Differences Between Income and Bank Levies

Posted 6/1/2009 12:51:03 PM

Income Levies (a/k/a Wage Garnishment)

A wage garnishment is a legal action that the IRS has a right to take against taxpayers that owe the IRS money. A wage garnishment, which is an income levy, is one method the IRS uses to collect a past due tax liability from a taxpayer. The IRS sends out the wage garnishment order to the taxpayer’s employer to order the employer to send in a portion of the taxpayer’s income. An employer is legally obligated to comply with the terms of the wage garnishment.

Through the wage garnishment, the IRS is allowed to take a taxpayer’s wages up to a certain amount. The IRS gives the employer a chart that informs the employer of how much it needs to send to the IRS. Frequently, the amount the IRS can garnish is up to 80% of a taxpayer’s wages.

A wage garnishment is typically ongoing until the taxpayer or his/her representative can contact the IRS and negotiate for a release of a garnishment.

The IRS can issue more than one wage garnishment. If a taxpayer has two jobs, the IRS can issue a wage garnishment to each employer. Additionally, if a husband and wife have a joint back tax liability, the IRS can issue a wage garnishment to each spouse’s employer. However, if only one spouse owed the taxes, then the IRS can only issue a wage garnishment to the liable spouse’s employer.

The IRS can also issue levies against other sources of income. Specifically, the IRS can issue a levy on self-employed individuals. This is done through issuing a levy against a self-employed individual’s accounts receivable or contracts. Because some self-employed individuals have multiple accounts receivable or contracts, this can result in multiple levies. Typically, levies against accounts receivable or contracts are one-time events (similar to bank levies, discussed below). However, the recipient of an income levy may continue to levy the proceeds of a taxpayer’s account or contract even after the one-time event occurs.

The IRS can also issue a garnishment against Social Security Benefits as well as other federal income, including retirement, pension, and annuities. The release process is very similar to that of a wage garnishment. However, if the amount of the garnishment is relatively low, such as 15% of the monthly amount, then generally, the IRS will not agree to issue a release unless the taxpayer can prove that even a15% reduction in income is causing the taxpayer to incur an economic hardship. It can be extremely difficult to negotiate the release on these types of levies. It is also frustrating as Social Security levies are released on a monthly basis. Often a taxpayer will release a Social Security levy only to find that the Social Security Administration has yet to process the release.

Bank Levies

A bank levy is another method the IRS uses to collect a back tax liability from a taxpayer. The IRS sends the levy notice to the taxpayer’s bank, which orders the bank to hold the money in the taxpayer’s account(s) for 21 days. The bank is legally obligated to honor the levy. No one can access the funds during this period. The 21-day period provides an opportunity for the taxpayer or his/her representative to contact the IRS and negotiate for a release of the funds controlled by the levy. Once the 21-day period passes, the funds are remitted to the IRS.

Any money deposited after the receipt of the levy is not frozen by the levy. The taxpayer should have full access to the deposited funds. The IRS can only get any subsequent funds deposited by a taxpayer after issuing another bank levy.

Releasing an Income Levy

The IRS will not release an income levy unless a taxpayer resolves his or her back tax liability. The taxpayer can resolve his or her back tax liability through Full Payment, an Offer in Compromise, an Installment Agreement, or through placement in Currently Not Collectible status.

Thus, for the most part, a taxpayer does not need not engage in any special process to release an income levy. However, a taxpayer does need to respond quickly to any IRS requests for documents, so that their case can be resolved before the a levy is imposed.

Releasing a Bank Levy – Extreme Financial Hardship

Because a bank levy is a one-time event and the amounts within bank accounts are typically small, the IRS will not always release a bank levy after entering into an Installment Agreement or proving a financial hardship (i.e. Currently Not Collectible status). Instead, the IRS will typically release a bank levy only if the taxpayer is experiencing an “extreme financial hardship.”

An “extreme financial hardship” occurs when the funds within the bank account are needed for a specific reason. The reason must relate to allowable expenses, which are those expenses necessary for the health or welfare of the taxpayer, or for the production of income. Usually, if proven, the IRS will release the bank levy up to the amount necessary to pay for the allowable expense.

Here are some examples that could demonstrate an extreme financial hardship:

• Notice of Eviction
• Notice of Foreclosure
• Shut-Off Notice (i.e. electricity, water, phone, etc.)
• Notice of Repossession
• Upcoming Medical Procedures
• Necessary Travel Expenses for Employment
• Payroll for Business

Releasing a Levy through Filing an Offer in Compromise

You can also get a levy released by filing an Offer in Compromise. However, the IRS will only release a levy after an Offer in Compromise has been “deemed processable” by the IRS Centralized Offer in Compromise (COIC) Unit. This means that the IRS COIC Unit has determined that the filed Offer in Compromise has met all procedural requirements.

Unfortunately, releasing a levy through filing an Offer in Compromise is not an exact science. A taxpayer must rely upon the IRS COIC Unit to notify the department that issued the levy (i.e. ACS, Revenue Officer, etc.) that it has received a processable Offer in Compromise. A taxpayer must also rely upon the IRS COIC to ask that department to release the levy so that IRS COIC may accurately consider the taxpayer’s financial situation.