In 2023, the Internal Revenue Service (IRS) issued 286,270 levies through their Automated Collection System and Field Collection programs, demonstrating the lengths they go to collect unpaid taxes. The number highlights that many Americans are subject to bank levies when they fail to pay their taxes on time. It’s important to understand what a bank levy is and how to deal with it if you’re in this situation.
This article aims to provide clear, actionable information to help you prevent or stop a bank levy, ensuring you’re prepared to protect your finances.
Hopkins CPA Firm is aware that you might fall under a tax situation for so many reasons and this is why we also deliver services like offer in compromise with the IRS, innocent spouse relief IRS, and penalty abatement IRS, so that when you receive an IRS letter or notice, you don’t have to worry.
What is a Bank Levy?
A tax levy is a legal action that the IRS or state authorities take to seize your property if you do not take action to resolve your unpaid taxes. This can include seizing your real estate, taking money directly from your bank accounts, or garnishing a portion of your wages until the debt is paid off.
The Process of Issuing a Levy: How Do Levies Work?
Before the IRS or state can initiate a levy, they must follow several legal steps.
- Notice of Delinquency: You will receive a bill detailing what you owe and a Notice of Delinquency or a similar document.
Opportunity to Resolve the Debt: You have a chance to pay the bill or negotiate a settlement before the deadline stated in the notice. - Notice of Intent to Levy and Right to a Hearing: If the debt remains unpaid, you will receive a Notice of Intent to Levy and a Notice of Your Right to a Hearing. You must not ignore these notices, as they indicate a levy could be imposed within 30 days.
- Failure to Communicate: If there is no response or arrangement made, the IRS will proceed with the levy. At this point, your bank and employer are legally required to comply with the IRS orders to withhold and send funds from your paycheck or accounts.
Types of Levies
The list is typically quite broad. So, let’s get into it.
- Tax Levy: A tax levy is when the IRS takes your property to pay off your tax debt. This can include money in your bank account, your car, your house, or even part of your wages. The IRS must first send you a bill for the taxes you owe. If you ignore this bill, they will send a final notice at least 30 days before taking your property. They can then take assets like money from your bank account, your paycheck, or even your retirement accounts to cover the unpaid taxes.
- Bank Levy: A bank levy is when a creditor freezes your bank account and takes the money you owe directly from it. The creditor needs a court order to freeze your bank account. Once your account is frozen, you can’t access the money until the debt is paid. Some funds, like Social Security and veterans’ benefits, are protected and cannot be taken.
- Climate-Based Levy: A climate-based levy, or green tax, is a tax on activities that pollute the environment, such as emitting greenhouse gases. The government imposes these taxes to encourage businesses to adopt cleaner practices. For example, a carbon tax is charged on companies based on the amount of carbon dioxide they emit, making it more expensive to pollute and cheaper to go green.
- Mill Levy: A mill levy is a property tax used by local governments to fund services like schools and parks. Each year, your property is assessed for its value. The local government then calculates the tax based on a percentage of this value. This tax money is used to support community services.
Who Can Issue a Bank Levy?
Bank levies can be issued by:
- The IRS: Mainly for unpaid taxes.
- Private Creditors: Including banks, mortgage lenders, and credit card companies.
- Department of Education: For unpaid student loans.
- Child Support Recipients: To enforce child support agreements.
Consequences of a Bank Levy
If a bank levy is placed on your account and you do not challenge it, you could face significant financial difficulties:
- Immediate Financial Impact: All the money in your account could be taken, leaving you unable to manage day-to-day expenses.
- Additional Fees: Your checks might bounce, resulting in late fees and bank charges for processing the levy.
Ways to Stop Bank Levy
There’s one question people ask quite often, “Can the IRS take money from your bank account? The answer is yes. If you owe unpaid taxes, the IRS can take money from your bank account through a bank levy.
But, there are several strategies to stop it. Engaging with the IRS promptly and understanding your options are integral steps in managing or preventing a levy on your accounts. So, here’s how you can stop this from happening:
1. Negotiate with the IRS
When you get a notice about a levy, contact the IRS immediately. Explain your financial situation and try to work out an alternative arrangement. This can help adjust the levy terms or stop it altogether.
2. Request a Levy Release or Modification
If the levy has already started, you can ask the IRS to release or modify it, especially if it’s causing financial hardship or if there’s been a mistake. Provide evidence to support your request.
3. Explore Payment Options
- Installment Agreement (IA): This plan lets you pay your tax debt over time, usually up to 72 months. You need to show you can’t pay the full amount at once. A tax attorney can help with the application.
- Offer in Compromise (OIC): This allows you to settle your debt for less than you owe if you can prove financial hardship or doubt the tax amount. You must be up-to-date with tax filings and not in bankruptcy or under audit.
4. Set Up a Payment Plan with the IRS
- Short-Term Payment Plan: If you can pay off your debt within 120 days, this plan avoids a levy. Payments can be made via check, automatic withdrawal, or debit/credit card, with standard penalties and interest until the debt is paid.
- Long-Term Payment Plan: For those needing more than 120 days, this plan involves an application fee and requires paying the full balance with penalties and interest over time.
By quickly engaging with the IRS and exploring these options, you can manage or prevent a bank levy and protect your finances.
Understanding Wage Levy Exemptions and Your Rights
When the IRS issues a levy on your wages, not all of your income may be taken. There’s a portion of your wages that is exempt from the levy, meaning it will still be paid to you. The exempt amount depends on a few factors, including the standard deduction and the number of dependents you have. Here’s how it works:
- Exempt Amount Calculation: When a levy is placed, the IRS sends out Publication 1494 to your employer. This document guides your employer on how to calculate the portion of your wages that is exempt from being levied based on your filing status and dependents.
- Statement of Dependents and Filing Status: Your employer will give you a form called the Statement of Dependents and Filing Status. You need to fill out this form and return it within three days. This form helps determine the exempt amount based on your personal situation.
- Consequences of Not Returning the Form: If you don’t return the form within three days, the IRS will assume you are married and filing separately with no dependents, which typically results in a lower exempt amount (zero dependents).
- Multiple Income Sources: If you have multiple sources of income, the IRS might distribute the exemptions across these sources. However, they might choose to levy 100% of the income from one particular employer if that simplifies the enforcement of the levy.
Understanding this process can help you better prepare for and respond to an IRS wage levy, ensuring you retain as much of your income as possible.
Understanding this process can help you better prepare for and respond to an IRS wage levy, ensuring you retain as much of your income as possible.
Preventing Future IRS Tax Levies
To avoid the stress and complications of an IRS tax levy, ensure you file your taxes on time, pay what you owe promptly, and keep your financial records organized. This proactive approach can help you avoid levies and maintain financial peace of mind.
If you need help with your taxes to avoid levies, the expert team at Hopkins CPA Firm is here to assist you. We’re ready to help you manage your finances effectively. In addition to helping you avoid tax levies, we also offer additional services like insurance planning services, tax preparation services in Texas (and beyond), and retirement planning services.
