What is a bank levy? A taxpayer faced with one from the IRS can expect quite a lengthy process, and therefore should know how to proceed efficiently to lower the time wasted and costs associated with it.
In this article:
- What Is a Bank Levy?
- How Does the IRS Levy Notice Start?
- How Long Does a Bank Levy Last?
- What Are the Options Available for a Taxpayer When It Comes to the Bank Levy?
What Is a Bank Levy and Other Important Questions and Answers
What Is a Bank Levy?
To properly collect unpaid taxes, the IRS has many options at their disposal. One of the most common methods used is an IRS levy.
If the taxpayer cannot pay the tax debt, they may see an IRS levy attached to their bank account. For taxpayers who are employees, the bank levy can also function as wage garnishment, while business owners can see it as a lien, where the IRS places the funds in the account as collateral for the unpaid tax debt.
Most debtors have to get the levy through the court with the jurisdiction (usually the court where the taxpayer resides) to get a garnishment order against a bank account. The IRS, however, has a more streamlined method where the IRS files for a levy to the United States Tax Court.
To clarify, taxpayers should know the difference between what is a bank levy or tax lien. Some taxpayers confuse one for the other, and inaccurate forms may be sent, which leads not just to wasted time and effort but also to a possible negligence penalty.
On one hand, a tax lien:
- Attaches to a property but does not take away ownership,
- Functions as a claim for the creditor, and
- Enjoys privilege over other creditors not part of the lien in case of asset disposition or bankruptcy.
On the other hand, a tax levy:
- Freezes any movement of the asset,
- Disposes the property to the market, usually through an auction, and
- Applies the earnings towards the tax debt.
The IRS can use either a tax lien or a tax levy, but a tax levy affects taxpayers more compared to a tax lien due to forced asset disposal. The IRS can attach a lien or a levy to a bank account, however, the IRS prefers attaching a tax levy first since tax collection is easier to do.
How Does the IRS Levy Notice Start?
There is good news for taxpayers though; the levy process by itself can take at least four different kinds of IRS notices if the taxpayer counts from the receipt of the first tax bill. These constitute four letters, starting from the First Notice and Reminder to a Notice of Tax Levy.
However, the IRS bank levy process formally starts with the Collection Due Process Letter (Form 12153) for the taxpayer. With this letter, the IRS also sends an IRS Form Letter L-1058 or IRS Form Letter L11 that informs the taxpayer about the pending case in the tax court for the tax or bank levy.
The taxpayer has 30 days from the sending of the letters to prepare for the Collection Due Process (CDP) hearing with the IRS. For the CDP hearing, only the taxpayer and the assigned settlement officer meet, wherein the taxpayer negotiates with the IRS.
If the taxpayer and the settlement officer reach an agreement during the CDP, the taxpayer may receive an IRS installment plan, offer in compromise, or other options that can help lessen the financial burden for both parties.
However, if the negotiations within the CDP fail, the IRS may ask the tax court to continue with the bank levy with a Notice of Determination where the IRS specifies the details of the case. The taxpayer has 30 days to petition the tax court from the mailing of the Notice of Determination, and the taxpayer may want to get the services of an attorney or a tax advocate.
Tip: The law prohibits the IRS from attaching a levy if there are actions or cases pending for the taxpayer. Taxpayers can use this to their advantage by applying for other options like an installment plan, or if the IRS is undergoing a tax audit for the taxpayer.
How Long Does a Bank Levy Last?
In a nutshell, the taxpayer can expect the release of a bank levy immediately, or at most 30 days, after the tax court has decided in favor of the taxpayer. This timeframe starts upon a successful agreement between the IRS, whether through the CDP or the tax court.
Even if the IRS or the tax court has decided in favor of the taxpayer, a bank levy can still be in effect. Once the IRS forwarded a notice of cancellation for the tax levy to the courts, the levy may remain at 30 days maximum.
Bank levies, on the other hand, can be removed almost instantaneously, especially if the tax collection method used is wage garnishment. In wage garnishment, the IRS simply sends a letter via fax to the bank to cancel the installment plan and release the levy.
What Are the Options Available for a Taxpayer When It Comes to the Bank Levy?
As mentioned previously, going into negotiations with the IRS can give taxpayers not just better options, but also stalling time.
Taxpayers can apply for an installment plan, ask for an Offer In Compromise, or even request for their payment status to be changed to Currently Not Collectible (CNC).
Negotiating with the IRS requires preparation, so planning what option works for the taxpayer as early as possible can really help taxpayers.
- Installment plans have the highest chance of getting approved by the IRS. However, the taxpayer may pay a slightly higher amount due to processing fees, especially if paid through a bank.
- For the Offer In Compromise, a 2015 survey showed an acceptance rate of 59%, where the IRS approved 27,000 Offer In Compromise agreements from 67,000 offers.
- Lastly, getting a CNC status approved can be difficult, since the IRS effectively postponed not just the unpaid tax debt, but also the imposition of penalties.
Another option that the taxpayer can use is to declare bankruptcy. However, bankruptcy shows up on credit reports and has other long-term effects, which can be too drastic an action just to avoid a bank levy.
Interestingly, taxpayers, whether they are individuals or businesses, can have a bank levy attached. Knowing what is a bank levy and its related concepts can help you avoid the situation.
Do you now know the answer to “What is a bank levy?” Have you encountered one before? Share your experience in the comments section below.
If you owe back taxes, visit taxreliefcenter.org for more information on tax relief options.