What Is a Levy?
A levy is the legal seizure of property to satisfy an outstanding debt.
- Levies are the legal means by which a taxing authority or a bank can seize property for the payment of a debt.
- Properties that can be seized in a levy are both real–such as cash, cars, and houses–as well as intangible and held by someone else, like future wages.
- A levy is different from a lien because a levy takes the property to satisfy the tax debt, whereas a lien is a claim used as security for the tax debt.
How a Levy Works
Levies can be exercised by either a tax authority–such as a state treasury or the Internal Revenue Service (IRS)–or a bank.
A levy is different from a lien because a levy takes the property to satisfy the tax debt, whereas a lien is a claim used as security for the tax debt. In other words, while a lien secures the government’s interest or claim to an individual’s or business’s property when the tax debt remains unpaid, a levy actually permits the government to seize and sell the property to pay the tax debt.
The Internal Revenue Code (IRC) authorizes levies to collect delinquent tax payments to the federal government. However, certain procedures must be followed and requirements met before enforcing a levy. In the U.S., for example, the IRS must first assess the tax and send a Notice and Demand for Payment (a tax bill) to an individual owing federal taxes.
If the individual still neglects or refuses to pay the tax, the IRS will send a Final Notice of Intent to Levy and Notice of Your Right to a Hearing (a levy notice). This is typically sent at least 30 days prior to the levy and can be given in person, dropped at the tax debtor's home or place of business, or mailed to the individual's last known address.
In the U.S., the IRS has the authority to levy an individual's property to satisfy a tax debt. Property that can be levied includes real property like cash in a bank account, a house, car or boat.
Intangible property and property belonging to the individual that is held by someone else can also be levied. This includes wages, retirement accounts, dividends, bank accounts, licenses, rental income, accounts receivables, commissions or the cash loan value of a life insurance policy.
As a measure of last resort, the taxing authority may impose a federal tax lien to inform other creditors of the taxing authority’s legal right to a taxpayer’s assets and property. A tax lien goes up on the debtor’s credit report and remains there for up to15 years if it remains unpaid. If the taxes remain unpaid, the tax authority can use a tax levy to legally seize the taxpayer's assets (such as bank accounts, investment accounts, automobiles, and real property) to collect the money it is owed. The IRS is also authorized to garnish the taxpayer’s wages until the debt is paid off.
A state tax levy applies to unpaid state taxes. Note that the IRS can also levy a debtor’s state tax refund, in which case, he may receive a Notice of Levy on Your State Tax Refund and a Notice of Your Right to Hearing after the levy.
For federal contractors, the IRS does not need to provide any notification of the levy until after the tax levy is applied.
A creditor that obtains a court judgment against a debtor may be able to have the court issue a bank levy.
The bank levy usually freezes the bank account(s) of the debtor until all the outstanding debt is repaid in full, dependent on the court's ruling. If the levy is not lifted, the creditor can take the money from the bank account and apply it to the total debt owed.
A bank levy is not a one-time event. A creditor can request a bank levy as many times as needed until the debt has been satisfied as per the terms of the court judgement. In addition, most banks charge a fee to their customers for processing a levy on their account.
A bank levy can occur due to either unpaid taxes or unpaid debt. Some types of accounts, such as Social Security Income, Supplemental Security Income, Veteran’s Benefits, and child support payments, generally cannot be levied. However, a debtor who owes money to the federal government would not have as much protection as he would if he owed a private creditor.
Examples of a Levy
The IRS provides sample case scenarios for levies and what you can do.
How to Avoid a Levy
The best way to avoid a levy is prevention: file your returns on time and pay your taxes when they are due. If you need more time to file, you can request an extension, and if you can't make a full payment, contact the IRS and arrange to pay the balance in installments.
Don't Ignore Tax Levy Notices
Don’t ignore IRS billing notices. They don't go away, and in extreme cases, delinquent tax bills can lead to time in prison.
There are different ways to make tax payments. You may be able to set up a payment plan or settle your tax debt for less than the full amount you owe. In some cases, there may also be other options.
If you do not work with the IRS to resolve your tax debt and respond to their billing notices, the IRS may levy your property. Even if you think you do not owe the tax bill, you should contact the IRS.
If you receive an IRS bill titled "Final Notice, Notice of Intent to Levy and Your Right to A Hearing," contact the IRS right away. Call the number on your billing notice, or individuals may contact the IRS at 1-800-829-1040; businesses may contact the IRS at 1-800-829-4933.
What If Someone Else's Bank Account Was Levied for My Taxes?
The IRS proposes a couple of hypothetical scenarios for levies that may be removed. One is a situation where Person Number One is listed as a signer on Person Number Two's bank account, and Person Number One's property is levied by the IRS. For example, a son is a signer on his elderly mother's bank account to help her pay her bills, but a levy has been put on his property for some reason.
The IRS says the mother or her power of attorney should call the IRS at the telephone number shown on Form 668-A(C)DO and be prepared to explain why the funds in the bank account are the property of the mother. The IRS may ask for substantiation that the mother is the owner of funds in a bank account.
How to Recover Money Lost Due to IRS Error
In the second hypothetical scenario, the IRS has levied a person's bank account after they have fully paid all of their tax liability. The bank charged the taxpayer a $100 fee for processing the levy, and the taxpayer would like to recover the fee for $100 from the IRS.
The IRS may reimburse a taxpayer for bank charges caused by erroneous levies by submitting Form 8546, Claim for Reimbursement of Bank Charges, to the IRS address on the taxpayer's copy of the levy. To be eligible to recover bank charges from the IRS, all of the following conditions must be satisfied:
- The IRS must have caused the error.
- The taxpayer must not have contributed to continuing or compounding the error.
- Before the levy, the taxpayer must have responded in a timely way to contacts and given information requested to establish the taxpayer's position.