IRS Levy and Wage Garnishment
Owing the IRS and not paying or not being able to pay them and/or ignoring the matter can put you in quite a predicament. Although, in some cases, the IRS may take a long time to start the pressure campaign, they rarely ever just don't collect the money they are owed. Even if you haven't received any IRS collection notices, it doesn't mean that the problem isn't growing. The last thing anyone needs to happen to them is to randomly wake up one day with an IRS issued levy on their bank account or most of their paycheck missing come payday.
Generally, if you owe the IRS and put off dealing with it, the problem only worsens as penalties and interest add up over time (and quickly too). This is part of our efforts to help you understand the process the IRS takes and what you can do to deal with an IRS levy, or even prevent it. It is not intended as specific advice and we believe anyone dealing with back tax issues should seek advice from proper licensed representation. This would be an enrolled agent, tax attorney or CPA. Regardless of which, they should be experienced and specialize in back tax issues and have a good reputation.
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The IRS will give you notice that you owe unpaid tax initially. Then they'll send a reminder letter and a second reminder letter. When you don't respond to that, they send notice of intent to levy, and then finally a final notice of intent to levy and your right to a hearing. If these notices go unanswered, you are left open to aggressive enforcement action by the IRS collections department. In order to prevent this, there are number of steps that can be taken. But once it has happened, what do you do?
Normally, people think to just try to operate under the radar, they switch jobs when their check gets levied, change bank accounts, use others' bank accounts, or try to keep as much cash on hand as possible. Drawbacks? Yes. Definitely. Changing jobs all the time to put food on the table sucks. Not only that but having multiple jobs and not filling out your W-4 correctly can cause you to owe more taxes. Fearing the IRS actions causes some to not file other tax returns causing loss of refunds or additional penalties and interest. Changing bank accounts is just a pain, we all hate having to even replace a card and refill that info everywhere, let alone all of our account info for ACH drafts, ordering new checks, or possibly getting black listed for the negative balance and not be able to get a new account. Let's not forget the sleepless nights or wondering if every unexpected knock on the door is the IRS. It can be overwhelming.
Living on a cash only basis limits you in this world of technology and reporting, causing limitations on pretty much anything credit or financial related. Using someone else's bank account doesn't protect you either, at least not forever. In fact, it can likely put them at risk with the IRS too. The IRS can file a nominee lien and levy that bank account even though it isn't technically yours. Hopefully they don't decide to pursue it on an even harder line if you're not reporting that income on your taxes too or transferred other assets out of your name. That couuld spell liability trouble for everyone involved.
There are many other real problems that come from pretty much just changing your entire life and behavior to only avoid IRS levies and enforcement. There really is a far better way to deal with this issue than to live like this, literally doing whatever you have to do to survive. Our first suggestion is to hire experienced representation that knows what to do and how to handle things. Just don't waste any more time and money. It can seem like digging your heels in and hiding and hoping is the cheapest or only way...but it is not. It is probably the worst way to handle things, even if you owe tons in taxes.
To fix this on your own, be prepared to spend hours dealing with it. And, if you are wanting to get the best deal for yourself, expect even more time to go into it. Even then, you still may only get "OK" results. But hopefully not, hopefully it's good in the end. We hope for the best regardless, but we believe anything like this is best left to the professionals, just like if you were trying to defend yourself in a courtroom. Why risk it, why possibly make it worse or not get the best outcome, just have peace of mind instead and move on with life, and not just in survival mode.
Dont let the IRS just run over you. Get Experienced Help.
With that being said, here are some helpful details about IRS levies.
668-A: This form is generally used to levy bank accounts, business accounts receivable, retirement savings, life insurance, etc.
668-W(ICS) or 668-W(c)DO: These forms are generally used to levy salary & wages, commissions, bonuses, retirement and other income.
