By receiving an IRS Final letter of Intent to Levy from the IRS, you have entered the “advanced phases” of the agency’s collection process for tax debt settlement. In order for the IRS agent to keep track of your tax debt, it must do an assessment. Your income tax returns (self-filed returns), an audit by the IRS, a ruling by the Tax Court, or an IRS calculation mistake might all lead to an assessment. For you to combat these issues, you have IRS tax relief services, such as installment plans, offer in compromise, and much more. This article will explain levy in detail and what to do when you receive one. 

What is an IRS Tax levy and How is it different from Tax lien?

A levy is a legal procedure wherein your property is taken and sold to pay off a tax debt. A levy is the legal equivalent of a lien in this context. The difference between a tax lien and a levy is that the latter actually takes possession of the property in question and sells it to cover the tax liability. 

The tax lien is a legal safeguard for the government’s claim to your property. It happens if you fail to pay your tax bill or are careless about it. All your assets will be frozen to cover any debts you incur from failing to pay your taxes.

This claim is entirely legitimate, and the government has every right to use this tool to settle accounts with its creditors. Timely tax payment and other strategies, like property discharge, subordination, and withdrawal, is the best approach to removing a tax lien from your credit report.

If you believe the IRS data, the federal levy is much more important than the lien. Seizure and accurate property purchase are both certain outcomes of a levy. In contrast to a lien, in which the government’s only interest in your property takes center stage, your interests in the property are equally important.

When does the IRS take before it may levy your account?

The IRS typically issues three warnings before levying. 

The correct number is two announcements! The announcements are as follows:

  • In regards to account CP14/CP501, you owe taxes.
  • The Internal Revenue Service hasn’t contacted you in a long time, but you still have a tax debt (CP503).

CP504: This is a notice of intent to levy, not a final notice. If you don’t settle your state income tax bill right away, the state will take it out of your refund.

The IRS will send letters to those with a tax debt explaining their current condition. Those who repeatedly disregard these letters are more likely to be served with a Notice of Intent to Levy.

Only when these four conditions are met will the IRS levy your account.

The IRS sent you an IRS Final Notice of Intent to Levy and a Notice of Your Right to a Hearing at least 30 days before the levy (levy notice). The IRS may leave this notice at your home or place of business, send it to your last known address with a request for a return receipt, or personally deliver it to you. The IRS may issue you a Notice of Levy on Your State Tax Refund Notice of Your Right to Hearing if they take your tax refund.

Please be aware that the Internal Revenue Service (IRS) may contact a non-affiliated third party to verify or collect a tax liability and that you have been given a fair warning of this possibility.

How Does a Tax Levy Work?

After sending you a notice and starting collection efforts, the IRS has a few different avenues to pursue to get what’s owed to them. They can pick one or more of the following methods: wage garnishment, bank levy, property seizure, or tax refund offset (meaning they apply your future tax refunds to the taxes owed).

  1. Wage garnishment:

    • Garnishment of wages is a common method of enforcing tax charges. A wage levy requires your employer to withhold money from your salary and send it to the IRS because you owe back taxes. Your business will have one full pay period to begin complying after receiving the IRS levy letter.
  2. Bank Levies:

    • The Internal Revenue Service (IRS) may instruct your bank to freeze any funds on deposit for you if you owe back taxes. This will cause your bank account to become inaccessible. Depending on the bank’s policies, you may not be informed of this.

Just how can a tax levy affect your credit?

Being hit with the wage garnished by the IRS after receiving your paycheck. But a levied judgment does not affect your credit score immediately. Your credit score will not be affected if the IRS collects on a levy via wage garnishment.

A levy, however, might have lasting effects on your credit score. If the IRS takes a large chunk of your income, it may be challenging to meet your other financial obligations on time. A negative mark from overdue debts may remain on your credit record for up to seven years.

How Do I Stop Tax Levy?

  1. Make an appeal for tax levy:

    • You have 30 days from the IRS notice of intent to levy an asset to file a formal appeal. The charge will be temporarily suspended while your tax situation is reviewed. To file a formal appeal, you must use Form 9423. Your appeal may be upheld if you prove that paying the levy would cause extreme financial hardship.
  2. Installment plan:

    • A tax payment should be your first order of business. It’s so simple that it almost seems like a joke, but it does work! The only way to avoid a tax lien or levy is to pay any outstanding taxes they owe. Don’t lose hope if you cannot pay your taxes right away; you may be able to have the federal tax lien erased from your credit report by contacting the IRS. One way to accomplish this is to agree to a payment plan in which a set amount of money is deducted from your bank account on a predetermined schedule. (This installment may include interest and penalties.)
  3. Offer in compromise:

