WHAT IS A TAX LEVY?

What is a tax levy?

A tax levy is commonly referred to as an IRS levy or wage garnishment/wage levy. If you have unpaid taxes and have not cooperated with the demands of the IRS to make the payments, it is likely that you will receive a tax levy. This means the IRS will actually seize your assets. The IRS can seize your retirement accounts, wages, commissions, salaries, dividends, bank accounts, cars, boats, house, or anything else that carries equity. You, the taxpayer, get what’s called a Notice of Intent to Levy. Once you get this notice, you have ways to stop the levy from happening.

The IRS has the power to levy under I.R.C. § 6331. The remarkable and unique thing about a levy is that it can happen without a judicial proceeding. Most creditors have to get permission from and undergo some sort of judicial review before levying property or rights to property, the IRS on the other hand is a special creditor that can execute a levy just by following certain procedures and without having to go to a court. It is easy for the IRS to levy most assets unless the taxpayer takes the necessary steps to stop them.

What are the procedures the IRS will follow before it levies?

The IRS will give a notice and demand for you to pay the tax and will not levy until 10 days after the IRS serves the notice and demand. The levy is invalid if made before the 10 day period.

Also the IRS must notify the taxpayer in writing of the IRS’s intention to levy on the taxpayer’s salary, wages, or other property at least 30 days before the date of the levy and serve it properly.

Although rare, these requirements can be waived if the IRS determines that jeopardy to collect the tax exists. Scroll down for more on jeopardy determinations.

What is a notice of intent to levy?

A notice of intent to levy is a notice to the taxpayer that a levy will occur. In other words, the IRS is telling the taxpayer to respond otherwise it plans on taking your money. It is a standard letter issued by the IRS and is known as letter 1058 or the CDP notice. It provides the taxpayer with substantial rights known as your collection due process hearing. It is critical that a taxpayer responds to the notice of intent to levy within 30 days to prevent collection.

Wait, didn’t the IRS need a lien on the property first before it can levy the property?

No, the lien is just a notice to all other parties that the IRS has priority over the property that it may eventually levy. The IRS files a notice of federal tax lien (NFTL) to prevent you from refinancing, selling, or transferring property. Technically, the IRS can obtain ownership just by levying and never even filing a lien. Procedurally, the IRS will file a lien before levies happen, but it is important to understand the difference between liens and levies.

A notice of a federal tax lien can cause federal tax liens to attach to any property I acquire after the federal tax lien arises; is this the case for levies?

A federal tax lien attaches not only to all of the taxpayer’s property or rights to property in existence at the time the lien arises but also to all after acquired property. The federal tax levy, on the other hand, generally only applies to property in possession and obligations in existence as of the date of the levy. The exception to this rule is a continuing levy on salary and wages and a continuing levy on periodic payments made to a taxpayer pursuant to a contract, trust, or similar reoccurring future payments. For instance, if you are getting monthly checks as a 1099 worker, the government can cause the third party to pay them instead.

What money is exempt from levy?

The IRS levies only the portion of the take home pay instead of the entire gross amount. In addition to this, certain exemptions apply.

The exemptions are hardly enough for anyone to survive on, thus a wage levy can be devastating to a taxpayer.

Moreover, most of the following items are exempt from levy in most circumstances:

• Wearing apparel (except luxury items such as mink coats) and school books
• Fuel, provisions, furniture, personal effects (that do not exceed $6,250)Books and tools of a trade, business, or profession (that do not exceed $3,125)
• Unemployment benefits
• Undelivered mail
• Specified annuity and pension payments
• Workmen’s compensation
• Judgments for support of minor children
• Minimum exemption for wages, salary, and other income discussed above
• Specified service-connected disability payments
• Specified public assistance payments
• Assistance under job training partnership act
• Residences in small deficiency cases
• Principal residences without approval from judge or magistrate of a district court
• Tangible personal property or real property used in a trade or business without approval from a district director or assistant district director of the IRS or if the Secretary find that the collection of tax is in jeopardy

What about money I’m receiving from the government?

The government can levy up to 15% of certain specified payments made by the government most of which are otherwise exempt from levy. These include any federal payment for which eligibility is not based on the income or assets of the payee, unemployment benefits, workmen’s compensation, certain public assistance payments, and certain annuity or pension payments received under the Railroad Retirement Act or benefit received under the Railroad Unemployment Insurance Act. However the government can also take up to 15% of the exempt amounts mentioned above.

