Tax Levy

A tax levy is the legal seizure of a taxpayer's property by the IRS to satisfy an unpaid federal tax liability. Section 6331(a) of the Internal Revenue Code authorizes it where a person "neglects or refuses to pay the same within 10 days after notice and demand", allowing collection "by levy upon all property and rights to property (except such property as is exempt under section 6334)." Section 6331(b) defines the term broadly: "The term 'levy' as used in this title includes the power of distraint and seizure by any means." In the IRS's plainer words, a levy "can garnish wages, take money in your bank or other financial account, seize and sell your vehicle(s), real estate and other personal property."

Two naming points prevent real confusion. The bare word "levy" in ordinary American usage also means a government imposing a tax, as in a county levying a school levy, which is the opposite direction of travel from the sense here. And "wage garnishment" describes the same practical event when the asset is a paycheck, though a federal tax levy is one of several distinct mechanisms that reach wages and it runs on its own rules rather than on the general garnishment caps.

Three clocks run before a levy, and they are not the same clock. Section 6331(a) makes levy lawful only after notice and demand and a further 10 days. Section 6331(d)(2) separately requires a notice of intent to levy given "no less than 30 days before the day of the levy". Section 6330 independently requires "notice and opportunity for hearing before levy", also 30 days, and the IRS sends both in one document titled Final Notice of Intent to Levy and Notice of Your Right to A Hearing. That is the letter to act on. All of it can be overridden where the Secretary finds "the collection of such tax is in jeopardy", which is the jeopardy exception in the last sentence of 6331(a) and in 6331(d)(3).

The hearing right is worth more than most people realize. Under section 6330(b) the hearing is held by the IRS Independent Office of Appeals, by an officer with no prior involvement in the case. Section 6330(c)(2) lets the taxpayer raise "appropriate spousal defenses", "challenges to the appropriateness of collection actions", and "offers of collection alternatives, which may include the posting of a bond, the substitution of other assets, an installment agreement, or an offer-in-compromise", and the officer must weigh whether the action "balances the need for the efficient collection of taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary." The underlying liability itself can be contested if the taxpayer never received a notice of deficiency or otherwise had no chance to dispute it. Requesting the hearing suspends the levy and, under 6330(e)(1), the running of the collection period, and the determination can be taken to the Tax Court within 30 days.

A wage levy and a bank levy behave completely differently, and the statute is the reason. Section 6331(b) provides that a levy "shall extend only to property possessed and obligations existing at the time thereof", which makes a bank levy a snapshot: it catches the balance as of the moment the levy is received, and the IRS says money added afterwards is normally unaffected. The bank then holds the funds for 21 days before remitting, a waiting period the IRS describes as "intended to allow you time to contact the IRS and arrange to pay the tax or notify the IRS of errors in the levy." Section 6331(e) reverses that for wages: "The effect of a levy on salary or wages payable to or received by a taxpayer shall be continuous from the date such levy is first made until such levy is released under section 6343." One notice, and every future paycheck is reached without any further paperwork.

What is exempt is a closed statutory list. Section 6334(a) enumerates it, and 6334(c) shuts the door on everything else: "Notwithstanding any other law of the United States (including section 207 of the Social Security Act), no property or rights to property shall be exempt from levy other than the property specifically made exempt by subsection (a)." The list includes necessary wearing apparel and school books; unemployment benefits; workers' compensation; certain service-connected disability payments; certain public assistance including SSI; undelivered mail; amounts needed to comply with a pre-levy court order to support minor children; household goods, furniture, personal effects, arms for personal use, livestock and poultry up to $11,980; and the books and tools of the taxpayer's trade, business or profession up to $5,990. Those two figures are adjusted for inflation each year under section 6334(g), which indexes them and nothing else on the list.

A home IS on the exempt list, and most summaries state this backwards. Section 6334(a)(13)(A) exempts outright any real property used as a residence by the taxpayer where "the amount of the levy does not exceed $5,000", a fixed statutory figure that is not indexed. Above that amount, section 6334(a)(13)(B) exempts the principal residence, and an individual's tangible business property, "except to the extent provided in subsection (e)". Subsection (e) is what lifts the exemption rather than what creates it: a principal residence "shall not be exempt from levy if a judge or magistrate of a district court of the United States approves (in writing) the levy of such residence", and the district courts have exclusive jurisdiction to give that approval. Business property other than the residence needs the written personal approval of a district director or assistant district director, who "may not approve a levy ... unless the official determines that the taxpayer's other assets subject to collection are insufficient to pay the amount due". So a house is not simply outside the protected list. It is protected until someone outside the collection function is persuaded otherwise.

Part of wages is exempt, on a formula rather than a flat amount. Section 6334(a)(9) exempts wages up to "the applicable exempt amount determined under subsection (d)", and 6334(d) computes that amount from the standard deduction plus an inflation-adjusted amount for each dependent, divided by 52 for a weekly payroll and prorated for other pay periods. The IRS mails Publication 1494 with the levy so the employer can look the figure up, and sends the employee a Statement of Dependents and Filing Status to complete and return within three days. Miss that deadline and, in the IRS's words, "your exempt amount is figured as if you are married filing separately with no dependents (zero)", which is the smallest exemption available. Two further details catch people out. A bonus paid separately generally goes to the IRS in full, because the exempt amount belongs to the pay period and has already been paid out. And child support paid directly rather than through payroll is not automatically in the exempt amount; the IRS will release from levy the amount needed to satisfy a support order entered before the levy, but only on request.

