The money you earn is yours to keep and do with as you please. Right? Well, for the most part, that statement rings true – but when you incur a certain level of debt, and a creditor decides to exercise their power to collect on that debt, you may quickly find the contents of your bank account drained over time. This is the power of a levy, specifically a bank levy.
Levies are especially important to keep in mind when talking about the IRS. They are undoubtedly one of the tax authority’s strongest and most valuable tools in the Collection Process, which for the lack of better phrasing is the IRS’ step-by-step plan for forcing debt repayment.
However, the government is not a particularly cruel creditor. You will have ample time to receive information on an impending levy, and even some time to try and do something about it before the IRS (or any other major creditor) begins draining your funds to repay your debt.
There may be a million questions on your mind. Can the IRS or any other creditor make me financially destitute? Can they take the shirt off my back? Is there a limit to how much a bank account can be drained through a levy?
How Long Can a Levy Stay?
For all intents and purposes, it is not the IRS’ modus operandi to leave a taxpayer indigent. Bank levies are usually utilized by the IRS when wage garnishment – that is, taking a portion off every pay check – is unviable, either because you do not earn a traditional wage (self-employment), or because your wage is too low to be garnished, to begin with.
Technically speaking, the IRS can drain any target bank account down to the last dollar, regardless of how many other bills you’ve got to pay with that same account. This means nearly any checking account targeted by the IRS will inevitably overdraft the next time a round of bills is due, which can bring a taxpayer to their financial breaking point.
However, unlike other creditors, the IRS can be persuaded to back off on their collection actions if it turns out that continuing is pointless (because you cannot outearn your debt), or if there is nothing left to take. This would render you temporarily uncollectable, until your finances improve again. This may cause a levy to withdraw.
If you are not rendered uncollectable, a bank levy will stay attached to your account until your debt has been paid. This means the IRS and any other creditor can effectively attach a levy to an empty bank account, and then automatically funnel every incoming dollar before it can be used to pay bills or be withdrawn as cash.
Unless you petition for currently not collectible status, your only option for lifting a levy is to sufficiently address your tax debt. If you haven’t defaulted on a previous debt with the IRS, then they may release the levy on your account before your debt has been entirely paid off, as long as you continue to commit to the repayment plan negotiated with the IRS. Otherwise, the levy will be automatically lifted once your accumulated debt (including penalties and interest) is entirely resolved.
Reading Your Notice of Intent to Levy
When the IRS decides to issue a bank levy against one of your bank accounts, you will receive a Notice of Intent to Levy, as well as a Notice of Your Right to a Hearing. Once this notice is sent (NOT once it is received), you have 30 days to pay your debt, or at least negotiate a payment plan that entails halting the levy.
Opting for a hearing or an appeal can further delay the levy while the IRS goes through a review process but note that you will want to make sure that you have a legitimate reason to appeal the IRS’ decision (such as having already paid your debt or being in an active payment plan to repay your debt).
Your notice may be one of many the IRS sends your way to inform you of your levy, and your right to a hearing. Be proactive – at the latest, once you receive this notice, get in touch with a tax professional to discuss your options and next steps.
What If I Cannot Pay?
Tax debt can pile up over time. Some people accrue significant debt, then fall on hard times, losing the financial viability needed to repay what they owe. It’s unlikely to occur with something as simple as a rounding error or a late tax return, but it can quickly become a problem if you’ve failed to account for a significant portion of your business’ income yet become bankrupt soon thereafter.
Accruing a large tax debt is self-explanatory – dealing with it on limited financial means, however, is not. That is where the IRS offers some leeway, provided you qualify for it. If you can reasonably repay your debt while continuing to stay on top of your current tax obligations (including ongoing tax costs and tax returns), then the IRS will expect you pay back every cent, even if it takes a solid decade.
But if that is not financially viable, you may qualify for other repayment plans. Partial payment plans, or the more generous offer in compromise allow taxpayers of limited means to pay back some or most of their tax debt, and have the rest stricken off entirely.
It’s easier said than done. The IRS has little interest in forgiving a debt that it still might be able to collect on, so one of the big qualifiers is an inability to pay back what you owe, even over a period of multiple years. While the IRS does have pre-qualifier tools to test your case for an offer in compromise, your best bet will still be to work with a tax debt professional.
We at Rush Tax Resolution help clients deal with dicey IRS cases every year, from liens to levies, and everything in between. Contact us today to learn more about how we can help you resolve your tax debt.