Often, taxpayers fall behind on their taxes owed to the IRS. Once your debt reaches a certain point, the IRS may file a tax levy against you. A levy or garnishment is a collection measure used by the IRS to collect back taxes owed. Through these collection methods, your assets may be seized, your bank account may be frozen and the IRS may garnish your wages to recoup the outstanding taxes due.
Here’s the ultimate guide to understand levies and garnishments:
Levies refer to legal assessment against an employee’s wages which are initiated by the Federal or State Revenue Departments for payment of taxes. The Internal Revenue Code (IRC) authorizes levies to collect delinquent tax. Any property or right to property that belongs to the taxpayers or on which there is a Federal tax lien can be levied unless the IRC exempts the property from levy.
Usually, the IRS will levy only after the following three requirements are met:
- The IRS assessed the tax and sent you a Notice and Demand for Payment, a tax bill
- You neglected or refused to pay the tax
- The IRS sent you a levy notice Final Notice of Intent to Levy and Notice of Your Right to A Hearing at least 30 days before the levy. This notice may be given by the IRS to you in person, or at your home or usual place or business or to your last known address by a certified or registered mail, return receipt requested.
If you don’t pay your taxes or make arrangements to settle your debt and the IRS determines that a levy is the next appropriate action, it may levy any property or right to property you own or have an interest in. The IRS could levy your property which is held by someone else, such as your dividends, bank accounts, retirement accounts, wages, licenses, accounts receivables, the cash loan value of your life insurance, rental income, or commissions. Or the IRS could seize and sell property you own such as your house, boat or car.
Garnishments refer to legal assessment against an employee’s wages that are initiated by companies or individuals that have processed legal papers through a court. Federal law prohibits employers from firing a worker to avoid processing a garnishment payment. Garnishments can be taken for any type of debts such as unpaid court costs, child support payments, defaulted student loans, unpaid taxes and monetary fines.
The Consumer Credit Protection Act stipulates the amount of income which can be garnished from an individual’s wage. The garnishment amount is the lower of the following:
- Any amount greater than 30 times the weekly minimum wage, which is $217.50
- 25% of weekly disposable income if the individual’s disposable income is greater than $290
Individuals earning disposable income under $217.50 per week do not receive any wage garnishment. Those who receive a disposable income ranging from $217.50 to $290 per week can have any amount above $217.50 garnished. A maximum of 25% can be garnished on individuals having disposable earnings above $290. Disposable income or earnings refers to the amount left after the legal required deductions such as social security deductions and federal, state and local taxes are made.
The garnishment limits set by the Consumer Credit Protection Act do not apply to child support, student loans, bankruptcy orders, unpaid tax debt, or voluntary wage allocations. While the IRS can garnish up to 15% of an individual’s wage, the Department of Education can garnish up to 10%. If an individual has no other dependents to support, 60% of wages can be garnished for child support payments.
The lower garnishment limit applies since the Federal and State garnishment limits may differ. If an individual faces financial hardship due to wage garnishment, they may be eligible to file a claim to reduce the garnishment amount.
If you are facing levies or garnished wages, please contact us today to negotiate a better solution with the IRS.
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Stephen Wallick started Stephen Wallick & Associates to provide tax and accounting services to Contractors, Real Estate Investors, and Realtors. Steve specializes in IRS Tax Resolution services and works with his clients to resolve cases under scrutiny by the IRS. As a tax professional and enrolled agent, Steve can save you money with IRS loopholes each year. With over 20 years going up against “The Man”, Steve is uniquely qualified to resolve even the toughest IRS cases.