How and When Can a Tax Levy Be Reversed?

A tax levy is a legal seizure of property to satisfy a tax debt. It allows the tax authority to take money from bank accounts, garnish wages, or seize other assets for unpaid taxes. Understanding how to reverse such an action is important for taxpayers. This article outlines when a tax levy can be released and steps for its reversal.

Grounds for Releasing a Levy

Full payment of the outstanding tax liability directly secures a levy release. When the entire amount owed, including penalties and interest, is satisfied, the tax authority has no further basis to maintain the levy. This automatically stops collection actions for that debt.

An approved installment agreement with the tax authority is another common ground. This allows taxpayers to pay their debt through regular monthly payments. Once an agreement is established and the initial payment is made, the levy is released, provided the taxpayer adheres to its terms.

An Offer in Compromise (OIC) can also lead to a levy release if accepted by the tax authority. An OIC allows taxpayers to resolve tax liability for a lower amount than owed. If approved, the tax authority accepts a reduced payment, and existing levies are released as part of the settlement.

Taxpayers may seek a levy release based on economic hardship, if the levy prevents them from meeting basic living expenses. This requires financial information (income, expenses, asset statements) to show undue burden. If the tax authority determines the levy causes hardship, it may be released to allow the taxpayer to maintain living standards.

A levy issued in error is a reason for release. This occurs if the tax debt was paid, the levy was issued against the wrong taxpayer, or the amount owed was miscalculated. Documentation (proof of payment or identity) demonstrates the levy was based on incorrect information. Upon verification, the tax authority lifts the levy.

Taxpayers have collection appeal rights, which can lead to a levy release. If a taxpayer disputes the levy, they can appeal the decision through the tax authority’s appeal process. A successful appeal, demonstrating errors, can lead to the withdrawal of the levy. This allows independent review.

Filing for bankruptcy protection can result in an automatic stay on collection actions, including tax levies. When a bankruptcy petition is filed, it triggers an injunction stopping most collection efforts by creditors, including tax authorities. This automatic stay provides relief from the levy; long-term resolution depends on the bankruptcy type and tax laws.

Process for Requesting Levy Release

Requesting a tax levy release begins by contacting the relevant tax authority. For federal matters, the Internal Revenue Service (IRS) is the contact; state departments handle state levies. Taxpayers can find contact information on official notices or the tax authority’s website.

Contact methods include calling the tax authority’s collection or taxpayer service line, sending mail, or using online portals. Phone contact provides the quickest response for active levies. Written communication, though slower, creates a record of the request and supporting documentation.

When requesting a levy release, taxpayers provide documentation for their chosen ground. For example, claiming economic hardship requires financial statements, bank records, and expense documentation.

Communication with the tax authority involves discussing the levy’s circumstances and negotiating resolutions. This may include proposing an installment agreement, an Offer in Compromise, or evidence of an erroneous levy. Taxpayers should explain their situation and provide requested information to facilitate review.

Following up on the request ensures progress. Taxpayers should keep a record of all communications (dates, names, reference numbers). If no response is received within the expected timeframe, a follow-up call or written inquiry can help ascertain the status.

Requests for levy release or related actions may require forms. Taxpayers proposing an installment agreement use Form 9465, Installment Agreement Request. Those seeking an Offer in Compromise submit Form 656, Offer in Compromise, with financial forms (e.g., Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses). These forms standardize the submission process and ensure all information is provided.

For taxpayers appealing a collection action, including a levy, Form 9423, Collection Appeal Request, is used. This form allows taxpayers to request a review of a collection decision by the Office of Appeals. It outlines the basis for the appeal and desired resolution, providing a way to dispute the levy decision.

Actions Following Levy Release

After a tax levy is released, the taxpayer must verify implementation. This involves checking bank accounts for withdrawals or frozen funds, and confirming with an employer that wage garnishment deductions ceased. Direct confirmation from the tax authority, via a release letter, also provides verification.

If the levy was released due to an agreement (e.g., installment agreement or accepted Offer in Compromise), adherence to its terms is important. This includes making all payments on time and fulfilling other conditions. Failure to comply can result in levy reinstatement or new collection actions.

Ongoing tax compliance prevents future levy actions. This means filing all required tax returns and ensuring current tax obligations are met via withholding or estimated tax payments. Maintaining good standing with the tax authority reduces the likelihood of new collection enforcement.

If funds were erroneously levied and collected, the taxpayer should understand the refund process. This involves submitting a claim to the tax authority, with documentation proving the error. The refund process is separate from the levy release and ensures the taxpayer receives money seized in error.