Understanding the difference between a federal and state tax levy can prepare you for the next steps to get in good standing with the tax man.
Part of the duties of the state and federal governments is to collect taxes from taxpayers – and to pressure taxpayers into paying their debts when they’re behind on payments. While the IRS is not as fearsome as it once was, death and taxes remain inevitable – and there very few, if any, ways to reduce or talk down your debt with the government.
Once a taxpayer reaches a certain level of tax debt, the government is within its rights to pursue collection actions against their tax account.
These collection actions often begin with a tax lien on your assets and property, and eventually lead to a levy on wages, assets, and accounts. But what is a state tax levy? And why should you do your utmost to avoid it?
What is a State Tax Levy?
A state tax levy is a claim on one of your accounts or properties by state tax authorities. Levies constitute an actual physical claim of what you own, reappropriating it in the name of paying off your delinquent tax debt. These are not to be confused with liens, which are a legal claim on all your assets and property, limiting your ability to seek financing or pay off other lower priority debts.
When the government issues a levy, it effectively claims something you own to sell it (if it’s an asset or property) or withdraw funds (if it’s an account) and pay off your debt.
The government cannot put you through financial distress, so there are properties and amounts that remain exempt from levies. The government can’t evict you out of the family home your parents paid off, if it’s your one and only residence, even if you owe a tax debt.
But they can strip you of anything non-essential or cut into your wages and compensation.
If you don’t own any assets or property, or if you are employed rather than self-employed, state and federal tax authorities can also begin garnishing wages, also known as a wage levy.
In this case, the government takes a portion of every paycheck until your debt is paid, with the portion taken being determined by your costs and number of dependents. The portion being levied is directly withheld by your employer, rather than taken out of your pocket.
If the government levies a property, such as a vacation home, they will sell it at the earliest convenience and use the proceeds to pay your debt. Any remainder will be sent back to you. If your debt isn’t satisfied by the sale of your property, they may issue another levy.
Types of State Levies
In summary, levies can be applied via:
- Levies on bank accounts
- Levies on property
- Levies on wages
- Seizure of assets
- Levy on 1099 payments
- Seizure of business assets
- Seizure of social security payments
- Seizure of tax refunds
- Passport seizures (for high tax debt)
Levies can be stopped if you take the necessary steps to contact your local state tax authority or the IRS during the levy process and begin paying off your debt.
State tax authorities and the IRS don’t just wake up and start issuing levies – there are a few different notices that state and federal tax authorities may send out first, and the whole process takes time to get started. Some notices to keep an eye out for include:
- Notice and Demand for Payment
- Notice of Intent to Levy (Notice CP504)
- Notice of Your Right to A Hearing (a month before the levy begins)
Note that, due to the coronavirus, many collection actions have been put on hold over the last year or so.
The IRS recently issued news releases explaining that lien and levy notices would continue via the Automated Collections System starting mid-June 2021, and actions would follow in mid-August. Taxpayers who had previously been warned regarding potential levies would see these levies begin if they haven’t contacted the IRS to work on paying off their tax debt.
State Tax Levy vs. Federal Tax Levy
The main difference between a state tax levy and a federal tax levy is that one is managed by a state tax authority, and the other is managed by the federal government’s tax authority, the IRS.
As such, there may be minute differences in when and how notices are filed, what formatting they may have, and their exact contents.
State tax authorities may also come down on tax debt more vehemently, as they can better focus their resources on investigating tax debt within the state, rather than the whole country.
State tax debt and federal tax debt are two different things. You need to manage your state and federal taxes separately, file the appropriate tax returns, and pay off any penalties for filing or paying late. Even if you are in serious tax debt, never neglect to file your tax returns.
Both state and federal tax authorities allow you to negotiate for a release on a lien or levy via a long-term payment plan, but an important prerequisite for nearly any payment plan is that you remain up to date with your tax returns and estimated payments, if applicable.
What To Do When Facing a State Tax Levy
If you have received notice of an oncoming state tax levy, the first thing you should do is review your tax account. You can visit the website of your respective state tax authority or call them directly and inquire about your account.
If you’re having state tax problems, an even better idea is to contact a tax professional or CPA and discuss your next steps. Compile all the notices and paperwork you received from your state tax agency, and discuss the possibilities of an appeal, or your next steps to avoid the levy.
If a levy has already been issued on your property and/or wages, you can contact a tax attorney for help. They can help you release the levy, via negotiating payment with the state tax authority or filing an appeal.
How Rush Tax Resolution Helps
Dealing with the tax man can be stressful, and scary. But it’s important to keep in mind that state and federal tax authorities cannot force you into extreme financial hardship. If collection actions push you to the brink of poverty, you can get these called off on the premise that you simply aren’t able to pay off your debt. Your tax debt will still accumulate interest, but you won’t be forced to pay until you get back on your feet.
If you can pay off your debt, then you can work with a tax professional to negotiate long-term tax payments to slowly work off your debt without the threat of a lien or levy. Or, you can even negotiate a reduced tax payment via a counteroffer, also known as an offer in compromise. Explore your options with Rush Tax Resolution.