This is a one-time levy, meaning, a new levy would have to be issued to attach to any other funds not available at the time the levy is received. It is not a levy that continuously causes money to be sent to the IRS. This may also be issued for levy of an IRA, 401K, life insurance, etc., but is most commonly issued against bank accounts. Your financial institution is only supposed to send the funds that were in the account at the time the levy was received. Also, they are supposed to hold those funds for 21 days before they send the money to the IRS. Knowing that date is important, so be sure to ask your bank when it was received; You may not have noticed it right away and the clock is ticking.
Knowing how long you have until the funds are released to the IRS, you can contact the IRS or get representation to find out what is going on with your IRS account and what needs to be done to release or reduce the levy. You can make that the first step if you want to just get it over with. If you don't address it, they will surely get all the funds that were available in the account. What can also happen here is that, depending on your bank's policy, they may freeze your bank account entirely until they release the IRS levy funds. This means that even if you deposit additional money in your account, even though it isn't levied by the IRS, you may still not have access to it or end up bouncing checks. Some banks no longer practice this policy, and funds are otherwise available. Be sure to check with your bank to make sure what will happen specifically with your bank. Most banks also charge an extra fee for handling a levy.
If you are going to attempt to release a bank levy without paying the balance off, be ready to disclose your financial details to the IRS. Be ready to jump through any hoops and drop what you are doing to get what's needed done. However, there are circumstances where the financial disclosure may not be necessary. Also, the IRS may not see the levy as creating a hardship. The devil is in the details. We can't list every circumstance here but there are many ways to handle the situation and many details that are a factor in each situation. Either way, be prepared to give your financial details over to the IRS. If you want help from a professional that knows the ins and outs and how to secure the best results, get a free consultation to see how we may be able to help.
If your financial situation shows a hardship was created by the levy, the IRS should release the bank levy if other factors aren’t present (there are other reasons the IRS may consider as well depending on the situation). You may want to take the extra step to be able to show what bills/expenses the funds in the bank account are earmarked for as well, just in case. Better safe than sorry.
Now, just because you feel financially destitute doesn't mean the IRS will see it that way. The IRS generally will base their financial analysis on sets of standards from the Bureau of Labor and Statistics and others to determine what you "should" be paying for certain expenses such as housing and utilities, food, transportation, out of pocket medical expenses, etc. These are outlined as collection financial standards which can be found on the IRS website. These figures are their guidance on what should typically be allowed for expenses depending on your area or situation. This is done to be fair in a sense. Someone paying on a $4,000/month mortgage in an area that the average for housing and utilities expenses combined is $1,800/month and being considered in financial hardship wouldn't be fair to the person paying $1,800/month right down the road making the same amount of money who isn’t in a tight financial bind that has to repay their balance.
If they didn't establish these standards, then everyone would just go spend excess income on housing just to avoid paying back taxes to the IRS. It's just not practical and realistic to expect them not to do this. There are circumstances and options to work out arrangements though, even if you exceed the standards. Just because the standards may not match up with what you are spending, it doesn't mean it's the end of the line. Get help with IRS Problems.
This is generally a continuous levy, meaning it won’t stop until released or the balance owed is paid in full (see Accounts Receivable Levy below) The initial wage garnishment amount, or amount exempt from levy to be more specific, is based on your filing status, number of personal exemptions claimed, and pay period. Your employer is supposed to give you part 2, 3, 4 and 5 of the levy form to notify them of your accurate details. You are supposed to complete parts 3 and 4 within and return it to your employer within 3 workdays. Your employer is not supposed to just use the information on your W-4. Not submitting the required parts to your employer may cause extra funds to be garnished that should be exempt. Amounts paid for court or administrative ordered child support are also exempt, but the child(ren) can’t be listed as exemptions on the levy form. There are also several other specific exempt items. All of these are outlined on the levy notice.
Your employer is supposed to send the non-exempt pay to the IRS upon your next paycheck. If your employer processed your payroll prior to receiving this notice, you’ll likely at least get that full check. However, after they receive this levy notice they are supposed to pay the IRS moving forward, every paycheck, including money that is owed to you but not yet paid/processed for the current payroll period.
