You're scrolling through your bank statement when suddenly, your heart skips a beat. Your paycheck is significantly smaller than usual. After a frantic call to HR, they tell you the problem: a tax levy.

So, what exactly is a tax levy, and why is it taking a big bite out of your income?

What is a Tax Levy?

A tax levy is a legal claim by the government to seize your property in order to pay a tax debt. The government has many different methods of using a tax levy to obtain their debt from you. The IRS can levy real estate, bank accounts, and other valuable assets such as vehicles.

However, people who owe a tax levy often don’t have these assets to seize, and so wage garnishment—the act of taking a certain percentage of your income—is a common form of tax levy.

Why Is There A Tax Levy On My Paycheck?

Now that we know what a tax levy is, the next question you might be asking is why is there a tax levy on my paycheck in the form of wage garnishment?

In most cases, this is because you have unpaid taxes. By the point at which the IRS is taking a piece of your paycheck, you should have already received multiple official warnings about the unpaid debt and the potential consequences.

 These typically include:

1. CP-501 "Reminder Notice - Balance Due"

2. CP-503 "Important - Immediate Action Required"

3. CP-504 "Final Notice - Balance Due"

Only after sending these notices and allowing time for response would the IRS proceed with a wage levy.

The IRS doesn't just wake up one day and decide to garnish your wages. They follow a very specific process to be fair to all taxpayers:

1. They assess your tax liability and send a bill.

2. You neglect to pay the bill or make arrangements to pay.

3. The IRS sends an LT-11 "Final Notice of Intent to Levy and Notice of Your Right to a Hearing."

4. After 30 days, if you haven't responded or resolved the issue, they proceed with the levy.

How To Get Rid of a Tax Levy?

Facing a tax levy can feel a bit like standing on the edge of a cliff. A sense of vertigo until you can get a tax levy release. However, there are steps you can take to help get out of the situation smoothly: 

Understand the Levy

First, review all your IRS notices carefully. Verify the amount they claim you owe. Sometimes, they’ve done their accounting wrong, and you might not actually owe as much as they say – or anything at all.

If you believe there's been a mistake, gather the following:

• Past tax returns

• Payment receipts

• Records of any communication with the IRS

Then, you can request a detailed explanation of how the IRS calculated your tax debt. If something seems off, the next step is to talk to a tax attorney.

Pay the Debt

Can't pay your debt in full? The IRS also offers installments. There are several types of installment agreements the IRS offers, including an Offer in Compromise (see 3) which cuts down the total amount you owe:

1. Guaranteed Installment Agreement: If you owe less than $10,000, you can usually set up a plan to pay within three years.

2. Streamlined Installment Agreement: For debts up to $50,000, you can have up to 72 months to pay.

3. Partial Payment Installment Agreement: If you can't pay the full amount before the collection statute expires, the IRS might accept less than the full amount owed.

When setting up an installment agreement, be realistic about what you can afford. Defaulting on an agreement can lead to even more severe consequences, in particular the intent to levy, which may mean taking possession of your house and car, or garnishing your wages.

Seek Professional Help

If something does seem to be amiss, you can turn to a tax attorney for help. They’re experts in tax code and sometimes have solutions that you may not be aware of. They can also:

• Review your tax situation to ensure the levy is warranted

• Communicate with the IRS on your behalf

• Negotiate payment plans or settlements

• Help you understand your rights and options

While hiring a professional comes with an upfront cost, their expertise can often save you money in the long run. You can review our offerings at Redo Tax.

Pay On Time

Once you’re on good terms again, it’s crucial to figure out how to prevent it from happening again. Stay on top of your taxes, putting money aside to pay for them whenever you receive untaxed income. 

We recommend you also set up a system to keep track of tax deadlines and payments. This might include:

• Setting calendar reminders for tax due dates

• Using accounting software to track income and expenses

• Setting aside money each month for estimated tax payments if you're self-employed

Remember, even if you can't pay in full, always file your tax return on time. The penalties for not filing are typically much higher than the penalties for not paying.

Consequences of Ignoring a Tax Levy

Burying your head in the sand won't make a tax levy disappear. If you choose to ignore it:

• The garnishment will continue, which can make it difficult to cover your living expenses. The IRS can take up to 70% of your wages, depending on your filing status and number of dependents.

• Penalties and interest will keep accruing, increasing your debt. Because of this, levies are worse than installment arrangements.  The IRS charges interest compounded daily, and penalties can add up to 25% of the unpaid tax.

• The IRS might escalate to seizing other assets, like your house or car. They can also place liens on your property - a warning about their legal claim to seize the asset - which can severely impact your credit score.

• Your passport could be revoked or denied. If you have seriously delinquent tax debt (currently over $55,000), the IRS can certify this to the State Department, which can then deny, revoke, or limit your passport.

The psychological toll of ignoring a tax levy shouldn't be underestimated either. The stress of constantly worrying about potential IRS actions can impact your mental health.

The Fastest Way To Release Your Paycheck Levy

While paying in full is the surest way to remove a levy, most people in the situation don’t have that option. Here are some alternatives:

1. Negotiate the IRS tax levy: You might be able to set up a payment plan or settle for less than you owe through an Offer in Compromise. If you’re in good standing with the IRS, you can often get a first-time Penalty Abatement, which lowers the total amount you owe due to a good track record with the IRS. You can qualify for this if you have no penalties in the previous 3 tax years.

2. Claim financial hardship: If the levy is causing immediate economic difficulties, you may qualify for a hardship status, which can temporarily pause collection activities.

3. Request a Collection Due Process hearing: This can give you time to work out a solution. Sometimes, it can even free you from the levy.

Ultimately, the best strategy is to avoid a tax levy in the first place. You’ll have plenty of warning before it actually happens. Stay on top of your tax obligations, respond promptly to IRS notices, and if you can't pay, be proactive about negotiating.

Here are Redo Tax, we can help. Your future self (and paycheck) will thank you.