Question: Will the IRS garnish my wages or Levy my wages? How can I avoid this?
Answer: In order to answer this question effectively, some background and definitions with regards to IRS procedures are warranted. A levy on wages is where the IRS effectively takes a portion of ones wages and applies it to the outstanding tax balance owed. Lay people often refer to this as an IRS garnishment, but the technically correct word in IRS language is “levy.”
Unlike an IRS bank levy, a wage levy typically has a continuous effect, meaning that it stays in effect on future wages until the liability is satisfied or until the levy is released. Wages and salary include fees, bonuses, commissions, and similar items. Obviously, a wage levy can have serious and devastating financial implications. However, the IRS does have some rules, procedures, and restrictions with regards to issuing a wage levy and how much can be taken from each paycheck.
The IRS has to follow strict procedures before they are in a legal position to issue a wage levy. There are some exceptions to these procedures (i.e. collection of tax is in jeopardy, levy is served on a State to collect a Federal tax liability from a State refund, a disqualified employment tax levy, or a Federal Contractor levy is served), but these only apply in a limited number of situations and, for the purpose of this article, will not be discussed.
Steps to Take to Avoid IRS Garnishment
Prior to being able to proceed with a wage levy, the IRS has to make several attempts to resolve the outstanding tax liability on a voluntary basis. First, the tax liability has to be assessed against the taxpayer. This typically occurs when the taxpayer files his or her return, but it can also happen when the IRS estimates a return for a taxpayer who is delinquent in filing, as authorized by Internal Revenue Code Section 6020(b). Then the IRS has to issue a correspondence in which they provide notice of the liability and formally demand payment of the liability. The notice and demand must be left at the taxpayer’s home or business, or mailed to the taxpayer’s last known address. The taxpayer has 10 days to pay the amount that is owed.
If the taxpayer neglects or refuses to pay the amount due within 10 days of the initial notice and demand, a federal tax lien may be filed. Note that a lien is not the same thing as a levy. Without being overly technical, a lien is a claim to property. A levy is when they actually take property. With regard to paychecks, a levy is what most people desperately wish to avoid.
Once this notice is issued the taxpayer has 30 days to either resolve the liability (which could include entering into a formal installment agreement) or to file a Request for a Collection Due Process Hearing (CDP). If the taxpayer fails to either resolve the tax liability or file a request for a CDP within 30 days of the date on the Final Notice of Intent to Levy, the IRS will be in a legal position to proceed with issuing a wage levy (or a levy on other assets).
Note that there are strategies that can be utilized to reduce the chances of enforcement in the event that the taxpayer fails to file a CDP request within 30 days or if the taxpayer fails to resolve the tax liability at the CDP hearing. However, these strategies are beyond the scope of this article.
It is important to understand that there are restrictions on the amount that can be taken from each paycheck if the IRS does proceed with a wage levy. If the IRS does levy your paycheck, you should still have some take home pay. The amount of wages that are exempt from levy depends upon the total of the taxpayer’s standard deductions and the amount deductible for exemptions on an income tax return for the year that the levy was served. Additionally, any amount that a taxpayer is obligated to pay court ordered child support is exempt.
Now that the basic procedures that the IRS must follow prior to issuing a wage levy have been discussed, the next question is how to avoid being levied. Short of full paying the liability, a taxpayer can avoid enforcement by filing for bankruptcy protection, entering into an Installment Agreement or an Offer in Compromise with the IRS, or by convincing the IRS to place the tax liability into “Currently Not Collectible” status. It may also be possible to postpone enforcement by way of filing certain proposals or appeals. However, few taxpayers have the expertise to accurately and thoroughly evaluate these options, determine which option is best for their particular situation, and pursue that option in a fashion that is likely to procure optimal results.
This is precisely why having a tax attorney experienced with tax collection cases can be invaluable. Such an attorney can respond to the notices on your behalf in order to not only take steps to prevent a wage levy from occurring in the first place, but also to commence negotiations toward resolving the tax liability in a manner that is affordable. Do-it-yourselfers and taxpayers with incompetent representation can wind up paying far more to the IRS than they ought to or can wind up with unaffordable monthly payments, which can cause either an inability to make ends meet or a defaulted agreement.
There are many means and strategies of resolving a tax liability that do not require a lump sum payment in full. Each resolution strategy is dependent on the taxpayer’s individual and unique set of financial circumstances. The most common of these strategies are that of securing an Installment Agreement or an Offer in Compromise. These strategies are discussed in more detail in other articles on this website. I recommend that you refer to them for more details.
-David Feldman, Esq., Tax Attorney