Levy is not limited to wages and bank accounts. The IRS also runs federal and state levy programs reaching federal payments, state income tax refunds and the Alaska Permanent Fund Dividend. Beyond those, the statutory reach is defined by what is left out rather than by a list: section 6331(a) permits levy "upon all property and rights to property (except such property as is exempt under section 6334)", and a retirement account, an insurance policy's cash value and money owed to the taxpayer by a customer are none of them on the section 6334(a) exempt list. Two statutory brakes apply: section 6331(f) forbids a levy where the expected costs of levy and sale exceed the property's fair market value, and 6331(g) forbids levy on a day the taxpayer is required to appear in response to a collection summons.

The statutory bar on levy is the most actionable rule here. Section 6331(k), headed "No levy while certain offers pending or installment agreement pending or in effect", stops levy while an offer in compromise is pending, for 30 days after a rejection, and while an appeal filed in that window is pending; and applies the same structure to an installment agreement request, plus "during the period that such an installment agreement ... is in effect" and for 30 days after a termination. Getting a request in front of the IRS is therefore not only a way to resolve the debt, it is a statutory brake on the seizure.

Getting a levy released is a defined list, not a negotiation. The IRS is required to release a levy where the amount owed has been paid, where the collection period ended before the levy was issued, where releasing it will help the taxpayer pay, where an installment agreement whose terms do not allow the levy to continue is in place, where the levy "creates an economic hardship, meaning the IRS has determined the levy prevents you from meeting basic, reasonable living expenses", or where the property is worth more than the balance and release will not hinder collection. The IRS's own warning belongs beside that: "The release of a levy does not mean you don't have to pay the balance due." And where a bank charged a fee for processing a levy the IRS issued in error, Form 8546, Claim for Reimbursement of Bank Charges, exists for it.

1. The tax is assessed and a Notice and Demand for Payment is issued. Levy is not lawful until 10 days after that demand.

2. The IRS sends a Final Notice of Intent to Levy and Notice of Your Right to A Hearing at least 30 days beforehand. This document carries the section 6330 hearing right.

3. The taxpayer either responds or does not. Requesting a hearing within the window suspends the levy and the collection clock. Submitting an offer in compromise or an installment agreement request bars levy under section 6331(k).

4. If nothing happens, the levy issues to the third party holding the asset, the employer or the bank, not to the taxpayer.

5. The levy runs on its own terms. A bank holds the balance 21 days and then remits. A wage levy continues every pay period, less the exempt amount, until it is released.

6. Release follows payment, an agreement, an expired collection period, or a finding of economic hardship. Release ends the taking, not the debt.

A hypothetical example, using made-up figures. Suppose Renata owes $18,000 in assessed federal tax and ignores the Final Notice. Two levies issue. The bank levy catches the $2,400 sitting in her checking account on the day it arrives; the bank freezes that $2,400, waits 21 days, and sends it, leaving $15,600 owing. Her $1,900 direct deposit two weeks later is not caught by that levy, because section 6331(b) limits it to "property possessed and obligations existing at the time thereof". The wage levy behaves in the opposite way. It reaches her employer once and then applies to every pay period under section 6331(e), with only the exempt amount from the Publication 1494 tables released to her each time, until the $15,600 is paid or the levy is released. If she returns the Statement of Dependents late, that exempt amount is computed as though she were married filing separately with no dependents, which is the smallest figure on the table and the difference between an unpleasant paycheck and an unpayable one.

A levy is imposed rather than chosen, so the useful framing is what protects the taxpayer and what does not.

What protects the taxpayer

• Advance notice is mandatory outside a jeopardy finding, and it is 30 days with a hearing right attached.
• The Appeals hearing is before an officer with no prior involvement in the case, and collection alternatives are expressly on the agenda.
• Requesting the hearing suspends both the levy and the collection period, so using the right costs no time on the clock.
• Section 6331(k) bars levy while an offer or an installment agreement is pending or in effect. This is a statutory prohibition rather than a courtesy.
• Economic hardship is a mandatory release ground, not a discretionary one.
• A home is on the statutory exempt list, not off it. Any residence is exempt where the levy does not exceed $5,000, and above that a principal residence needs a federal judge's written approval before it can be levied at all.
• Bank charges caused by an erroneous levy are reimbursable on Form 8546.

What does not

• The exempt list is closed. Section 6334(c) overrides other federal protections by name, including the Social Security Act's own anti-assignment provision.
• A wage levy is continuous, so it needs no repetition and does not lapse.
• The order goes to the employer or the bank, so payroll cannot stop it and the first the taxpayer often hears is a short paycheck.
• Missing the three-day deadline on the Statement of Dependents defaults the exemption to its smallest value.
• A separately paid bonus generally goes over in full.
• The general 25 percent garnishment cap that protects wages from ordinary judgment creditors does not apply to a federal tax levy at all.
• Release stops the seizure and leaves the balance, the interest and the penalties exactly where they were.