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Introduction
Just the word and logo IRS on an envelope could cause heart palpitations. You open the letter and see the word “Levy”. This means the IRS has or is in the process of legally seizing your assets to collect unpaid taxes. According to the IRS, millions of Americans face an IRS levy each year. While it’s a serious situation, don’t panic! Understanding what a levy is and your options can help you navigate this situation. This guide will explain IRS levies, the types of property at risk, and steps you can take to prevent one (and potentially save your assets).
1. Understanding IRS Levies
The IRS has 10 years to collect any debt you owe them. However, once the 10-year Collection Statue Expiration Date (CSED) expires, they lose that money. Therefore, if a Lien has been placed on your assets and you still choose to not pay, to prevent missing out on collecting, the IRS’s next step is filing a Levy.
Seizure vs. Levy
There are two main categories of levies:
- Seizure: The taking of real and tangible personal property owned. Real property is an asset that can be touched but cannot be physically moved; if moved will cause major damages. Tangible personal property is an asset that can be touched and physically moved without causing damages. When these assets are seized, if they can’t be moved, the IRS tags the property and/or padlocks it.
These assets have the following characteristics:
- Must Convert into Cash: These assets have to be sold to be converted into cash.
- More time-consuming: The IRS needs to plan before taking action.
- Hire Third Party: The IRS may need to hire appropriate personnel to supervise or take care of the asset they are seizing.
- Upfront Expense to Maintain: The IRS will have expenses after seizing the asset to keep the asset in a satisfying condition to sell.
- Levy: The taking of Intangible personal property in the custody of a third party. Intangible personal property is an asset that cannot be touched or physically held such as customer lists, contracts, licenses, stocks, computer software, patents, franchises, etc. These assets belong to you, but a third party has custody. The IRS will issue Form 668-W, Notice of Levy on Wages, Salary & Other Income or Form 668-A, Notice of Levy to that third party on your behalf. These forms will display your name and identification number, amount of liability, the periods the liability applies to, etc. The third-party has no choice but to release the property after a certain period and does not need your permission to do so.
These assets have the following characteristics:
- Readily Cash: These assets are already cash or liquid assets so require little time to convert into cash.
- Less time-consuming: No need to plan before taking action. IRS serves a third party such as a bank a Notice and they comply.
- No Upfront Expense to Maintain: The IRS does not need to hire personnel to take care of or maintain assets.
2. Property at Risk During a Levy
Seizable Property (Real & Tangible Personal Property)
- Real Estate: Your house, land, or any other buildings you own.
- Tangible Personal Property: Your car, boat, motorcycle, jewelry, furniture, and other physical assets.
Leviable Property (Intangible Personal Property)
- Other Income (royalties, dividends, rental income, commissions, etc): The IRS can direct third parties to send those funds directly to them.
- Retirement Accounts (Qualified pension, Profit sharing, IRAs, SEP IRAs, Keoghs, IRC 403(b) retirement plans, Stock Bonus Plans under ERISA, and Thrift Savings (TSP) accounts of federal employees): The IRS can levy on some retirement accounts, and there can be penalties for early withdrawals and limitations.
- Investment Accounts (Stocks, Bonds, Mutual Funds, etc.): The IRS can seize your stocks, bonds, or mutual funds and sell them to collect the debt.
- Accounts Receivable/Notes receivable, and other debts (money owed to you by customers, insurance companies, credit card companies, employees, officers of the company, etc.): The IRS can notify them to redirect payments owed to you directly to the IRS.
- Federal contractor and vendor payments: The IRS can levy up to 15% of certain federal payments of Federal contractors. If the payments are for vendors of property, goods, or services sold or leased to the Federal government, the IRS may levy up to 100% of those payments.
- Cash Loan Value of Life Insurance and Endowment Contract: These companies are given 90 days after the IRS served notice of levy to submit the funds to them.
- State Income Tax Refunds: The IRS serves the state a levy on your behalf so the state can send your state refund to them. Therefore, you will receive two Notices. One from the state, stating your state refund was forwarded to the IRS, and a CP 92, Seizure of your state tax refund and notice of your right to a hearing from the IRS.
- Inheritances: The IRS can serve the administrator/executor a levy on the inheritance you’re due before you receive it.
- Digital Assets (virtual currency, cryptocurrency and non-fungible tokens, etc.): The IRS can levy your digital assets.
3. Levy Methods and Notifications
The IRS can use different methods to levy on your property, and they’re required to provide you with specific notification procedures to ensure your rights are protected.
- Before-the-Fact Levy Notification: You’ll receive a “Final Notice of Intent to Levy” and a “Notice of Your Right to a Hearing” at least 30 days before the levy takes effect. This gives you time to contest the levy or make arrangements with the IRS.
- After-the-Fact Levy Notification: In some cases, the IRS may notify you within 30 days after seizing your property.
- Example: Jeopardy Levy – The IRS takes possession of your property before issuing a Levy Notice because you start: * Moving property to hide it, * Transferring property to others to avoid paying the tax, and/or * Are about to leave the United States.
4. Common Levy Types
- One-Time Levy: This targets specific assets like bank accounts once to pay all or a portion of your tax debt.
- Example: On April 1, the IRS sends XYZ Bank a Levy on your behalf for $15,000. On that date, you had only $5,000 in your account. The next day, April 2, you deposited $10,000. Due to the second deposit, your bank now has a total of $15,000, the exact amount on the levy. Although your bank account has the amount needed to pay the IRS, after the 21-day waiting period, the bank can only send the IRS $5,000 because that was the balance in the account on the day the levy was served.
- Continuous Levy: This applies to current and future income until the tax debt has been paid in full or the statute of limitations on collection has expired.
- Example: The IRS issues a wage garnishment levy to your employer. A portion of your paycheck will be withheld each pay period and sent directly to the IRS until your tax debt is settled.
- Indefinite Levy: Similar to a continuous levy, however, it can continue even after the 10-year collection period expires.
- Example: If you owe $15,000 in back taxes and receive $1,000 in Social Security benefits each month, the IRS may levy up to 15%, $150 ($1,000 * 15%), of your benefits until the debt is paid off.
5. Steps to Prevent an IRS Levy
- Respond Promptly to IRS Notices: Don’t ignore IRS notices! Open and read them carefully. A prompt response can help protect your rights and potentially prevent a levy.
- Pay Your Taxes: Even partial payments demonstrate good faith and can show the IRS you’re willing to resolve the issue.
- Negotiate with the IRS: If you’re unable to pay the full amount owed, explore payment options with the IRS, such as installment agreements or offers in compromise.
- Secure a Loan: Consider securing a loan to pay off your tax debt and avoid the risk of an IRS levy.
- Seek Professional Help: A qualified tax professional can negotiate with the IRS on your behalf and explore all your options to avoid a levy and minimize the damage to your financial situation.
Conclusion
Facing an IRS levy is stressful, but manageable with professional assistance. By understanding your options and taking proactive steps, you can potentially prevent a levy and resolve your tax debt. Don’t gamble on your assets with the IRS. The sooner you act, the more control you’ll have over your financial future.
Need Help with an IRS Levy or Other IRS Tax Issues?
I understand how complex tax issues can be. Don’t try to navigate them alone. I have the experience that can help you explore your options and fight for the best possible outcome.
