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.
What Is a Bank Levy Judgment?
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.”
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:
- Send you a Notice and Demand for Payment (a tax bill);
- You neglect or refuse to pay the tax; and
- Send you a Final Notice of Intent to Levy and a Notice of Your Right to A Hearing (levy notice) at least 30 days prior to the levy taking effect. “The IRS may give you this notice in person, leave it at your home or your usual place of business, or send it to your last known address by certified or registered mail, return receipt requested,” the site notes.
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.
Ways to Stop a Bank Levy
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:
- Hardship Plan: Send a letter to the IRS with evidence proving that if they levy your bank account you will not be able to meet the standards of basic living.
- Payment Plan: Negotiate a payment plan (usually in the form of an Installment Agreement or Partial Payment Installment Agreement) with the IRS in which you will pay a monthly amount on your debt. The bank levy will be removed as long as you continue to pay monthly and on time.
- Negotiate a Settlement: It will be hard, but it’s possible to negotiate a settlement with the IRS to have your debt quickly paid in one lump sum. It’s a good idea to speak with a tax professional if you want to pursue this course of action. (We’ve got some tips for negotiating with creditors.)
Can a IRS Bank Levy Hurt My Credit?
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.