Levies

The IRS and most state tax agencies possess the authority to levy, attach, or garnish a taxpayer’s property for failing to pay a tax liability. Typically, several warning notices are mailed before the agency initiates enforcement action. Once a levy is issued, getting it released becomes challenging, especially if the taxpayer has unfiled tax returns. This difficulty, along with the potential representation cost, is a key reason why I advise clients never to ignore a tax agency’s warning notice of its intent to levy.

For the IRS, taxpayers have several avenues of appeal before the actual levy occurs. These rights, known as the Collection Due Process (CDP) and Collection Appeal Program (CAP), are detailed elsewhere. Appeals must be filed within specific time frames to be effective. Missing the deadline can result in significant financial consequences.

Levies on Third Parties
Levies on bank accounts, investment accounts, and other property held by third parties are the most common form of levy. The amount captured is generally what the third party holds for the taxpayer (such as a bank deposit) at the time they receive the levy. This amount, up to the total liability per the levy, will be taken and sent to the tax agency after a mandatory waiting period, usually 21 days. This period allows the delinquent taxpayer an opportunity to negotiate with the tax agency for a full or partial release of the levy amount.

In contrast, a levy served on an employer or payor of wages, commissions, or other periodic payments is continuous. This means that the entity receiving the levy must send all current sums owed to the taxpayer as of the levy date, plus future sums, to the IRS or state agency until the levy is released or the total amount shown on the levy is collected. There is a small exemption for IRS levies, but it is minimal. The California Franchise Tax Board, for instance, generally takes 25% of take-home pay through a wage attachment order, which, though painful, is not as catastrophic as an IRS levy.

Levies on a Taxpayer’s Property in Their Possession
A direct levy on a taxpayer’s personal or real property is known as a seizure. This could involve the agency taking possession of a car, boat, home, or other physical property. The IRS must follow specific rules, including filing a Federal Tax Lien, before a Revenue Officer can physically take a taxpayer’s property to sell at auction.

Release of a Levy
Once a levy is issued, the IRS may release the property if the delinquent tax is paid or a repayment plan (such as an installment agreement) is approved. If the levy results in a hardship where the taxpayer cannot meet basic living expenses (such as food and reasonable lodging), the IRS can grant a full or partial levy release.

In the case of Vinatieri v. Commissioner, 133 T.C. 892 (2009), the U.S. Tax Court ruled that the IRS must release levies causing economic hardship, even if all tax returns are not filed. If the levy prevents the taxpayer from meeting basic living expenses, it must be released. The IRS applies its COLLECTION FINANCIAL STANDARDS when evaluating basic living expenses, which may limit the consideration for items like rent or car payments. While the IRS typically requires delinquent returns to be filed before releasing a levy, the levy must still be released if the taxpayer cannot pay basic living expenses with it in place. A partial release is possible if that suffices for the taxpayer’s survival.

Disqualified Employment Tax Levies
Generally, the IRS must notify taxpayers of its intent to levy before actually doing so. However, Congress introduced a “disqualified employment tax levy,” allowing the IRS to levy property without prior notice in certain situations. This applies to businesses with a recent history of CDP hearing requests for unpaid employment taxes within the past two years. The rationale is that such taxpayers should not be entitled to another CDP hearing for subsequent or additional employment tax liabilities within that period.

Levies are a powerful tool for tax agencies to enforce taxpayer compliance. It is always easier to respond to warnings and avoid the issuance of a levy than to ignore them and later try to get the levy released.