How to Stop a Tax Levy on Your Paycheck or Property

If you’re behind on your federal taxes, the IRS may levy your paycheck or property. Although it may be scary to face asset seizures or wage garnishments, it’s possible to avoid a tax levy or even have one removed after the IRS initiates the levy process.

So, what is a tax levy, and how can you stop it? Here’s what you need to know.

Table of Contents

1. What is a tax levy? 
2. Tax levy vs. garnishment
3. What assets can the IRS seize?
4. Limits on IRS wage garnishment
5. Steps to stop or release a tax levy
6. How to prevent future tax levies
7. The bottom line

What is a tax levy? 

A tax levy is the legal seizure of your assets to satisfy a federal tax debt. It’s essentially the next step beyond a tax lien, which is a legal claim on your property to secure payment for back taxes. 

According to the IRS, you may face a tax levy if the following four requirements are met:

1. You’ve received a tax bill.
2. You’ve neglected or refused to pay the amount owed.
3. You’ve received a final notice of intent to levy and a notice of your rights to a hearing. You’ll receive this at least 30 days before the levy.  
4. You’ve received a notification that the IRS may contact third parties—for example, your bank or employer—regarding the determination or collection of your tax bill.

Tax levy vs. garnishment

With a tax levy, the IRS typically seizes certain assets, such as your home, vehicle, bank account, or retirement accounts, selling the property to satisfy the debt. 

If the assets are held by a third party, such as your bank or brokerage firm, the federal agency may contact them to handle the process. This may involve placing a hold on the assets until they’re liquidated, at which point the levy may be satisfied.

In some cases, the federal tax agency may also choose to levy your wages, which may also be referred to as a wage garnishment. If this happens, the IRS will provide your employer with a levy notice, and it’ll be legally required to comply.

Unlike other types of levies, however, a wage garnishment may not resolve quickly. In fact, it’ll remain continuously attached to your paycheck until you’ve satisfied the debt or had the levy removed in another way.

What assets can the IRS seize?

The IRS can levy any property or right of property that you own or have an interest in, with just a few exceptions. Examples of the type of property the federal agency can seize include the following:

• Salary and wages, including bonuses and commissions
• Deferred compensation, such as retirement or pension income
• Social Security benefits
• Bank accounts
• Retirement accounts
• Dividends
• Licenses
• Rental income
• Accounts receivable
• Life insurance cash value
• House
• Car
• Boat

It’s important to note, however, that the IRS rarely seizes homes, vehicles, and business assets, such as equipment. 

Which items are exempt from an IRS levy?

Although the IRS can seize a wide range of assets to satisfy a tax debt, there are some that are exempt from levies. Here are just a handful of examples:

• Clothing (excluding luxury apparel, such as furs)
• School textbooks
• Up to $6,250 in fuel, provisions, furniture, and personal effects 
• Up to $3,125 in books and tools necessary for your trade, business, or profession
• Judgments for support of minor children
• Residential property in cases where the levy doesn’t exceed $5,000
• Certain business assets

A tax levy can lead to reduced income and the potential loss of assets, such as a home or vehicle. Acting quickly can help mitigate the impact by setting up a payment plan to release the levy. I strongly recommend working with a tax professional to ensure compliance and serve as an advocate throughout the process. Recovery, particularly for damaged credit, can take up to seven years, but the sooner steps are taken to resolve the issue, the faster financial stability can be restored.

Limits on IRS wage garnishment

If the IRS opts to levy your wages, part of your pay may be exempt from garnishment. The amount that’s exempt will depend on your filing status, the number of dependents you claim on your tax return, and your payroll period. 

However, there are some caveats to keep in mind:

• Reporting your dependents and filing status: Upon receiving the notice of garnishment from the IRS, your employer will provide you with a statement of dependents and filing status. However, if you don’t complete the statement and return it within three days, you’ll receive the default status of married filing separately with no dependents. In other words, you’ll get the lowest exemption amount.
• Other income sources: If you have multiple income sources, the federal tax agency may choose to apply your income exemptions to one income source and garnish 100% of your wages from a particular employer.

It’s important to note that there’s nothing on the IRS website stating that it can’t perform wage garnishments and other tax levies at the same time. If you receive other forms of income, however, you may qualify for exemptions depending on the type of income and the source. Examples of exempt income include:

• Unemployment benefits
• Workers compensation payments
• Certain service-connected disability payments
• Certain public assistance payments
• Certain annuity and pension payments

Steps to stop or release a tax levy

A tax levy can cause significant financial hardship, so it’s important to avoid ignoring your tax debt long enough to risk one. 

That said, if the IRS has already notified you of its intent to levy your assets or garnish your wages, there are steps you can take to eliminate it. Here’s how to stop a tax levy or remove a wage garnishment:

• Pay the total amount you owe, including interest and penalties.
• Enter an installment agreement to pay off your tax debt.
• Show that the levy creates an economic hardship, which prevents you from meeting your basic, reasonable living expenses.
• Show that the value of the property is more than the amount you owe and that releasing the levy won’t hinder the agency’s ability to collect the debt.
• Show that releasing the levy will make it easier for you to pay your back taxes.

If you request a release and the IRS denies it, you may file an appeal. Keep in mind, though, that getting the IRS to release the levy doesn’t change the terms of your debt. If you don’t find a way to resolve it, the federal agency may reissue the levy. 

How to prevent future tax levies

If you’re handling your tax debt with the IRS, it’s important to also take steps to avoid potential tax levies in the future. Here are some steps you can take to accomplish your goal:

• Pay your bill on time: If you owe federal taxes in the future, make it a priority to file your return and pay your bill on time. If you’re a small business owner, it can help to submit estimated tax payments throughout the year.
  
• Work with a professional: If you’re struggling to know how much to save up for tax payments, consider hiring a tax professional to help you estimate what you’ll owe each year, so you can prepare.
  
• Use installment plans: If you have a year where you can’t afford to pay your tax bill in full, take advantage of the IRS payment plans to satisfy your debt without risking a tax lien or levy.
  
• Consider other tax relief options: If your financial situation is dire, you may consider other tax relief options that can resolve your debt without a levy. Examples include settlement, offer in compromise, currently not collectible status, and innocent spouse relief.

If you’re in a situation again where you’re worried about the possibility of a tax levy, maintain open communication with the IRS and discuss your options to see if you can find another way to resolve your debt. 

I recommend staying proactive with tax planning, budgeting, and savings to prevent financial distress. Addressing financial issues early makes it easier to avoid serious consequences like tax levies or wage garnishments. For clients who struggle to stay on top of their finances, I schedule regular monthly or quarterly check-ins to help them stay on track with their annual tax obligations. If a situation requires specialized expertise, I refer them to a trusted tax professional for further guidance.

The bottom line

Facing a tax levy can be overwhelming, but understanding your options and taking proactive steps can help you resolve the issue. Ways to stop a levy before it impacts your assets include paying your tax debt, setting up an installment agreement, or demonstrating financial hardship. 

Going forward, you can avoid future levies by prioritizing timely tax payments, seeking professional guidance, and exploring relief options if needed. Most importantly, maintain open communication with the IRS. Ignoring notices can escalate the situation, but staying engaged can help you find manageable solutions to resolve your tax obligations effectively.