Levy

Levy: What It Is and How It Works

Definition

A levy is the legal seizure of property or assets to satisfy an unpaid debt. Tax authorities (such as the IRS or state tax agencies) and, after a court judgment, private creditors can use levies to take cash, bank account funds, vehicles, real estate, wages, retirement distributions, and other property.

Key points

• A levy actually takes property to pay a debt; a lien is only a legal claim on property as security for that debt.
• A garnishment directs an employer or third party to send a portion of wages or other income to a creditor.
• Federal tax authorities generally do not need a court order to levy; private creditors normally must first obtain a court judgment.

How tax levies work

• For federal tax debts, the IRS must assess the tax, send a Notice and Demand for Payment, and—if unpaid—issue a “Final Notice — Notice of Intent to Levy and Your Right to a Hearing” at least 30 days before seizing assets.
• The IRS can levy intangible property held by third parties (wages, bank accounts, dividends, commissions, rental income, retirement accounts, etc.) by serving a levy on the third party.
• State tax agencies can levy state refunds and other state-level assets under similar procedures.

Bank levies and private creditors

• A bank levy typically follows a court judgment against a debtor. The creditor serves the bank with the levy, which freezes the account and allows the creditor to withdraw funds to satisfy the judgment if the levy is not lifted.
• Banks may charge account-processing fees related to levies.
• Some sources of funds are protected or partially protected from levies (examples commonly include certain benefit payments); rules vary by jurisdiction and by the type of benefit.

Other types of levies

• Green (climate) levies: taxes on greenhouse gas emissions or pollution-intensive goods (e.g., carbon taxes) intended to reduce pollution by increasing costs for polluters.
• Mill levies: property taxes on assessed real estate value used by local governments to fund services such as schools and parks.
• Ad valorem taxes: levied “according to value” (typically real estate or vehicles) based on assessed value.

Garnishment vs. Lien vs. Levy (brief)

• Lien: a legal claim on property to secure payment of a debt; does not remove property.
• Levy: the legal seizure of property to satisfy the debt.
• Garnishment: an order directing a third party (often an employer) to pay part of someone’s earnings or income to a creditor.

Avoiding or stopping a levy

• File tax returns on time and pay taxes when due.
• Contact the tax agency promptly if you can’t pay—options include installment agreements, offers in compromise (settlement for less than the full amount), or temporary hardship relief.
• If you receive a final notice of intent to levy, request a Collection Due Process hearing or otherwise contact the agency before the levy date.
• If the levy resulted from an error or identity theft, provide documentation to the agency to get the levy released and access restored.

IRS errors and reimbursements

If the IRS caused an erroneous levy that resulted in bank charges, taxpayers may be eligible to recover those fees by submitting the appropriate claim form (for example, Form 8546) and meeting eligibility criteria such as demonstrating the agency caused the error and that the taxpayer cooperated to resolve it.

Frequently asked points

• Constitutional basis: The Sixteenth Amendment authorized Congress to levy income taxes without apportioning them among the states by population.
• Repeated levies: There is no absolute limit on the number of times a taxing authority can levy to collect unpaid taxes, but levies can be released if they create undue economic hardship or when protected funds are involved.

Bottom line

A levy is a powerful collection tool that allows creditors or tax authorities to seize assets to satisfy unpaid debts. Early communication, filing returns, and arranging payment plans are the most effective ways to avoid levies or to get them released.