IRS Levy Relief

When you owe money to the great collector, all of your appeals have run their course, and the 30 days allotted to you in the CP-504 Intent to Levy notice has passed, it’s time to deal with the IRS levy.  Even if you are attempting to negotiate in good faith, you are likely to be hit with an IRS levy.  They may claim it to be inadvertent or a system error, but you won’t get your money back if they latch on to it.  So, take steps to protect your assets from an IRS levy before the government catches up with you.

An IRS levy is a taking of your money held by third parties, such as banks, employers, and the like.  While a lien is simply a notice filed to secure a debt, like a mortgage, an IRS levy is the seizing of cash or other assets.

The real problem for most who are subject to an IRS levy is that it is the taking of ALL of the cash the agent can find up to the tax debt, including interest and penalties.  So, if you owe $100,000, and you have $101,000 in your savings on which you are living while out of work, the IRS can seize the full $100,000, leaving you $1,000 on which to survive.

This also means that the levy reduces or eliminates your ability to hire representation.  Unless you seek out a professional before the government empties your accounts, you are likely going to be fighting the Service on your own.

The most common properties hit by an IRS levy are your bank accounts, your salary (wages from an employer), commissions, and self-employment income (usually from clients who’ve sent you a 1099 the prior year).

Of course, an IRS levy comes with the stigma of your employer or client learning of your financial issues and the amount of your tax debt.  I have seen people fired as a result, and independent contractors terminated.  This is quite common for those in the financial services industry.

* If you’re an independent contractor and your client must send all of your income (not the portion representing your profits, but all of it), you will likely be left unable to perform on the contract and in big trouble with your suppliers.

I will also note that Keoghs, IRAs and other retirement accounts ARE subject to an IRS levy.  Many assume their retirement is protected from the IRS, as it is from other creditors… and they would be wrong.  The IRS has written its own rules and can take everything and anything from you that it wants.

* Only an IRA in an offshore LLC at a bank without a branch in the U.S. is protected from an IRS levy.  For more information on dealing with the IRS as an Expat, please see www.premieroffshore.com.

Other sources subject to an IRS levy include:

  • property (i.e., your car, boat or house),
  • cash value of life insurance,
  • accounts receivable,
  • Social Security payments,
  • state tax returns,
  • pension or profit-sharing plans,
    • The IRS can’t force a distribution from a pension plan if the employee (you) can’t obtain a lump-sum payment.
  • dividends,
  • rental income,
  • licenses and franchises,
  • promissory notes,
  • inheritances you have a right to receive,
  • and all other property not exempt.  See my post on property exempt from levy for more information.

Before an IRS levy can take what’s yours, certain procedures must be followed.  The IRS is required to send a notice by certified mail, or leave one at your home or office, informing you of the pending attack.  You then have 30 days to file an appeal or setup an installment agreement before they hit you where it hurts.

* All that’s required is that they send the notice to your last known address.  It’s your problem if you’ve moved and don’t get it.

Two exceptions to the notice requirement for an IRS levy are when they take your state tax refund, or the government believes your assets are in jeopardy of being moved out of their reach (God forbid).  In these cases, they can issue and IRS levy and send you a notice with appeal rights after the fact.  Again, you must get your appeal filed within 30 days or lose your rights.

In many cases, the purpose of an IRS levy is to get your attention.  If you have not been returning their calls or participating in the process, the IRS will levy your accounts, take what they can get, and then negotiate an installment agreement.  If the IRS levy doesn’t get to your cash, it will at least give you an indication that you’re out of time and need to begin to deal with the situation.

As I have said before, and IRS levy is common even when you are negotiating in good faith.  For this reason, I recommend that you take steps to protect yourself after you submit a financial statement or when you are talking to a revenue agent.

For example, you might send in your Form 433-A and then change banks.  It will take the government several months to find your new accounts and this will give you time to set up an installment agreement, make any arrangements necessary to pay other creditors, and resolve your tax debt without living in fear of an IRS levy.

I hope this post on the IRS levy process has been informative.  As I always say, it helps to be proactive and get your financial house in order before going in to battle.  If you are prepared, then an IRS levy is just one of many shots fired in the war and not a kill shot to your or your business.