A notice of levy is a notice that the federal Internal Revenue Service (IRS) uses to collect money or property from a taxpayer who owes the IRS money for unpaid tax debt. The IRS may take the following actions to collect tax debt owed to it:
- Garnish the person’s wages;
- Seize money in the person’s bank accounts;
- Seize and sell real property and/or personal property, such as vehicles, that are owned by the person.
The notice is sometimes called a “Final Notice of Intent to Levy and Notice of Your Right to a Hearing.” The IRS advises a person who receives an IRS tax bill with the title, “Final Notice of Intent to Levy and Notice of Your Right to A Hearing” to contact the IRS immediately.
The IRS also advises a business person who receives an IRS notice of levy against one of their employees, vendors, customers or other third party to comply with the levy. Of course, the person may also wish to consult with an experienced tax attorney to learn about their options.
What Does an Employer Who Receives a Notice of Levy Have to Do?
In some cases, an employer may receive a notice of levy from the IRS directed against one of its employees, vendors, or even a third party. In such cases, the employer is required to turn over whatever property the IRS requests that it is currently holding. Besides actual physical property, this property can also include:
- Some of the employee’s salary or wages;
- Other types of compensation, such as income paid in the form of bonuses or a pension.
The IRS typically seizes these wages and other funds before they are paid to the employee. The employer has a duty to transfer the property or funds sought to the IRS as directed in the notice of levy, or it may face penalties.
The IRS generally uses Form 668–W(ICS) or Form 668-W(C)DO to levy an individual’s wages or salary, including fees, bonuses, commissions, and similar items, or other income. Form 668-W(ICS) and/or Form 668-W(C)(DO) also provide notice of a levy on a taxpayer’s benefits or retirement income.
The IRS generally uses Form 668–A(C)DO when its goal is to levy property that a third party is holding. For example, this is the form that is used to levy accounts held by banks and credit unions and business receivables.
After receiving either of the forms referenced above, an employer has at least one pay period before they are required to send any funds from their employee’s wages to the IRS. The IRS advises a person who has had a levy placed on their wages, salary or other income to contact the IRS as soon as possible to discuss how to release the levy and resolve their tax liability. Or, a person may wish to consult a tax attorney for guidance on how to proceed. In any event, the person should act promptly.
The Internal Revenue Code permits continuous levies to apply to wages, salaries and certain other kinds of property. This means that a levy on wages and salaries is effective continuously until such time as it is released by the IRS. Examples of property continuously attached include:
- Wages and salary; and
- So-called “deferred compensation”, such as retirement benefits or pension payments.
A continuous wage levy may last for an extended period of time. When all the tax shown as owing on the levy has been paid in full, the IRS then issues a Form 668-D, “Release of Levy/Release of Property from Levy.” The levy then ends.
Of course, if the taxpayer pays their tax debt in some way other than through the levy on their wages or salary, the IRS may also release a levy.
If the IRS Levies My Wages, Is Any Amount Exempt from the Levy?
If the IRS executes a levy on a person’s wages, the employer should continue to pay the employee any amounts that are exempt from the levy. The IRS calculates the exempt amount based on the standard deduction and an “amount determined”, which is calculated in part based on the number of dependents the employee is allowed for the year in which the levy is delivered. IRS Publication 1494, which is mailed with the Form 668-W(ICS) or 668-W(C)DO, explains to the employer how to compute the amount that is exempt from the levy.
A notice of levy includes a “Statement of Dependents and Filing Status.” The employer gives this statement to the employee to complete and return within three days. If the employee does not return the statement in three days, the exempt amount is figured as if the person is married filing separately with no dependents. The IRS notifies the employer if the taxpayer is not entitled to any exemptions from a levy.
If a wage levy continues from one calendar year to the next, the employee is allowed to submit a new “Statement of Dependents and Filing Status” and ask their employer to compute the exempt amount again.
What Are the Penalties for an Employer’s Non-Compliance?
An employer who fails to comply with an IRS levy notice directed towards one of its employees may become liable for the employee’s tax debt. The employer may also become liable for paying any penalties on the debt, including interest.
It is also possible that the IRS would impose a penalty consisting of up to 50% of the tax debt that is owed by the employee. These penalties can have significant effects on the employer’s own business tax issues. This is why it is important for an employer to comply with any levy notices that it receives from the IRS.
What about Levies on Bank Accounts?
When the levy is directed at a bank, credit union or similar account, the Internal Revenue Code gives the bank or other business that holds the account a 21-day waiting period before it has to comply with the levy. The waiting period gives the taxpayer a limited time in which to contact the IRS and arrange to pay the tax or notify the IRS of errors in the levy.
Generally, IRS levies are delivered via the U.S. Postal Service. The date and time of the levy’s delivery is the time when the levy is considered to have been made. The funds to which the levy is directed are frozen as of the date and time the levy is received. Any funds deposited to the levied account after the date of the levy are not affected by it. They would remain in the account and not be remitted to the IRS.
If the account holder does not receive a release of the levy from the IRS within 21 days after the levy is delivered, then the funds that were in the account as of the date and time the levy was received must be forwarded to the IRS. The notice of levy contains instructions for remitting levy payments.
Do I Need a Lawyer for Help with an IRS Levy?
Employers want to be prepared to handle an IRS levy that they receive directing remittance of garnished wages and the like of their employees to the IRS. You may want to consult a tax attorney in your area if you need guidance regarding IRS tax levies.
Your attorney can provide you with advice and representation regarding any issues with IRS levies. They can verify the validity of any levy notices you receive from the IRS. Your lawyer can confirm the need to comply and tell you how to comply so as to avoid liability for penalties.