What Is a Tax Levy Fee and How Does It Work?

Unpaid taxes can lead to serious financial consequences, including a tax levy fee. This legal action allows authorities to seize assets or income to satisfy tax debts. Many taxpayers are unaware of how these levies work until they face one themselves.

Understanding tax levy fees is essential for anyone dealing with unpaid taxes. Specific conditions trigger them, different authorities impose them, and various assets can be affected. Knowing how they are calculated, their consequences, and ways to address them helps individuals take informed steps to resolve tax issues efficiently.

Conditions That Trigger a Tax Levy Fee

A tax levy does not occur immediately after a missed payment. It begins when a taxpayer fails to pay by the due date, leading to an outstanding balance. The IRS or state tax agencies first send a notice demanding payment. If the taxpayer does not respond or arrange a payment plan, additional notices follow, including a Final Notice of Intent to Levy and a Notice of Your Right to a Hearing. These must be sent at least 30 days before any levy action begins, giving the taxpayer a final chance to resolve the issue.

Ignoring these notices escalates the situation. The government may assess penalties and interest, increasing the total amount owed. The IRS applies a failure-to-pay penalty of 0.5% per month, up to 25%. Interest accrues daily based on the federal short-term rate plus 3%, causing the debt to grow over time.

Certain situations accelerate the levy process. A history of noncompliance, such as repeated failure to file returns or prior unpaid balances, can prompt quicker action. If the IRS suspects asset concealment or an attempt to leave the country, levy actions may proceed without delay.

Authorities That Impose the Fee

The IRS is the primary federal agency enforcing tax levies in the U.S. Under the Internal Revenue Code, it has the authority to seize property when a taxpayer neglects or refuses to pay. This includes wages, bank accounts, retirement funds, and Social Security benefits. Before enforcement, the IRS must issue a series of notices, ensuring taxpayers receive ample warning.

State tax agencies also impose levies, though procedures vary by jurisdiction. The California Franchise Tax Board, for example, can issue wage garnishments and bank levies, while the New York State Department of Taxation and Finance can place liens on property and seize funds from financial institutions. Some states have shorter notice periods or different appeal procedures, making it essential for taxpayers to understand local enforcement rules.

Municipal governments can also impose levies for unpaid property taxes. If a homeowner fails to pay, a county tax collector may initiate a tax lien or, in extreme cases, a tax foreclosure sale. In Texas, counties can auction a property if taxes remain unpaid for a specified period, typically two years for homestead properties. Local governments may also garnish wages or intercept state tax refunds to recover unpaid local taxes.

Assets Subject to Levy

When a tax levy is enforced, the government can seize various assets to recover the unpaid balance. A common target is wages. Through wage garnishment, a portion of each paycheck is withheld and sent directly to the taxing authority. Unlike typical debt collection garnishments, IRS levies do not follow state-imposed limits—federal law allows the agency to take all earnings above a minimum exemption amount based on filing status and dependents.

Financial accounts are another frequent target. Banks and credit unions must freeze a taxpayer’s funds for 21 days before releasing them to the IRS, providing a short window to resolve the issue. Checking and savings accounts are most commonly levied, but brokerage accounts holding stocks, bonds, and mutual funds can also be seized. Cryptocurrency held on an exchange is not exempt. The IRS treats digital assets as property, making them subject to levy like any other financial holding.

Real estate can also be affected. The IRS typically places a tax lien on a property rather than immediately seizing it, but in extreme cases, they can force a sale. This is more common when there is substantial equity or multiple real estate holdings. Rental properties can also be targeted, with the IRS intercepting rental income before the property owner receives it.

Business assets are not exempt. If a taxpayer owns a business, the IRS can seize equipment, inventory, and even accounts receivable. This can be devastating for small business owners, as losing essential machinery or customer payments can disrupt operations. While the IRS may avoid actions that completely shut down a business, this is not guaranteed.

Calculation of Amounts Owed

Determining the total amount subject to a tax levy includes the original liability, accrued penalties, interest, and enforcement costs. The starting point is the principal tax debt, which consists of unpaid income, payroll, or other assessed taxes. If multiple years of nonpayment exist, each period is calculated separately, often compounding the total liability.

Penalties increase the amount owed. The IRS applies a failure-to-file penalty of 5% per month on unpaid taxes, up to 25%, separate from the failure-to-pay penalty. If both apply in the same month, the combined charge is capped at 5%. In cases of fraudulent failure to file, the penalty jumps to 15% per month, up to 75% of the unpaid tax. State agencies impose their own penalties, with some charging flat percentage fees while others apply escalating rates based on delinquency duration.

Interest accrues daily, calculated using the federal short-term rate plus 3%. If the short-term rate is 5%, the total annual interest charged would be 8%. Some states exceed federal rates, with California imposing a 10% annual interest charge on delinquent taxes. Unlike penalties, there is no cap on accrued interest, meaning prolonged nonpayment results in exponentially growing debt.

Consequences for Ignoring the Fee

Failing to address a tax levy leads to escalating financial and legal repercussions. Once a levy is in place, the immediate impact is the loss of access to seized assets, whether frozen bank accounts, garnished wages, or intercepted tax refunds. This can create financial strain, especially for those who rely on their income for daily expenses. Employers are legally required to comply with wage garnishments, and failure to do so can result in penalties for them as well.

Prolonged inaction can result in more aggressive enforcement. The IRS can escalate collection efforts by seizing physical property, including vehicles, business equipment, or real estate. In extreme cases, the agency may pursue criminal tax evasion charges if it determines that the taxpayer is willfully avoiding payment. Tax liens can also impact credit scores, making it difficult to secure loans or mortgages. For business owners, unresolved levies can disrupt operations by freezing accounts payable, preventing payroll processing, and damaging relationships with vendors.

Methods to Address or Remove the Levy

Resolving a tax levy requires prompt action. Several options are available depending on the taxpayer’s financial situation and ability to repay the debt.

Payment Plans and Installment Agreements

One common way to remove a levy is by setting up an installment agreement with the IRS or state tax agency. The IRS offers short-term agreements for balances under $100,000 and long-term plans for debts up to $50,000. Once an agreement is in place, the levy is typically lifted. Interest and penalties continue to accrue, but structured payments prevent further enforcement.

Offer in Compromise

For taxpayers facing financial hardship, an Offer in Compromise (OIC) allows settlement of tax debt for less than the full amount owed. The IRS evaluates OIC applications based on income, expenses, asset equity, and future earning potential. While approval is not guaranteed, those who qualify can significantly reduce their tax burden.

Appeals and Hardship Relief

If a taxpayer believes a levy was issued in error or creates an undue financial burden, they can file an appeal through the IRS Collection Appeals Program or request a levy release due to economic hardship. If bankruptcy proceedings are underway, levies may be halted under the automatic stay provision of the U.S. Bankruptcy Code.