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A tax debt with the federal Government can end up in a much more serious situation than a simple payment notice. When a taxpayer maintains an outstanding balance with the Internal Revenue Service (IRS) and fails to resolve it, the agency has legal tools to recover the money owed.
Among those powers is the levy, a procedure that allows the agency to legally take certain funds, income or assets to cover a tax debt. The measure can reach everything from bank accounts and wages to vehicles, real estate and other personal assets, provided that the conditions established by federal regulations are met.
Although New York, California, and Texas concentrate a large number of taxpayers, the rules were not created specifically for those states. The mechanism belongs to the federal collection system and can be used against taxpayers anywhere in the United States who have a tax debt that remains unresolved.
How the IRS collection process begins
A levy is not usually the agency’s first action in response to a debt. Before reaching that stage, the IRS must complete certain steps within its collection process.
In general terms, the agency must have determined the tax owed, sent the taxpayer a bill or Notice and Demand for Payment, and confirmed that the obligation was not paid. If the situation continues unresolved, the IRS can move toward a final notice of intent to levy.
One of the central documents is the Final Notice of Intent to Levy and Notice of Your Right to a Hearing. The IRS states that this notice must be sent at least 30 days before carrying out a levy, except for certain exceptions provided by regulation.
That is why receiving a communication from the agency does not mean that the assets will be seized immediately. The taxpayer can still contact the IRS, pay the debt or try to establish an agreement to resolve it.
What assets can be reached by a levy
The scope of a levy can be broad. The IRS explains that the measure can be applied to property or rights to property belonging to the taxpayer.
Among the assets that may be affected are:
- Money deposited in bank accounts or other financial accounts.
- Wages and other income.
- Vehicles.
- Homes and other real estate.
- Business assets and other personal property.
- Certain benefits or payments due to the taxpayer.
The agency itself distinguishes a levy from a tax lien or tax lien. While the lien constitutes a legal right of the Government over certain assets to secure the debt, the levy involves the actual seizure of assets or funds to satisfy it.
What happens with the money in a bank account
Bank accounts have a particular procedure. When a financial institution receives an IRS levy, the affected funds are held.
However, the money is not sent to the agency immediately. The regulations establish a 21-day waiting period, during which the taxpayer can contact the IRS to pay the debt, reach an agreement or report if they believe there is an error in the levy.
If the IRS does not release the levy during that period, the funds reached by the measure must be sent to the agency. The procedure applies to the funds that were in the account when the bank received the levy and, normally, does not reach deposits made afterward.
The notice taxpayers should not ignore
The Final Notice of Intent to Levy and Notice of Your Right to a Hearing is one of the most important communications within the procedure.
The IRS recommends acting immediately when this document is received. The notice informs that the agency intends to apply a levy and explains the taxpayer’s rights to request a hearing.
In addition, the IRS indicates that a person may have the possibility of requesting a Collection Due Process hearing before the measure advances, according to the established conditions and deadlines. For certain notices, the deadline to request this hearing is 30 days.
Ignoring the communications can cause the process to move toward stricter collection measures.
What alternatives exist if the full debt cannot be paid
Not having enough money to pay off a tax debt all at once does not necessarily mean that the taxpayer must wait for a levy to occur.
The IRS offers different alternatives for certain people, including payment plans and agreements to pay off the debt over time. The agency also considers situations in which a taxpayer may try to settle their obligation for less than the total amount through an Offer in Compromise, provided they meet the corresponding requirements.
In some cases, there may also be mechanisms to temporarily delay collection actions when the taxpayer shows that facing the debt creates a financial hardship situation.