What Is a Tax Levy and How Does It Work?

A tax levy is a legal action used by a government tax agency to seize a taxpayer’s property to satisfy an outstanding tax debt. This measure is an enforcement tool, employed after other attempts to collect the owed taxes have been unsuccessful. It is a direct action that can impact a person’s financial stability by targeting wages, bank accounts, and other personal assets.

The process is governed by specific legal procedures that an agency, like the Internal Revenue Service (IRS), must follow. A levy is not the first step in the collection process but rather a later-stage action, indicating the seriousness of the tax delinquency.

Distinguishing a Levy from a Lien

While the terms “levy” and “lien” are often used interchangeably, they represent two distinct actions. A tax lien is a legal claim against a person’s property to secure a debt. When the government files a Notice of Federal Tax Lien, it creates a public record alerting creditors that the government has a legal right to an individual’s property. This action secures the government’s interest but does not involve the immediate seizure of assets.

A levy, on the other hand, is the actual seizure of property to pay the tax debt. While a lien establishes the government’s claim, a levy is the enforcement of that claim. A lien can affect your ability to get credit or sell property, whereas a levy directly removes funds or property from your possession.

If a taxpayer does not resolve their debt after a lien is placed, the tax authority may proceed with a levy. This escalation from a claim to a seizure carries more immediate financial consequences.

Assets Subject to Seizure

When a tax agency initiates a levy, a wide range of assets can be targeted to satisfy the outstanding debt. This includes both financial accounts and physical property that can be converted to cash.

Commonly Levied Property

The most frequently targeted assets are those that are easily accessible and liquid. A wage garnishment is a continuous levy where the IRS requires an employer to withhold a portion of a taxpayer’s paycheck each pay period until the debt is paid. The amount withheld depends on the taxpayer’s filing status and number of dependents. Bank accounts are also a primary target; a bank levy allows the agency to seize funds from checking or savings accounts. Upon receiving the notice, the bank must hold the funds for 21 days before sending them to the IRS.

Other financial assets are also at risk, including:

• Retirement and investment accounts
• Stock dividends and the cash value of life insurance policies
• Physical property, such as vehicles, boats, and real estate, which can be sold at auction
• Payments from clients for self-employed individuals, known as a 1099 levy

Legally Exempt Property

Federal law exempts certain property and income from seizure to prevent undue hardship. A portion of a taxpayer’s wages is protected from levy, and the exempt amount is determined by tables published by the IRS based on filing status and the number of claimed dependents.

Certain types of income and benefits are also protected. These exemptions include:

• Most unemployment benefits
• Certain pension and annuity payments
• Workers’ compensation and court-ordered child support payments
• Specific personal items like necessary wearing apparel, school books, and fuel
• Tools and books used in a trade or business, up to a specified value ($5,700 for 2024)

The Levy Issuance Process

A tax agency cannot seize property without following a legal procedure that provides the taxpayer with notice and an opportunity to resolve the debt. The process begins with a tax assessment, followed by the agency sending a Notice and Demand for Payment, such as the IRS CP14 notice. If the taxpayer neglects or refuses to pay the debt after receiving the initial demand, the agency will send a series of subsequent notices.

The process culminates in the issuance of a “Final Notice of Intent to Levy and Notice of Your Right to a Hearing.” This document, often an IRS Letter 1058 or LT11, must be sent at least 30 days before the levy can be executed. This 30-day window provides the taxpayer with a final opportunity to prevent the seizure of their assets.

During this period, the individual can pay the debt, make arrangements for payment, or formally appeal the collection action. The notice explains the taxpayer’s right to a Collection Due Process hearing, which can temporarily halt the levy process while the appeal is considered.

Resolving a Levy

Once a final levy notice has been issued or a levy is in place, a taxpayer has several options to resolve the situation and secure a release. The most direct method is to pay the tax debt in full. For those unable to pay immediately, other solutions are available.

An Installment Agreement is a formal payment plan to make regular monthly payments. By agreeing to these terms, a taxpayer can often get the levy released. This can be requested by filing Form 9465, Installment Agreement Request.

Another option is an Offer in Compromise (OIC), which is an agreement to settle the tax debt for less than the full amount owed. An OIC is considered when the taxpayer cannot pay the full liability or doing so would create an economic hardship. The process involves submitting detailed financial information on Form 433-A or 433-B, along with Form 656.

A taxpayer can also seek to have the levy released by demonstrating that it is causing an immediate economic hardship. This means proving to the tax agency that the levy prevents them from meeting basic living expenses. If approved, the account may be placed in Currently Not Collectible status, which temporarily suspends collection efforts.