Releasing or reducing a wage garnishment follows generally the same type of process as with releasing a bank levy, without the 21-day holding period. However, a wage garnishment release may be slightly easier to address. For instance, showing financial hardship or establishing payment arrangements will typically release an IRS wage garnishment but a bank levy won’t necessarily be released even if you establish a payment plan with the IRS. The IRS doesn’t have to release the garnishment, they may only reduce it in the end. Different situations and details create different outcomes.
The loss of money and inability to pay expenses is only part of the problem you have to deal with. Now your employer knows you owe taxes, possibly affecting how they may view you. It’s just another burden you really don’t need to have. Get professional help if you would prefer to get the best results and get rid of your tax problems.
Although the IRS may send a 668-W(c) at times for accounts receivable (they may not know the business relationship), the rules still apply a little differently with accounts receivable. Regardless of which form, a levy on accounts receivable is a one-time levy for all funds owed to you from that customer, contractor, etc., at the time they received the levy notice. So, for instance, say you have outstanding accounts receivable with Joe the Builder in the amount of $15,000. Joe receives the levy and sends the $15,000 to the IRS. That’s the end of the levy. However, most people misunderstand this levy and continue to send any new receivables to the IRS pretty much just putting you straight out of business, cause you problems with non-payment to vendors, or leaving you to rush to find new work/customers to compensate.
If Joe gets the levy when he owes you the $15,000 you can literally do more work the day after the levy was received and be owed another $10,000 that isn’t supposed to be paid to the IRS. Joe may owe you $25,000 at that point but he’s only supposed to send the $15,000. Don’t just assume that Joe won’t send the money to the IRS though. Typically, most people misunderstand the levy notice and treat it as a continuous levy. Many times, it may even require the person who owes you to speak with the IRS to clarify they don’t have to send the money after the outstanding amount that was owed at the time of the levy. We have seen where many people erroneously sent money to the IRS even when there were no accounts receivable owed at the time of the levy.
Accounts receivable levies can be very damaging far more than just the initial loss of money. If a customer or contractor receives this levy, attention is now brought to your tax problems. It can cause you to lose their or other business. You’d like to think that people would respect such a private issue, but the fact is, now your customer must disclose an otherwise private business relationship or a transaction with you to the IRS. Most people aren’t fond of this and don’t want to be involved in any way with IRS problems. It is far better to just prevent an accounts receivable levy.
In the event you haven’t righted the situation with your taxes and the IRS does issue an accounts receivable levy, releasing an accounts receivable levy is generally the same as releasing a wage garnishment or bank levy. However, there are more relevant business factors involved that could be beneficial or detrimental and it may be more difficult, especially on your own. The IRS can sometimes view this levy as a last ditch effort to collect as much money as possible before you can’t operate anymore or to end the tax debt cycle and shut you down– especially if you are pyramiding tax debt (this basically means owing new taxes continuously and is generally applied to employment/sales taxes). Even if you shut down and start a new business and start owing again it’s tax pyramiding.
Many people think you can just close up shop and start a new business/company. Though it may seem simple to do, it’s not that simple. If you don’t deal with things properly, the IRS can come after your new company for the closed business’ tax debt, even if you set up corporation or set up a business in someone else’s name. This is where it gets into successorship entities, alter-egos, nominees, etc. If you start owing for the new business, then it’s gets even more complicated and serious. If the debt stems from payroll tax, you can also be assessed and collected against personally for a portion of the tax. If you are dealing with business or payroll tax problems, contact us to see how we may be able to help you and prevent bigger problems.
Showing why the IRS should release an accounts receivable levy clearly can be quite a bit more intricate of a process. Not being able to show your business operations and financial situation properly or having financial dilemmas creating more tax debt may cause you serious problems or put you out of business. The amount of work, time and financial details that may be involved may be over your head. If you received an accounts receivable levy, or want to prevent it, or you owe payroll tax or other taxes seemingly endlessly contact us immediately for help. The cost and benefits of good representation will generally far outweigh the impact of IRS enforcement actions.
Dealing with the IRS can be overwhelming and you don't have to do it alone. For more information or ways we can help please view our tax problems page and solve your tax problems for good.
Steven C. Musick, E.A. | 10/22/2019