Levy

What Is a Levy?

A levy is the legal seizure of property to satisfy an outstanding debt. If you fail to pay your taxes, the Internal Revenue Service may respond by levying your tax return or property. Tax authorities can also levy other assets, such as bank accounts, rental income, or retirement accounts.

Key Takeaways

  • 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.
  • While private creditors need a court order to levy property, federal agencies like the IRS do not.
  • A levy is distinct from a garnishment, where a court orders an employer to direct part of your salary to a creditor.

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.

Tax Levy

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.

Private creditors must win a monetary judgment before levying a bank account. However, the IRS can levy an account without a court order.

Bank Levy

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 judgment. In addition, most banks charge a fee to their customers for processing a levy on their accounts.

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.

Green Levy

A green levy is a tax on greenhouse gases or other sources of pollution. These levies are intended to incentivize environmentally-friendly behaviors by raising the costs on polluting businesses. Carbon taxes are among the most common green levies, but many local governments have also sought to reduce plastic waste by raising the price of plastic shopping bags.

Mill Levy

A mill levy or mill tax is a property tax, based on the assessed value of real estate. These taxes are typically used by local governments to allocate funding for school districts or parks. Every year, each property in the district is valued by a tax assessor, and taxation is allocated on a percentage basis.

Levy vs. Garnishment

A levy is distinct from a garnishment, another means that the IRS or other creditors can use to secure repayment. Whereas a levy allows creditors to withdraw money from a bank account, a garnishment is when a court instructs a third party (usually an employer) to redirect a portion of a debtor's wages or income.

Both garnishments and levies are available to private creditors, as well as the government. However, federal agencies like the IRS do not need a court order in order to levy or garnish a person's assets.

Other creditors must provide proof of the unpaid debt and acquire a court order for the wages or other income to be garnished. Garnishments are frequently used to pursue defaulted loans or delinquent child support. Debtors may be entitled to some relief, if the garnishment would cause them financial hardship.

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.

The Bottom Line

A levy is one of several available means to secure repayment for overdue taxes or unpaid loans. Levies can also refer to other kinds of taxes, that may be used to support government programs.

Which Constitutional Amendment Gave Congress the Power to Levy an Income Tax?

The Sixteenth Amendment allows Congress to collect direct income taxes without regard to state census counts. Prior to the amendment's passage in 1909, income taxes could only be allocated among the states based on their population. Until the 16th amendment was ratified, federal revenues largely came from customs duties and excise taxes.

How Can You Stop a Levy on Your Bank Account?

The simplest way to avoid a bank account levy is to repay the debt that prompted the levy in the first place, but this is easier said than done. However, there are other legal ways to escape a bank levy. If you can prove that the levy was due to an error on the creditor's part, or that you were the victim of identity theft, you may be able to have your account access restored. You may also be able to contest the debt or declare bankruptcy, although this will likely require the help of a debt relief attorney.

How Often Can the IRS Levy My Bank Account?

There is no limit to the number of levies the IRS can place in order to collect unpaid taxes. However, there are limits to what they can take–the IRS can only levy up to 15% of Social Security benefits, and it cannot levy veterans' benefits. In addition, the IRS may release a levy if the lost funds would create an undue economic hardship.

What Is an Ad Valorem Tax Levy?

An ad valorem tax is a tax levied on the assessed value of a piece of property, usually real estate or a vehicle. The phrase "ad valorem" means "according to value," so these tax burdens are distributed among the community according to the value of each taxpayer's property. These taxes are a major source of revenue for local governments and school districts.

How Much Can Child Support Levy From My Bank Account?

Laws vary from state to state, but each state can levy bank accounts for unpaid alimony or child support. However, there are limits to the amount that can be garnished. Under Title III of the Consumer Credit Protection Act, courts can garnish no more than 60% of a worker's disposable earnings, unless they are supporting a spouse or child, in which case the limit is only 50%. An additional 5% may be taken if the worker is more than 12 weeks behind in payments.

Article Sources
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