What Is an IRS Levy?

Understanding an IRS levy

An IRS levy is a seizure of your personal property by the IRS to pay back a tax debt. It’s one of the more extreme actions the IRS can take to ensure you pay income taxes, and it will only execute its legal right to seize your property after notifying you of the debt and giving you time to pay it.

The IRS can seize many types of personal property via a levy:

• Your home or other real estate
• A vehicle, including cars and boats
• Funds from a bank account or another financial account
• Funds from a retirement account
• Funds from your wages before you receive them
• Funds from a pending tax return
• Social Security benefits

IRS levy vs. IRS lien

IRS levies remove ownership of your personal property. Once the IRS legally owns your property, it will sell the assets to recover the money you owe.

An IRS lien is a legal claim to property, but you technically still own the assets. The IRS will notify creditors and loan officers of the lien, preventing you from selling the property until the lien is removed.

Both liens and levies are results of unpaid taxes, and both can ultimately result in loss of personal property.

The IRS levy process

The IRS uses levies to ensure payment of tax debts, but it must follow a strict legal process involving multiple notifications and warnings before it seizes your property.

Step 1: IRS notification

The IRS will notify you of any taxes due by sending a Notice and Demand for Payment. This notification details what you owe and the date you must pay to avoid further action.

Step 2: IRS final notice

If you fail to pay your debts by the due date, the IRS will send a Final Notice of Intent to Levy and Notice of Your Right to a Hearing. This document lists what personal property the IRS intends to levy.

Step 3: Response to notification

Once you receive that final notice, you have 21 days to respond, either by paying the debt or scheduling a hearing if you believe the IRS made an error.

Step 4: Opportunity to dispute IRS levy

You have the right to a Collection Due Process (CDP) hearing to dispute the amount owed or the levy in its entirety. You may have options for tax resolution other than submitting to the levy, depending on your situation.

Step 5: Seizure of property

At the end of that waiting period, the IRS will take legal ownership of your property. If it seizes non-monetary personal property, like real estate or vehicles, it will typically sell the assets at auction to satisfy your debt.

How to avoid or release an IRS levy

Avoiding a levy in the first place is the easiest way to avoid loss of personal property and the stress it can cause. If you cannot avoid a levy, you may still be able to protect your personal property by getting a release.

Ways to avoid an IRS levy

You can take several actions to avoid an IRS levy.

1. Pay your taxes in full: The easiest way to avoid an IRS levy is to pay your taxes in full and on time. For individuals, that means paying the IRS the full amount you owe or expect to owe by April 15th. Note that this is still the deadline for payment even if you get an extension to file your taxes.
2. Set up a payment plan: If you’re unable to pay your taxes in full, you may be able to set up a payment plan with the IRS to pay your debt over time. However, you should consider the pros and cons of IRS payment plans carefully before committing to a plan.
3. Negotiate an offer in compromise: The only other option to avoid an IRS levy is to settle on an offer in compromise. It’s an alternative to full payment that’s mutually beneficial to you and the IRS.

Ways to release an IRS levy

If you can’t avoid an IRS levy, here’s how you can resolve or release an IRS levy.

1. Pay the debt: Pay the debt and notify the IRS of the payment. Arrange a payment plan with the IRS to pay your debt over time, if needed.
2. Request a release: Contact the IRS and make it clear that a release of the levy would help you pay your taxes. The IRS will make the final determination whether to release the levy or deny the release request.
3. Prove hardship: Contact the IRS and prove that paying the debt would cause financial hardship.
4. Offer other assets: Prove to the IRS that the personal property it’s levying is worth more than the debt you owe. Confirm that there’s other property it can levy to satisfy your debts.

Note that if the IRS denies your request to release the levy, you can appeal the decision before or after the IRS places the levy on your property.

Additionally, it’s important to note that the release of an IRS levy doesn’t clear your debt. You’ll still need to make arrangements to pay the debt in full or in part via an offer in compromise.

IRS levy: Impact on your finances

The most obvious impact of an IRS levy on your finances is the loss of money or valuable personal property. Depending on what the IRS levies, you could lose money in financial accounts, real estate, vehicles and other valuables. In the case of the IRS garnishing your wages, a process called a bank levy, your income could effectively decrease going forward.

You may have access to the IRS Fresh Start Program, which can include options like payment plans with reduced fees.

Tax levies and tax liens don’t appear on your credit report and don’t directly affect your credit score. However, they can have an impact on your ability to get credit in the future, and they can have a secondary impact on your credit score for a few reasons:

• Banks and lenders may become aware of a tax levy if they’re notified of the loss of property, and they may report that to the credit bureaus.
• Losing investment properties to a tax levy can affect your income and debt-to-income (DTI) ratio.
• Finding a resolution for a tax levy may involve making payments to the IRS that could make it more difficult to pay back other debts.
• Wage garnishment can immediately increase your DTI ratio, making it harder to take out a loan and more challenging to pay back other debts.

The best way to avoid these issues is to pay your taxes in full or agree to a payment plan with the IRS.

» LEARN: How to set up a payment plan with the IRS

Legal rights and protections

During the initial stages of an IRS tax levy, specifically before the IRS seizes your property, you have the right to dispute the levy and the amount the IRS claims you owe. You can do this by scheduling a Collection Due Process hearing. Information on how to schedule a hearing will be on the final notice you receive from the IRS.

After the 21-day waiting period and the IRS officially seizes your property, you have the right to file for a levy release. You’ll still need to pay your tax debt, but if the IRS approves the release, you can retain ownership of your personal property.

You may also qualify for IRS tax forgiveness, which can include access to payment plans, offers in compromise, spousal relief and bankruptcy filing. If paying your taxes would result in financial hardship, you may qualify for the IRS hardship program, deferring your repayment until your situation improves.

» MORE: IRS tax forgiveness: what to know