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An HR Glossary for HR Terms

Glossary of Human Resources Management and Employee Benefit Terms

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Levy

What Is a Levy?

A levy is the legal seizure of property to satisfy a debt. Levies are usually an attachment or garnishment for a tax debt or a court judgment requested by the creditor of the debt. 

The term levy may be more commonly used than “attachment” or “garnishment” in some cases.

What Is the Purpose of a Levy?

The purpose of a levy is to allow the IRS or a debt collector to garnish wages from a debtor who has not paid their outstanding balance. This is usually the last resort for creditors, as they have to alert their debtors with at least 30 days’ notice that they plan to collect their debt by enacting a levy.

How Does a Levy Work?

When a levy is enacted, the debtor’s financial account will be frozen by the creditor. This means the debtor cannot make any withdrawals to their account for a certain period. During that time frame, the creditor will collect capital from the financial account to cover the outstanding debt.

Until the full debt is covered, any money that the debtor deposits into the account will be taken by the creditor to pay the debt. Once the debt is finally paid in full, the creditor will unfreeze the financial account.

In some cases, a court may decide to allow creditors to levy physical belongings. In this case, the creditor can take personal possessions and appraise their worth to absolve the debt. However, this is quite rare.

What Is an IRS Levy?

An IRS levy is a means for the IRS to collect money from individuals who have not paid what they owe on their taxes.

The IRS will seize assets from the taxpayer through any of the following channels:

  • Checking/savings accounts

  • Investment accounts

  • Wages

  • Social Security savings

  • Pensions

  • Insurance policies

  • Physical assets

  • Accounts receivable

The IRS will not levy tax debts without first alerting the debtor. Generally, the IRS will follow a five-step notification process before enacting a levy:

  1. The tax amount is assessed by the taxpayer or IRS.

  2. A tax bill is sent to the taxpayer.

  3. If the tax bill is not paid by the tax deadline, the IRS will notify the taxpayer to remind them of the tax due and warn them of consequences if the taxpayer fails to pay.

  4. If the taxpayer still has not paid their taxes, the IRS will send warning letters titled “Final Notice of Intent to Levy” and “Notice of Your Right to Hearing.”

  5. After receiving these letters, the taxpayer will have 30 days to resolve the taxes or be subject to a levy.

What Is a Bank Levy?

A bank levy and an IRS levy work similarly. However, in a bank levy, it is not a government agency that attempts to collect the debt. In the case of bank levies, any creditor who is owed debt can request a levy, provided they alert the debtor ahead of time.

What's the Difference Between a Tax and a Levy?

While they are related, there is an important difference between a tax and a levy. A tax is a compulsory contribution a government places on an organization or an individual as a means to contribute toward the state or federal revenue. Meanwhile, a levy is the forceful seizure of assets to cover a tax fee or debt after the debtor fails to pay what they owe. The two terms describe different stages of the process: after taxes or borrowing credit creates a debt, a levy attempts to collect that debt.

Another important difference is that a levy can be enacted by a non-governmental organization, while taxes are instituted solely by the government.

What’s the Difference Between Levies and Garnishments?

Levies and garnishments are ways creditors can take money from a debtor to pay off their outstanding debt. However, the methods of collection vary.

In a levy, money is taken directly from the debtor’s financial accounts. This process will also take any deposits the debtor makes into that account. Because this method has access to larger amounts of capital, this form of debt collection may be fulfilled somewhat quickly.

With garnishments, a creditor requests that the debtor’s employer takes a portion of the debtor’s paycheck and forwards it to the creditor. These reserved portions of the paycheck are then used to pay off the debt. During garnishment, the creditor cannot take more than 25 percent of the paycheck per pay period. As such, the time it takes for the garnishment to complete will vary depending on the size of the debt and the wage of the debtor.