Since wage garnishment gives both the IRS and the taxpayer a hard time, taxpayers experiencing financial hardship can use this to their advantage.
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How Financial Hardship Can Mitigate Wage Garnishment In 5 Steps
Step 1: Understand Wage Garnishment
Wage garnishment happens when the IRS deducts a debtor’s tax payments directly from their wages, rather than wait for the debtor to pay them personally. For creditors to wield wage garnishment successfully, a court order is required to approve collection, except for a few federal institutions like the IRS.
Any creditor can file a request for wage garnishment in the local court with jurisdiction, even the state. It bears emphasizing that the two main exceptions for a court ruling are unpaid debts to the IRS and federal student loans.
Interestingly, four states do not allow wage garnishment except for a few important areas, like unpaid taxes. These states are Texas, North Carolina, South Carolina, and Pennsylvania.
For unpaid tax debt, the IRS collects up to 25% of the wages for unpaid taxes. Losing a quarter of monthly income can affect finances drastically, which makes avoiding wage garnishment a necessity for taxpayers.
The IRS can garnish wages when:
- The taxpayer received the tax assessment by the IRS;
- The IRS issued a Notice and Demand for Payment to the delinquent taxpayer;
- Taxpayer either ignored or refused to pay the assessed tax amount; and
- Lastly, the IRS has sent the Final Notice of Intent to Levy and Notice of Your Right to a Hearing.
Step 2: Know When Wage Garnishment Starts Procedurally
Basically, a tax levy leads to wage garnishment. If a taxpayer does not pay the taxes within 30 days of the Final Notice of Intent to Levy, the IRS can proceed to garnish the wages, together with levying other assets like real estate property or other sources of income.
Do note that the IRS will send three notices minimum before a levy:
- The first notice requesting information why you are late together with a Tax form filled out by the IRS (usually with a larger tax amount);
- Followed by a Notice and Demand for Payment;
- Lastly, the CP504 or Final Notice of Intent to Levy.
Most of the time, the IRS sends a Notice for Levy first before the Final Notice. However, the taxpayer may prefer to prepare in advance, as the IRS may not send a notice to levy first.
Also, while the IRS tax levy does not require a court order, the parties involved still need notification. The IRS needs to inform the employer regarding the automatic collection.
Step 3: Discern What the IRS Means by Financial Hardship
For taxpayers who require specifics, the IRS National Standards lists down taxpayers’ essential living expenses and their related costs. The IRS National Standard figures as of April 2019 are:
- Food, at $386 per month for a single taxpayer;
- Housekeeping supplies, at $40 monthly;
- Apparel, at $88 monthly;
- Personal Care, at $43 every month;
- Miscellaneous expenses, at $170 every month.
For a single taxpayer, the total monthly income should reach $727. Theoretically, if the wages minus the IRS garnishment decreases the monthly income below $727, the IRS may provide tax relief or postponement of garnishment due to financial hardship. Simply put, the IRS cannot garnish your wages if it means their deduction will cost you your basic standard of living, or cause financial hardship.
These numbers come from the Bureau of Labor Statistics Consumer Expenditure Survey. Numbers may change due to inflation and costs, so taxpayers should always do their homework, ask the IRS what their National Standards are, and see if their net wages reach the national standard.
Another option that the taxpayer can use lies with current experiences. Instead of the hardline and clearcut numbers set by the IRS National Standards, taxpayers can show financial hardship by raising the following:
- Recent reduction of work hours
- Debilitating illness of injury, wherein a wage garnishment can have a drastic effect
- Currently undergoing Chapter 7 or 12 bankruptcy proceedings
- A pay cut
- Recently undergoing a financially draining experience, like a divorce.
This list is not exhaustive; being barely able to pay the bills does not necessarily constitute financial hardship. Quality of life must see a big drop, or the IRS must at least anticipate a substantial risk of losing the whole debt when wage garnishment applies.
Also, wage garnishment can be stopped even if the taxpayer currently does not experience financial hardship. Showing that financial hardship will arise when wage garnishment proceeds can convince the IRS to stop the process and come up with another tax collection method.
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Step 4: Understand and Take Advantage of the Wage Garnishment Process
First off, the IRS can postpone wage garnishment for up to 10 years. The statute of limitations gives the taxpayer this maximum cap, but the IRS does not always give out such a long postponement.
The IRS can actually give relief to the taxpayer immediately.
Most taxpayers send a request letter detailing how the wage garnishment negatively affects their finances that paying off the taxes becomes impossible. With the letter, documentation to prove financial hardship, or at least the chance of experiencing hardship, should also be present.
What most of the taxpaying public does not know is that the application process can be verbal for financial hardships with wage garnishment.
Talking with an IRS agent in person can lead to the cancellation of wage garnishment. The taxpayer can go to the nearest IRS branch office and request an audience.
Tip: Taxpayers should schedule an audience request at least a week in advance. An IRS branch office has a lot of territory to cover in their operations, and an early appointment can increase your chances of a positive outcome.
For the final option, a taxpayer can call the IRS at (800) 829-7650 or (800) 829-3903. Informing the IRS regarding financial hardship can lift the garnishment.
During the phone call, prepare the social security number and the latest IRS correspondence for verification. Lastly, get the fax number of the bank or employer that takes care of garnishment, as the IRS needs to fax over a wage garnishment cancellation document right away.
In any case, knowing the best way to contact the IRS can help any taxpayer, especially due to the long wait time and busy phone lines.
Step 5: If the Application Fails, Proceed with Alternative Tax Solutions
The IRS aims after the collection of taxes, not the financial ruin of the taxpayer. Sometimes proving loss of tax collection rather than personal financial hardship may work better if the cancellation of wage garnishment is difficult.
Taxpayers can negotiate with the IRS for other less burdensome options.
Having an installment plan can help taxpayers breathe easier. Since an installment plan can allow a schedule of 5 years, the amount paid by the taxpayer may be lower compared to having your wages garnished by the IRS.
Having a Currently Not Collectible (CNC) status can help taxpayers regain their financial footing. With a CNC, the IRS stops collecting taxes and sending notices, where taxpayers no longer incur penalties and fees.
An Offer in Compromise also lowers the tax debt that delinquent taxpayers need to pay. In an OIC agreement, both parties benefit, as the taxpayer pays a lower tax debt and the IRS receives revenue that the government needs to operate.
Interestingly, both the IRS and taxpayers dislike wage garnishment: automatic collection from employers and banks can lead to higher costs for the IRS, while taxpayers directly feel the damage as a fourth of their income vanishes as soon as it comes in.
Talking to the IRS and explaining financial hardship can lead to the cancellation of wage garnishment. As long as taxpayers follow these five steps, taxpayers have higher chances in ceasing wage garnishment.
Have you talked to the IRS about financial hardship? How was your experience with the negotiation?
For questions and recommendations, please sound off in the comments section below.
If you owe back taxes, visit taxreliefcenter.org for more information on tax relief options.
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