When it comes to collecting money, the IRS has unprecedented powers. The power to take your paycheck? Check. The power to drain your bank account? Yep, that too. You need to know what the IRS can do and when they are coming for you.
In most cases, people who have tax debt will pay attention to the series of letters the IRS sends them as they become increasingly more threatening.
Being proactive to an IRS letter is always the best approach.
But what happens if you ignore those IRS nasty-grams?
Bad things. Very, very bad things.
The IRS is the largest and most effective collection agency on earth. Their reach crosses U.S. borders due to agreements with foreign governments. They have the legal authority to simply take money away from people, and they exercise this authority frequently. In fiscal year 2020, the IRS “only” wielded this power 396,269 times, which was a nearly 50% reduction from 2019 due shutting down during the Corona virus scare.
To take you money, the IRS uses levies. Levies are the most common forceful actions used by the IRS takes to collect money. Most people are afraid of a seizure, where the IRS takes physical property, but these are actually very rare. The IRS will occasionally take business inventory, car collections, art, and the like, and even more rarely they take homes.
Levies, on the other hand, are very common, plus they can occur rapidly and don’t even require a court order.
Let’s discuss the two most common types of Levies: Bank account levies and wage levies.
Bank Account Levies
Have you ever had the IRS direct deposit a refund into your bank account?
Did you provide the IRS with your bank account information last year so they could deposit stimulus funds to you?
Have you ever received enough interest on a savings account that your bank sent you a 1099-INT (and a copy to the IRS)?
Have you ever sent the IRS a check to pay your taxes?
If you said YES to the above, or any number of other actions, then congratulations: The IRS knows where you bank.
If you then owe the IRS money and don’t pay it, they know exactly where to send a bank account levy.
In such a situation, the IRS will send a notice to your bank’s legal department, instructing them to withdraw all money that’s in your account. The bank is then required to hold that money for 21 days, at which time it is then sent to the IRS.
Why 21 days? Theoretically, that gives you enough time to contest the taking of your money. During this time, you must rush to get your financial records organized, file an appeal against the levy, and try to obtain a levy release. This is something that I assist clients with, and the 21 days often seem to vanish much faster than that!
Think about whatever amount of money you have sitting in your checking account right now. What are you planning on using that money for? Rent or mortgage payment? Paying for the kid’s summer camp? Groceries? Or the autopay power bill?
Whatever it may be, you’ve probably set that money aside for something, mentally.
Now, imagine you wake up tomorrow morning and that money was just gone.
That’s what a bank account levy from the IRS feels like.
If you are subject to an IRS bank levy, there is one small saving grace here: Only the money in the account on THAT DAY is subject to the levy.
In other words, if your bank’s legal department processes the levy today and takes all the money out, it’s a one-time hit. If your paycheck gets deposited, say, next Friday, then that money won’t disappear from the account. The IRS would need to issue another levy to grab those funds.
So, what about your Paycheck…?
Most non-IRS wage garnishments are the result of a court order. A creditor must sue you in court, obtain a judgment, then take additional legal action to obtain the wage garnishment.
Not true for the IRS.
The IRS does NOT need to go to court, rather an IRS employee and their manager can issue a wage garnishment against you. This gets sent to your employer, and your employer is obligated to forward most of your paycheck to the IRS. If your employer fails to do this, then the IRS goes after your employer directly, even eventually levying their business bank accounts.
One way or another, the IRS is going to get that money.
And hold on, unlike a bank account levy, which is a one-time grab, wage levies are a continuous levy. In other words, the levy applies to all future paychecks until the wage levy is released, or the tax debt to satisfied.
Another difference from a bank account levy, there is no 21-day holding period for a wage levy. Your employer is required to comply with the order on the very next regular payroll period.
The IRS uses a complex formula to determine how much of your paycheck will be garnished, and how much is exempt. For most people, the IRS will end up taking approximately 70% of their paycheck in the wage garnishment process.
How much would it impact your life if the IRS suddenly started taking 70% of your paycheck?
This is a very serious situation. Most people that find themselves facing levies were aware it was coming — the IRS is required to send a series of notices informing you of the actions they can take.
But what if you’ve recently moved, and the IRS has a bad address? The IRS is only required to send these notices to your last known address, and it’s totally possible that you just never got them, and then a levy happens.
Fixing either a wage levy or bank account levy from the IRS requires rapid action, but there most certainly ARE things that can be done. If you or somebody you know is facing such actions from the IRS, we need to talk, the sooner the better.