When taxpayers get a notice for an Intent to Levy, they might wonder, what is a federal tax levy. After feeling uneasy, they will either worry about what to do or choose to ignore it for the time being. We will cover what happens when choosing to respond or not.

What is a federal tax levy?

A tax levy occurs when the government, federal or state seizes your property and assets. On the other hand, a federal tax lien only grants them a legal claim to your property and assets. The government will take levy action after the taxpayer has not responded to notices for payment.

The IRS will take levy action in two situations. The first is if payment notices are unanswered. The second is if the taxpayer hasn’t arranged a payment plan or defaulted on one. The government will issue the levy to protect their interest.

Before an IRS tax levy is issued, they must send a Notice of Intent to Levy and Notice of Your Right to a Hearing. This is where the taxpayer can request a Collection Due Process Hearing (CDP) within 30 days for the notice date. The CDP request stops collections while the taxpayer and Revenue Officer work together to find a solution they both agree on. If we do not achieve a resolution, the RO sends the case to the Office of Appeals.

Two Types of Levies: Regular and Continuous

The institution or person holding the taxpayer’s property receives a notice when a levy is issued. The levy will be one of two types.

The Regular Levy

A regular levy seizes what the taxpayer owns at the moment the levy is issued. For example, I a have $200 in my bank account on Wednesday, and the IRS issues a levy for $5,000 on Wednesday at 2pm. I am unaware the the IRS issued the levy, and I make a deposit of $6,500 on Thursday at 10am.

The IRS would get the $200 I had in my account at the time the bank was issued the levy at 2pm on Wednesday. The levy cannot reach any of the deposit I made the following morning at 10am.

Generally, there are two types of regular tax levies. Those that levy against the afore- mentioned bank accounts and those that levy against third parties. The third parties would be those who had paid the taxpayer before and filed a 1099 to report the payment. For instance, a general contractor may get a levy from the IRS because the taxpayer (subcontractor) owes taxes to the government.

The general contractor would only pay over to the IRS, the amount that he is owing to the taxpayer at the time of the levy. If the taxpayer is working for the general contractor, but has not yet earned money, the IRS gets nothing.

As you can see, having a regular levy issued is a hit or miss event. On one hand you could have your bank account drained, and on the other, you might not have anything to give. It’s not the most comfortable situation to be in.

The Continuing Levy

A continuing levy is when the IRS keeps taking money from the taxpayer until they release the levy. This is a federal tax levy garnishment where they go after your wages or regularly paid commissions. The IRS uses a continuous levy to get the taxpayer’s attention and make them act by causing financial pain.

The State levy wage garnishment generally takes 25% taken from wages. The IRS will take considerably more. The IRS will let the taxpayer keep the amount of standard deduction, and the rest goes to the IRS. This can cause financial hardship and causes the taxpayer to act on resolving the tax issue.

This is where the taxpayer could work with the IRS and get an installment agreement or another payment plan set up. The State on the other hand, will not allow a payment plan after a wage garnishment is in place. They will adjust the garnishment according to the financial status of the taxpayer.

The standard deduction for single filer in 2023 is $13,850. Divide this amount by the number of pay periods to get your income. If I was paid a monthly salary of $5,000, the IRS would allow me $1,154.17 (13,850/12 months) and take the rest to pay the back taxes. This means that over 75% is taken for back taxes.

This calculation clearly shows that it is improbable for an individual to live on such a reduced income without financial assistance. Financial difficulties would arise, and prompt the taxpayer to seek a tax professional to help resolve the tax liability.

Levy on Retirement Accounts

Many taxpayers find it surprising that a tax levy can reach their retirement accounts. Your retirement savings are safe from creditors, except for the federal government and the IRS which may reach your retirement accounts. But this can only happen as long as the taxpayer can liquidate the account.

Generally, self-directed IRAs can be levied, and most 401(k) and 403(b) plans can be levied only if the employee has the right to liquidate the assets. Some employers do not allow employees to liquidate the asset until employment ends, and the IRS cannot levy the account.

The government can levy even a taxpayer’s social security, but they generally limit it to 15% of the monthly payment received. An automated system handles this, and the taxpayer does not need to take any action. There are instances where the levy can be 100% of the benefit if there are additional sources of income available.

Another thing to keep in mind is that there is no collection statute with the social security benefit. If the collection statute expires, the levy will continue until the debt is paid or the taxpayer dies and the benefit ends.

How to Avoid a Federal Tax Levy

Avoiding a federal tax levy is rather simple, like avoiding most tax issues are. Do not ignore notices from the IRS or procrastinate responding, and provide what the IRS requests. As long as you are responding and working with the agents, then there won’t be any issues with collections.

Stay in compliance with tax returns and estimated tax payments if necessary. Keep on top of communications with the IRS agents in clearing up back tax issues. The IRS is reasonable if the taxpayer is putting forth an effort to clean up their account.

Once the taxpayer achieves compliance, they must request an Installment Agreement, Offer in Compromise, or Hardship. This requires full financials and supporting document provided to the IRS.

Assets Exempt from Levy

Good news is that there are some assets and payments excluded from Levy by the IRS.

• Wearing apparel and schoolbooks deemed necessary for the taxpayer and family.
• Fuel, provisions, furniture, and personal effects for personal use, livestock, and poultry of the taxpayer that does not exceed $10,090 in value.
• Books and tools of a trade, business, or profession that do not exceed in the aggregate $5050 in value.
• Unemployment benefits
• Undelivered mail
• Annuity of pension payments under the Railroad Retirement Act, benefits under the Railroad Unemployment Insurance Act, special pension payments received by a person whose name has been entered on the Army, Navy, Air Force, and Coast Guard Medal of Honor roll (38 U.S.C. 562), and annuities based on retired or retainer pay under chapter 73 of title 10 of the United States Code.
• Workmen’s compensation
• Judgments for support of minor children
• Minimum exemption for wages, salary, and other income (i.e. the standard deduction)
• Certain service-connected disability payments
• Certain public assistance payments relating to supplemental social security income for the aged, blind, and disabled of the Social Security Act, or State or local government public assistance or public welfare assistance programs for which eligibility is determined by a needs or income test.
• Assistance under Job Training Partnership Act

If you have questions about IRS Tax Levies, please contact Dan Ohara at (408) 684-8505 or email dan@oharataxresolution.com.