Think an IRS levy isn’t something that could happen to you? So did Tom.
When Tom began receiving letters from the IRS about his tax debt, he did the right thing; he contacted the IRS. Even though he couldn’t pay the entire amount, he worked with the IRS and entered into an installment agreement, which allowed him to pay his debt over a stated period of time.
Tom stayed current on the payments due into the following year, but then his business revenue started to slow down. He used the funds to pay the IRS on operating expenses, but he couldn’t make quarterly estimated tax payments, which created a default in the IRS installment agreement. Tom called the IRS, but they were not able to reduce his required payments. More tax due notices arrived, warning Tom of expanded collections efforts, but nothing else happened—at least that was the way it appeared to Tom.
Then one day, totally unexpectedly, Tom received information that the IRS had levied his bank account. Tom began to think, “how will I pay my employees? What about my rent and utilities? Can I get the money back?” And that’s when the panic set in.
What is a Levy?
Simply stated, a levy is a legal seizure of wages, assets or property to satisfy an outstanding tax debt. It can mean garnishing wages, seizing money from checking or savings accounts, liquidating equipment, taking proceeds when a property is sold and many other situations in which the IRS collects a tax debt. In the case of a bank account, once a levy is issued and the bank receives a Form 668-B, a levy, the bank is required to freeze the funds in the levied accounts, up to the amount of the tax debt stated in the levy, for 21 days. If the bank does not comply with a levy, the IRS can hold them responsible for the tax debt and add penalties equal to 50% of the tax liability.
The 21-day freeze allows the taxpayer time to appeal. If the taxpayer (or the representative who has power of attorney for the taxpayer) does not contact the IRS within the allotted time, the levy instructs the bank to send the levied funds to the IRS to apply against the tax debt due. This will usually mean paying any penalty and interest first, leaving the payment of actual tax debt last.
Anyone with a tax debt problem should be aware that the IRS can issue a levy at any time once the taxpayer has been properly notified. The levy of a bank account takes more internal IRS discussion and approval than most IRS collection activities. Therefore, they are not done just by chance; they are direct and used to get the full attention of someone who has a tax debt that they aren’t paying, particularly where a business operation is involved.
Still confused on the difference between a levy and a lien? We’ve got you covered.
What Can Taxpayers Do?
While levies produce difficult circumstances, there are a few good options to consider when responding to a bank account levy.
Hire Representation:Getting help is probably the best option when IRS collection activity has reached this point. If a taxpayer has enough time in the 21-day window, they may be able to get the levy lifted and the account funds unfrozen by presenting facts or other items that allow the IRS to change course. It is a difficult task, but hiring the right firm with the right expertise is an important factor in achieving this outcome.
Work Directly with the IRS:When bank accounts are levied, working directly with the IRS is an option, but taxpayers see varying degrees of success. Taxpayers may be able to enter into another form of payment not as immediate as the bank account levy. Or, they may be able to get funds from family or friends to pay the debt and lift the levy. However, during the limited 21-day cure period, their bank account is still levied, and the IRS typically will not release the funds.
Have you recently received a penalty letter from the IRS? Don’t panic; check out our checklist.
Ride It Out:Those who only owe a small amount or who have a sizeable balance in their bank account may be able to just ride the levy out. After getting past the initial shock, this may prove beneficial, especially when the levy captures the entire tax debt owed but doesn’t freeze all the money in the account. In such a case, the taxpayer will be able to pay off their tax debt and may still be able to pay their operating expenses, but they will not have to spend hours negotiating a payment agreement with the IRS that requires them to potentially over promise. And while they may be inconvenienced by the levy, their tax debt will be paid, and they can think about the future rather than the tax debt.
We Are Here to Help
Remember, a bank account tax levy never comes at a convenient time. The best way to deal with a levy is to prevent it from happening in the first place. We realize this isn’t always possible, but whether you are in the midst of dealing with a levy or at the very beginning of dealing with a tax debt, we can help. Our IRS Dispute Resolution and Collections team has navigated and successfully resolved thousands of cases for a wide variety of clients.
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