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Federal Tax Levies and Garnishments

The tax lien is passive; the tax levy is active. The tax lien sits there quietly and attaches to any property of the taxpayer, thus assuring the Government’s financial interest is protected until a later time when the Government decides to enforce the tax lien. The tax levy, by contrast, is an active step taken by the Government to collect the tax by intercepting taxpayer’s property.

A tax levy generally extends only to property possessed and obligations that exist at the time the levy is made. If the Service levies on property, but the tax claim remains unsatisfied after the levy, the Service is empowered “thereafter, and as often as may be necessary, [to] proceed to levy in like manner upon any other property liable to levy of the person against whom such claim exists, until the amount due from him, together with all expenses, is fully paid.” In other words, the Service may achieve its goal of collecting the delinquent tax by levying repeatedly on various sources of assets.

After assessment, the Service usually sends a series of four or five notices, three of which are statutorily mandated. The first is the notice and demand for payment per section 6331(a), the second is the notice of intent to levy per section 6331(d) and the last is the collection due process (CDP) notice (Letter 1058-DO). The taxpayer’s interests would be best served to contact a representative as early in the notice phase as possible to negotiate a payment arrangement acceptable to both the taxpayer and the Service

After learning of a tax levy, taxpayers have important administrative appeal rights, called Collection Due Process (CDP) hearings. Importantly, during the pendency of the CDP hearings, the taxpayer enjoys relief from tax collection. Section 6330(e)(1) states that “levy actions which are the subject of the [CDP] hearing. . . shall be suspended for the period during which such hearing, and appeals therein, are pending.” Taxpayers may not have the opportunity for a hearing before levy if the tax collection is in a jeopardy situation, or if the levy is on a state to offset the federal tax liability against a state tax return. In these two instances, the taxpayer will be given the opportunity for his CDP hearing within a “reasonable period of time after the levy.”

The broad sweep of a tax levy cannot be overstated. The levy is a summary process, except for collection due process hearing opportunities. It reaches all property of the taxpayer, including all rights to property. Some limited exemptions from the levy are provided, however slight. Property often thought of as being exempt property for some purposes, albeit incorrectly, are vulnerable to a tax levy.

Notices of levy cannot be served while an offer in compromise (OIC) is pending, within 30 days after an offer is rejected, or while a rejected offer is being appealed. Exceptions exist if collection is in jeopardy, if the taxpayer waives the restriction in writing, or the OIC is made merely to delay collection. Similarly, absent jeopardy, a written waiver by the taxpayer or a request submitted merely to delay collection, no levies can be served while a proposal to pay a liability through installments is pending. A proposed installment agreement becomes pending when it is accepted for processing. Levies and most other collection activity are suspended during the pendency of a bankruptcy proceeding pursuant to the automatic stay provisions of 11 U.S.C. § 362. Once the proceeding has been completed or if the government sought relief from the automatic stay per 11 U.S.C. § 361, the Service may levy on whatever property or property rights that are subject to the lien.

A notice of levy enables the Service to attach or gain custody of property in the possession of third parties. The authority of the Service to levy on a taxpayer’s property on which a tax lien has attached permits the Service to reach taxpayer’s assets sold or transferred to transferees, unless that transferee is protected by section 6323. A custodial relationship is created between the person holding the property and the Service so that the property comes into the constructive possession of the Service. When another holds a taxpayer’s property, the Service customarily serves a notice of levy upon the third-party. Persons in possession of property “subject to levy on which a levy has been made” are legally required to surrender that property to the Service on demand. As a levy may be used to collect an unpaid debt owed to the taxpayer by the third party, the third party creditor will be required to remit to owed amount to the Service. Any person who either fails or refuses to surrender property subject to levy upon demand is personally liable in the amount equal to the value of the property not surrendered.

When a levy is served on a bank account of the delinquent taxpayer, the depository bank is required by statute to notify the taxpayer and hold the funds levied upon for 21 days before complying with the levy. The purpose of the 21-day cooling-off period was to afford taxpayers a reasonable opportunity to resolve the tax delinquency.

The levy authority enables the Service to attach the non-exempt portion of wage or salary payments due the taxpayer otherwise known as “wage garnishment.” The computation of the exempt amount of wages, salary and other income payable to or received by an individual during an applicable pay period other than weekly is based on many factors, including the amount of one’s standard deduction, deduction for exemptions and the frequency of the pay period, whether the liable taxpayer is married and, if so, whether the spouse works also. A levy on salary and wages reaches after-acquired salary and wages. In contrast, for ordinary levies, the levy only attaches to the property existing at the moment when the levy is served and is not continuous. So the Levy continues with each subsequent paycheck until the matter is resolved.

It is vitally important to remember that many levies can be returned if they cause a financial hardship. But as in the case of the 21 day period for bank deposits, time is of the essence before the levy becomes permanent.