An IRS tax levy is different from a threatening collection letter. A levy is the legal seizure of property to satisfy an unpaid tax debt.
That can mean money frozen in a bank account, a continuing deduction from wages, accounts receivable diverted from a business, or in more serious cases, physical property seized and sold.
If you receive a final notice of intent to levy, or if a levy has already reached your bank or employer, the timing matters. Some rights and practical options are available only for a limited period.
What Is an IRS Tax Levy?
A levy allows the IRS to take property or rights to property belonging to a taxpayer who has not resolved an unpaid federal tax liability.
The IRS can levy property you hold directly and property held for you by someone else. That can include wages, retirement payments, bank accounts, commissions, rental income, accounts receivable, certain federal payments, and the cash loan value of life insurance.
The IRS can also seize and sell physical property such as vehicles, real estate, and other assets when the statutory requirements are met.
What Has to Happen Before the IRS Levies?
In most cases, the IRS must assess the tax, send a notice and demand for payment, and the taxpayer must neglect or refuse to pay.
Before most levies, the IRS also sends a final notice advising the taxpayer of the intent to levy and the right to request a Collection Due Process hearing. A timely CDP request is generally due within 30 days of the date on the notice.
There are exceptions and special levy procedures, including certain state tax refund levies and jeopardy situations. Always follow the rights and deadline printed on the specific notice you received.
IRS Bank Levies
A bank levy is one of the most time-sensitive IRS collection actions.
When a bank receives an IRS levy, it generally freezes funds in the account as of the date and time the levy is received. Under the Internal Revenue Code, the bank normally holds those funds for 21 days before sending them to the IRS.
That 21-day period exists to give the taxpayer time to contact the IRS, resolve errors, negotiate a collection alternative, or request release when appropriate.
A typical bank levy reaches funds in the account when the levy arrives. It normally does not automatically sweep later deposits, although the IRS can issue another levy.
IRS Wage Levies
A wage levy works differently.
Wage levies are generally continuous. Once the employer begins honoring the levy, part of the employee’s wages continues to be sent to the IRS until the levy is released, the liability is paid, or another event ends the levy.
A portion of wages is exempt based on the statutory exemption rules. The amount that remains available to the taxpayer is not determined the same way as ordinary creditor garnishments under state law.
Because wage levies affect every pay period, resolving them usually requires both immediate levy work and a longer-term plan for the underlying tax debt.
Can the IRS Levy Business Income and Accounts Receivable?
Yes.
The IRS can serve a levy on customers or other third parties who owe money to a business. That can redirect receivables that the business was expecting to use for payroll, rent, inventory, or other operating needs.
Levies can also reach certain business bank accounts and other business property, depending on who owes the tax and who owns the property.
For an operating company, a levy can therefore become a cash-flow problem very quickly.
What Is the Difference Between a Levy and a Lien?
A lien secures the government’s legal claim against property. A levy takes property.
The IRS can file a Notice of Federal Tax Lien before a levy, but the two are distinct collection tools. Resolving one does not automatically resolve the other.
For example, the IRS may release a wage levy after an installment agreement is established while a previously filed tax lien remains in place.
How Can an IRS Levy Be Released?
The IRS is required to release a levy when specified conditions are met. Current IRS guidance lists situations including:
- The amount owed has been paid.
- The legal period for collection ended before the levy was issued.
- Releasing the levy will help the taxpayer pay the tax.
- The taxpayer enters an installment agreement whose terms do not allow the levy to continue.
- The levy creates an immediate economic hardship by preventing payment of basic, reasonable living expenses.
- The value of the property is more than the amount owed and release will not hinder collection.
A levy release does not erase the tax debt. If the balance remains unresolved, the IRS can continue collection activity and may issue another levy later.
What If the Levy Is Causing Financial Hardship?
Contact the IRS immediately and be prepared to document the hardship.
The IRS can release a levy that prevents a taxpayer from meeting basic, reasonable living expenses. That determination generally involves financial information about income, necessary expenses, assets, and household circumstances.
For businesses, the analysis may involve business financial statements and whether collection is preventing necessary operating expenses.
Can You Appeal a Levy?
Yes. A final notice that includes Collection Due Process rights generally allows a timely hearing request using Form 12153.
The IRS also provides the Collection Appeals Program for certain collection actions. The correct appeal path depends on the notice, timing, and type of collection action.
If the IRS denies a levy-release request, that denial may also be appealable.
What If the Bank Has Already Sent the Money to the IRS?
Options become narrower after levy proceeds have been transferred, but the process may not be over.
The IRS states that taxpayers can in some circumstances file a claim to have levied property returned. Erroneous levies also have specific remedies, including potential reimbursement of certain bank charges when the statutory conditions are met.
This is why waiting until after the 21-day bank holding period is risky.
How Archer Lewis Can Help With an IRS Levy
A levy case needs both immediate triage and a sustainable resolution.
Archer Lewis tax professionals can review the levy notice, confirm the underlying balances, communicate with the IRS, evaluate hardship or collection alternatives, and help establish an installment agreement, Offer in Compromise, or other appropriate resolution when available.
When a levy involves disputed ownership of property, bankruptcy, litigation, or other legal rights outside tax representation, an attorney may also need to be part of the team.
Frequently Asked Questions About IRS Levies
How long does the bank hold money after an IRS levy?
A bank generally holds funds for 21 days before sending them to the IRS.
Is an IRS wage levy a one-time deduction?
Usually no. Wage levies are generally continuous until released or otherwise ended.
Can an installment agreement stop a levy?
A levy can be released when the taxpayer enters an installment agreement and the agreement’s terms do not allow the levy to continue.
Does a levy release eliminate my tax debt?
No. Release of the levy does not by itself eliminate the underlying balance.
This article is for general informational purposes and is not a substitute for tax advice based on your specific circumstances.