Levy
What is a levy?
A levy is the legal seizure of assets—such as wages, bank funds, or property—by a government agency (like the IRS) or a creditor to collect unpaid debt. Unlike a tax lien, which is a claim against property, a levy takes the asset to satisfy the debt. Employers often handle levies through wage garnishments, which are processed via payroll after receiving a notice of levy from the IRS. 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 withhold wages from someone who has not paid their outstanding balance. This is usually the last resort for creditors, as they must give their debtors 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 can't make any withdrawals from their account for a certain period. During that time frame, the creditor will collect from the account to cover the outstanding debt.
Until the full debt is payed, any money that the debtor deposits into the account will be taken by the creditor to pay the debt. Once the debt is 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 a tax levy?
An IRS levy allows the IRS to collect money from individuals who haven't 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 won't levy tax debts without first alerting the debtor. Generally, the IRS will follow a five-step notification process before enacting a levy:
- The tax amount is assessed by the taxpayer or the IRS.
- A tax bill is sent to the taxpayer.
- If the tax bill isn't 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.
- If the taxpayer has still not paid their taxes, the IRS will send warning letters titled “Final Notice of Intent to Levy” and “Notice of Your Right to Hearing.”
- After receiving these letters, the taxpayer will have 30 days to resolve the taxes or be subject to a levy.
What's the difference between a tax levy and a levy?
While they are related, there's an important difference between a tax and a levy. The primary difference is that a levy can be enacted by a non-governmental organization, while tax levies are enacted by the government.
A tax levy is a compulsory contribution a government places on an organization or an individual to contribute toward the state or federal revenue, while a levy is the forceful seizure of assets to cover a tax fee or debt after the debtor fails to pay what they owe.
What’s the difference between a levy and a garnishment?
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% 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.