When can’t the IRS levy?

1. During the time an offer in compromise is pending, the 30 day period after rejection of an offer, and during an appeal of a rejection.

2. When an installment agreement is in place, when an installment agreement request is pending, and the 30 day period after rejection of an installment agreement, and during an appeal of a rejection.

3. A timely request for a collection due process or equivalent hearing will prohibit levy action in most cases.

4. After the statute of limitations for collection has expired.

5. When a refund proceeding is pending. If the tax is divisible, meaning you can sue for a refund for paying only part of the tax, then a suit for the refund of tax can stop or delay a levy. In some instances the taxpayer can pay a small fraction of the tax and initiate a refund suit.

*Keep in mind the statute of limitations on collection are tolled (stopped) during periods in which the IRS cannot levy, causing the limitations period to toll may be a bad idea under certain circumstances.

When must the IRS release a levy?

The IRS must release a levy when

• The IRS determines that the release of the levy would facilitate tax collection
• When an installment payment agreement has been executed unless a levy is agreed to
• When the IRS determines that the levy causes an undue financial hardship
• When the tax liability is satisfied, or when the tax liability is unenforceable.

If the value of the levied property is greater than the tax liability, a partial release may be proper. Also, there is an expedited undue financial hardship review for levy on tangible personal property essential in carrying on a trade or business. Another effective way to fight a levy which isn’t technically a release of a levy is to petition a bankruptcy court, the taxpayer can keep control of the property in a bankruptcy estate under the bankruptcy court orders and under the bankruptcy court jurisdiction and keep the IRS at bay. A good tax attorney will know when and if to petition a bankruptcy court.

When will releasing a levy facilitate tax collection?

One example is when the taxpayer has found a willing and able buyer willing to pay a premium for the asset whereas the asset may go for little value in a tax auction, the IRS may agree to release a levy to get the higher sale price. Another example is when the levy will keep the taxpayer from making money to pay the IRS back because the asset is used for the livelihood of the taxpayer and the taxpayer is likely to produce income from the asset to pay the IRS back. There are many other scenarios where release of a levy will facilitate tax collection.

When must the taxpayer request for the levy’s release?

The taxpayer must ask for the release of a levy no later than five days before the date which the IRS has set to sell the levied property. In extraordinary circumstances, the IRS can consider a request for release of a levy that is made within the five-day period. Once the taxpayer requests a release the IRS must make a determination as to whether a release of the levy is warranted and must notify the taxpayer that the levy has been released or reasons why the levy has not released.

Is the taxpayer entitled to judicial review of the IRS’s refusal to release a levy or a seizure?

No, the taxpayer is not entitled to a judicial review, but the taxpayer can sue for a refund of what is levied once the levy has occurred if the taxpayer is not res judicata in a tax court and meets the time limits for a claim for refund and a suit for refund. In this case the taxpayer is not suing for the IRS’s wrongful decision, but making a claim that the tax originally assessed was wrong. The taxpayer may in certain circumstances keep seized property from being sold during the pending litigation.

Is there a scenario where the owner of levied or seized property can get the property back after it is sold?

Yes, except for personal property, the owner of the property, his heirs, executors or administrators, or any person having an interest in or lien on the property has a right of redemption to get the property back by paying the buyer the sale price plus interest. However, there is no right of redemption where property is sold under a section §7403 foreclosure action. A party with the right to redemption must exercise that right within 180 days. Moreover, the levied property can be returned if the levy was premature or not done properly according to IRS procedures, the taxpayer has entered into an installment agreement or other alternative payment method, and when return will facilitate tax liability.

The information above is meant to be educational and is not meant to constitute tax advice. The laws of liens and levy are extensive and complicated. For a clearer understanding of your rights and the law consult a tax professional. The best advice is to stay proactive; there are more options available at earlier stages of tax trouble. Abajian Law has been advising taxpayers in Los Angeles, Orange County and throughout the nation on lien and levy issues for years. Mr. Abajian, a former IRS tax attorney, has numerous contacts within the IRS (both within Los Angeles and most other major geographic areas) and is usually able to bring difficult collection cases to a speedy resolution.