they reach out to you, reach back. Communicate with them,” Klasing says.
- Get on an IRS payment plan. Your tax balance will still accrue interest and penalties until it’s paid off, but if you allow the IRS to take at least three consecutive payments right out of your bank account (called a direct debit installment agreement), you might convince the IRS to withdraw the lien from public record. (You’ll still have to pay your tax debt, of course.) You aren’t required to hire someone to get you on a payment plan — you can apply on the IRS website. Fees run from $0 to $225 depending on the plan and your income.
- Ask for an Offer in Compromise. This is a request to settle your back taxes for less than the full amount you owe. Beware: The IRS typically accepts fewer than half of the applications it gets in a year. To even be considered, you need to have filed all of your tax returns, plus make required estimated tax payments for the current year. You also won’t be considered if you’re in bankruptcy or are being audited. The IRS has a handy tool to show you whether you might qualify.
- File an appeal. You can ask for a collection due process hearing from the IRS Office of Appeals if you want a review of a lien or levy notice. Also, if you disagree with an IRS employee’s decision about a lien or levy, you can ask for a conference with the employee’s manager. If you disagree with the manager, you can ask the Office of Appeals to review your case.
- File for bankruptcy. It’s not a pretty option, but in some cases it can get rid of tax debt. However, it’s often a long process, there are lots of rules and it doesn’t always work, Klasing warns.