What Is a Levy?

What Is a Levy?

Let me explain what a levy really is—you're dealing with a situation where the IRS or other tax authorities legally seize your property or assets to cover an unpaid debt, like grabbing your tax refund or dipping into your bank account.

A levy means the legal seizure of your property to pay off that outstanding debt. If you fail to pay your taxes, the IRS can hit you with levies on things like tax refunds or other property. Tax authorities aren't limited; they can go after your bank accounts, rental income, or even retirement accounts.

Key Takeaways

Understand this: levies are the legal tool that a taxing authority or bank uses to seize your property for a debt. The property they can take includes cash, cars, houses, and even your future wages. Remember, a levy isn't the same as a lien—a levy actually takes the property to satisfy the tax debt, while a lien is just a claim securing that debt. And garnishment? That's when a court orders your employer to send part of your salary straight to a creditor.

Types of Levies

Levies come from different sources, like a tax authority such as a state treasury, the IRS, or even a bank.

Tax Levy

In the U.S., the IRS can levy your property to collect on a tax debt—think real property like cash in your bank, your house, car, or boat. The Internal Revenue Code allows this for delinquent federal tax payments. First, the IRS assesses your tax and sends you a Notice and Demand for Payment if you owe.

If you ignore or refuse to pay, they send a 'Final Notice - Notice of Intent to Levy and Your Right to A Hearing,' usually at least 30 days before they act. They might deliver it in person, leave it at your home or business, or mail it to your last known address.

Here's something important: they can levy intangible property held by others, like your wages, retirement accounts, dividends, bank accounts, licenses, rental income, accounts receivable, commissions, or the cash value of your life insurance.

For state taxes, a state tax levy hits unpaid state taxes. The IRS can even levy your state tax refund, sending a 'Notice of Levy on Your State Tax Refund and a Notice of Your Right to Hearing' after the fact.

Bank Levy

A creditor needs a court judgment against you to issue a bank levy. This freezes your accounts until the debt is paid in full. If not lifted, the creditor takes the money and applies it to what you owe. Banks might charge you a fee for processing this.

Bank levies happen for unpaid taxes or personal debts. Some accounts are off-limits, like Social Security Income, Supplemental Security Income, Veteran’s Benefits, and child support payments. For federal debts like student loans or taxes, no court order is needed—the IRS just notifies you and gives a chance to fix it.

In the UK, 'bank levy' also means taxes on financial institutions for the economic risks they pose.

Climate Based Levy

A green levy taxes greenhouse gases or pollution sources to encourage eco-friendly behavior by increasing costs for polluters. Carbon taxes are the most common, applied as emissions taxes or on gas-intensive goods like gasoline.

Mill Levy

A mill levy is a property tax based on your real estate's assessed value, used by local governments for funding schools or parks. Each year, a tax assessor values properties in the district, and taxes are a percentage of that value.

Garnishments and Liens

Both the IRS and private creditors use garnishments. A levy lets creditors pull money from your bank, but garnishment redirects part of your wages or income to repay debt. Private creditors and the government can use both.

Federal agencies like the IRS don't need court orders for levies or garnishments. Garnishments often target defaulted loans or child support. You might get relief if it causes financial hardship.

A levy takes property to pay the debt, unlike a lien, which is a claim securing the debt. A lien protects the government's interest in your property while the debt is unpaid; a levy seizes and sells it to collect.

The IRS can impose a federal tax lien to notify other creditors of their claim on your assets. If unpaid, they levy to collect. Tax liens used to stay on credit reports for 15 years, but as of April 2018, they're no longer listed.

Avoiding Levies

To avoid this, file your returns on time and pay taxes when due. You can request an extension or set up installments with the IRS. You might arrange a payment plan or settle for less than owed. If you get a 'Final Notice,' contact the IRS immediately.

IRS Errors

If the IRS errs and causes bank charges, you can get reimbursed by filing Form 8546, Claim for Reimbursement of Bank Charges, at the address on your levy copy. To qualify, the IRS must have caused the error, you didn't contribute to it, and you responded promptly with requested info before the levy.

Which Constitutional Amendment Gave Congress the Power to Levy an Income Tax?

The Sixteenth Amendment lets Congress collect direct income taxes without basing it on state populations. Before 1909, taxes were allocated by population, and federal revenue came mostly from customs and excise taxes.

How Can You Stop a Levy on Your Bank Account?

The easiest way is to pay the debt. If it's an error or identity theft, prove it to restore access.

How Often Can the IRS Levy My Bank Account?

There's no limit on levies for unpaid taxes, but they can only take 15% of Social Security benefits and nothing from veterans' benefits. They might release a levy if it causes economic hardship.

What Is an Ad Valorem Tax Levy?

An ad valorem tax is based on property value, like real estate or vehicles—'ad valorem' means 'according to value.' These fund local governments and schools, distributed by property values.

The Bottom Line

Levies let taxing authorities or banks seize your property for unpaid debts, including cash, cars, houses, and wages. Unlike a lien, which secures the debt, a levy takes the property. Garnishment redirects salary to creditors—know these differences to handle your situation.