    • The next thing to do is to inquire about submitting an Offer in Compromise. Keep in mind that there are many rules to follow and that the IRS typically approves of less than half of the applications it receives annually. All tax returns and estimated tax payments are due for the current tax year. Your application will be denied if you are currently in bankruptcy or under audit by the IRS.
  4. Establish that your property is worthless:

    • The IRS may seize and sell your property to satisfy your tax debt if you’re hit with a levy. You could argue to the IRS that your possessions are worthless and, therefore, not marketable. If you can prove that your assets are weak, the government may release the levy. You must provide recent statements for your checking, savings, and retirement accounts to support the claim. You may also be asked to provide valuation estimates or proof that the assets are worthless.
  5. Convince IRS That You’re Struggling Monetarily

    • If continuing to live with a tax levy would put undue strain on your family’s finances, you can petition the IRS to release the levy. Money from the IRS should be sufficient to support your family’s needs. If you can convince the IRS that maintaining operations as they are will result in undue hardship, they may lift the tax. Bank statements and pay stubs are just the beginning of the mountain of evidence that must be provided to support your financial claim.
  6. Put in a bankruptcy claim:

    • Bankruptcy is the final option for removing a tax lien from your property. After declaring bankruptcy, your credit will suffer for years. Although creditors and the IRS are prohibited from contacting you or doing any collection activities while your case is being processed, you will still be responsible for paying back any debts you owe. Your tax obligation may be eligible for consolidation under Chapter 13 bankruptcy, enabling you to make manageable monthly payments against the principal balance. There are exceptional circumstances when tax obligations may be discharged in Chapter 7 bankruptcy.

What if there is a mistake?

You can disagree with the information in the IRS’s final Intent to Levy letter.

First, contact the IRS agent listed on the notice, but remember that you have the option to file an appeal. There is a difference between this and calling the IRS, as the latter only has 30 days to respond. There are times when the IRS gets something wrong. It is important to keep records if you have made arrangements with the IRS for installment payments. You can file an appeal if you disagree with the decision.

How to stop an IRS levy?

If you have paid all past due taxes or entered into a payment agreement with the IRS, you may file a petition to have the Levy lifted.

Assuming you cannot pay your taxes in full, the real question is how long it will take to reach an arrangement with the IRS addressing the matter and get the Levy or garnishment removed (or “released”). Levy releases are expedited by the IRS when straightforward payment arrangements are made.

That’s it if you haven’t requested and granted a delay in payment. You can ask for up to 120 days if you need more time. You have 60 days to pay the full amount if assessed. You can request that the IRS remove the Levy if you are granted additional time.

If you meet the requirements of the extension-to-pay arrangement, you can get a levy or garnishment lifted faster than you can call the IRS.

Tips for Dodging an IRS Penalty

Maintaining order in your tax filings and payments is essential for avoiding a tax levy and other financial penalties.

The IRS records your tax debts. You’ll have several chances to make your payment. They may take further action if you don’t respond to their attempts to get in touch with you. The amount the IRS plans to seize is detailed in a tax levy fee. That’s right; your tax levy cost will match the sum of your tax debts.

The IRS must follow a certain procedure before initiating a levy on you, and your participation is equally crucial. If the IRS levies your bank account, you either refuse to pay your debt or decide not to pay it. You will be notified in writing 30 days before the Levy goes into effect, so it’s possible that appearing at a hearing will be your best chance of avoiding it. If you are considering this, it is best to speak with a tax attorney beforehand.

Conclusion

The IRS will send you a CP504 notice after they have written about your tax liability and requested payment. Once the IRS issues a Notice CP14, the collection procedure officially begins. If you have unpaid taxes, the IRS will send you a CP14 as your first notification. Let’s say you’re in a sticky scenario where you can’t find the money to pay what you owe, set up a payment plan, or even contest the amount. If that happens, the IRS could issue a notice of encumbrance as one of the measures to get what’s owed to it. If you receive a Notice of Levy, it’s in your best interest to speak with a lawyer immediately to ensure that you don’t put yourself in a more financially or legally vulnerable position. Avoiding the IRS Levy seizure of your assets is one of the main benefits of settling your debt for a reduced amount or making more manageable payments.

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Author

Mr. Michael D. Sullivan

Michael D. Sullivan is the founder of MD Sullivan Tax Group. He had a distinguished career with the Internal Revenue Service for 10 years. As a veteran IRS Revenue Officer / Agent, he served as an Offer in Compromise Tax Specialist and Large Dollar Case Specialist.

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