Why a Levy Should Never (Ever) Be Ignored
In a previous post, we discussed liens, the different types, and what to do if you have a lien against your property. A lien is a legal claim placed on a property that you own or use, such as your home or car. A creditor may file for a lien so they can take possession of your property or assets if you don’t make payments for a loan or service, or pay your taxes. A lien is not a reason to panic, but it can affect your credit score, so you should address a lien right away, whether the lienholder is a lender, a contractor or the IRS.
If you don’t deal with a lien and continue to miss payments, you may receive a levy notice. A levy is typically a last resort and, as a result, far more urgent. It means the creditor has been given the authority to take possession of your property or assets to recover the money you owe. This could mean losing your home, car or boat, as well as financial assets held by a third party, such as wages, bank accounts, retirement accounts, investments, licenses, rental income, accounts receivable and life insurance policies.
A levy remains in effect until all debt, interest, penalties, etc. have been paid or other arrangements have been made. There are several types of levies:
A tax levy is used by the IRS or a state taxing authority to legally seize your property or assets to recover unpaid taxes. Again, a lien is a claim used as security for unpaid debt, while a levy is the actual seizure of property or assets.
The IRS will first assess the tax amount and send a tax bill to your last known address. If you still fail to pay the tax or make arrangements to settle the debt, they’ll send a Final Notice of Intent to Levy and a Notice of Your Right to a Hearing. The IRS is required to notify you at least 30 days before the levy. After 30 days, the IRS can levy any property you own or have an interest in, including the financial accounts mentioned previously.
A state tax levy applies to unpaid state taxes, but the IRS can also go after your state tax refund to recover unpaid federal taxes.
A wage levy or garnishment allows the IRS, a state taxing authority or a creditor to demand that a certain portion of your pay is submitted to pay for unpaid taxes. A creditor must win a collection lawsuit in court before they can legally levy or garnish your wages. The IRS and some states can also issue a 1099 levy to collect 1099 payments.
The IRS, a state taxing authority, and a creditor that wins a lawsuit can also have the court issue a bank levy. The bank will freeze your account until your debt is repaid. Bank levies can be issued as many times as necessary. The icing on the cake is the fee charged to you by most financial institutions to process a levy on your account.
Most creditors will typically use a bank levy before attempting to garnish wages. There are limits on the percentage of a person’s pay that can be levied. It’s easier and takes less time to transfer funds from a bank account, and if the account has enough money to pay off the debt, the matter is settled with a single transaction. However, people will often leave little money in their accounts when they find out a creditor is attempting to levy those funds.
How to Stop a Levy
If you’ve received a notice from the IRS and can’t pay what you owe, you can file a Request for a Collection Due Process or Equivalent Hearing. You’ll have a chance to appear before the IRS Office of Appeals and make your case. If you’re denied, you have 30 days to challenge the ruling in U.S. Tax Court. Another option for stopping a tax levy from the IRS is filing for bankruptcy, which may only stop the process temporarily.
In some cases, levies are disputed. If you can prove creditor error, identity theft, or lack of notification about legal action, you may be able to stop or delay the levy. If the levy is valid, contact the creditor and negotiate an arrangement to pay what you owe before your property and assets are seized.
Regardless of your specific situation, we always recommend consulting with an attorney and an accountant. Understand your options before choosing a course of action and make sure any arrangement you agree to is financially manageable.