Question

ACC 407 question :)

What is a tax levy and what does it look like on paper through accounting?

Thank you for your help!

Answer 1

1. Tax Levy

A tax levy, under United States Federal law, is an administrative action by the Internal Revenue Service (IRS) under statutory authority, generally without going to court, to seize property to satisfy a tax liability. The levy "includes the power of distraint and seizure by any means". The general rule is that no court permission is required for the IRS to execute a tax levy. While the government relies mainly on voluntary payment of tax, it retains the power of levy to collect involuntarily from those who persistently refuse to pay. The IRS can levy upon wages, bank accounts, social security payments, accounts receivables, insurance proceeds, real property, and, in some cases, a personal residence. Under Internal Revenue Code section 6331, the Internal Revenue Service can "levy upon all property and rights to property" of a taxpayer who owes Federal tax. The IRS can levy upon assets that are in the possession of the taxpayer, called a seizure, or it can levy upon assets in the possession of a third party, a bank, a brokerage house, etc. All future statutory references will be to the Internal Revenue Code unless noted otherwise.

A levy is an assessment that is made on a taxpayer by a governing authority. A levy may be a tax or a fine. The term can also refer to the seizure of an entity's assets as an outcome of a legal process to settle a debt or to obtain payment of an unpaid tax.

A tax levy is a collection procedure used by the IRS and other tax authorities, such as the state treasury or bank, to settle a tax debt that you owe to them.

This involves collecting assets and seizure of your property, either tangible or intangible, in a variety of ways. Most commonly, owed funds will be garnished from your wages or removed from your bank account.

Unlike other forms of property seizure such as those from traditional creditors, when a tax levy is performed, the IRS can take property without taking you to trial or winning a judgment against you.

A levy occurs when unpaid tax debt is owed to the IRS or another institution such as your bank or state. If you have failed to pay enough taxes, any taxes at all, or failed to file your taxes on time, you may begin to get warnings that you have debt due.

Much like many other IRS procedures, a levy will come with ample warnings. If you owe money to the IRS, state treasury, or bank you will have already received a tax lien forewarning you of an incoming tax levy. That means a levy should never be too much of a surprise!

The levy is the last resort opinion that will come with plenty of notice. The IRS will send many letters in advance and is required to send a series of notices to you before proceeding with the levy. You will receive, via certified mail:

1. Multiple notices and demands for payment (IRS Notices CP14, CP501, and CP503)
2. A notice of intent to levy (IRS Notice CP504 – Intent to Levy State Tax Refund or Other Property)
3. A final set of notices titled Final Notice of Intent to Levy and Notice of Your Right to a Hearing letting you know that the levy is imminent

The Final Notice of Intent to Levy and Notice of Your Right to a Hearing is usually sent about 30 days before the levy and may be delivered via mail, in person, or at your workplace.

The notice will describe your rights to appeal and the processes that you can take to correct the levy before it is set into action.

If, after 30 days, you have not taken any action or requested an appeal, the IRS can begin the levy at any time.

It is important to note that if you owe money to multiple sources, for example, your mortgage lender, credit card company, and the IRS - the IRS will likely take precedent in collecting their debt via the levy.

In general, levies are released when your debt is paid off.

If the tax levy would, however, put your financial situation in a place of severe hardship - defined by the IRS as preventing you from meeting basic, reasonable living expenses - it’s possible to have a chance to get the debt withheld.

You always have the right to appeal the levy, which will prevent it from moving forward.

A qualified CPA, Enrolled Agent (EA), or another tax professional can advise you with the best way to handle your unique situation and help you proceed with your appeal.