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Bank levies are one of the most powerful tools used by the Internal Revenue Service to collect tax debt, and they can be devastating to the delinquent taxpayer, making normal day-to-day living impossible. One moment your ATM card gives you access to your accounts and the next, you’re frozen out.
Of course, it’s not just your bank accounts you need to worry about if you owe the IRS back taxes. Your paycheck can be garnished and your physical assets like your car, your home and other real property can be seized.
Here, we outline what an IRS bank levy is and how you can keep it from happening to you, even if you’re already delinquent on your tax payments.
A bank levy judgment is simply an IRS decision based upon the tax code to seize your property in order to satisfy your tax debt. The IRS points out on its website that “levies are different from liens. A lien is a legal claim against property to secure payment of the tax debt, while a levy actually takes the property to satisfy the tax debt.”
Note: A tax lien can directly mess up your credit. You can see how one may be impacting your scores by using our free credit report snapshot on Credit.com.
A levy doesn’t happen out of the blue, of course. If you owe back taxes, the IRS will definitely notify you. If you don’t respond, you’ll likely begin receiving threatening letters. It’s best that you don’t ignore these or take the situation lightly. If you receive a letter entitled “Final Notice of Intent to Levy,” the IRS is informing you that they are about to seize your assets. This means that they are freezing your accounts, possibly taking your physical assets and even garnishing your wages.
There are three important things that must happen before the IRS can decide to place a levy on your assets. According to the agency’s website, those are:
Will My Checking Account be Affected by a Levy?
Yes, it’s possible. An IRS levy can include all of your assets, even those not held by you (think wages, retirement accounts, dividends, bank accounts, licenses, rental income, accounts receivables, the cash loan value of your life insurance, or commissions, etc.). If the IRS freezes your bank accounts, you will not have access to any of your funds, and it’s possible that any future deposits made into those accounts will also be taken until such time that your tax debt is fulfilled.
How Can You Tell If Your Assets Have Been Frozen?
You’ll know right away when your assets have been frozen. You’re completely unable to access those funds.
Even if you’ve received a final notice from the IRS, you can still act. But it’s best to try to work with the IRS much earlier in the process. You’ll avoid a lot more stress and possible negative effects on your finances by doing so.
Here are some of the options you have when it comes to satisfying your delinquent taxes:
Through this stressful time it pays to keep in mind that communicating with the IRS rather than hiding or pretending your tax debt isn’t a problem can be crucial to coming out of this situation with your assets intact. It’s also good to keep in mind that a tax levy won’t just impact your current assets, it could also impact your credit, making getting back on your feet all the more difficult.
Unlike a tax lien, which makes your tax debt a public record, tax levies are not included on your credit reports. Still, with your savings and retirement accounts wiped and your wages likely being garnished, paying other creditors like your credit cards or auto loan (if you get to keep your car) can become difficult. And being late on those payments can have a direct impact on your credit scores. You can learn more about how your taxes can impact your credit.
By acting fast and communicating honestly with the IRS, you can satisfy your tax debt without the devastating effects of a levy.
This article has been updated. It was originally published May 8, 2014.
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