A levy is the legal confiscation of assets and properties to fulfill an unsettled debt. Upon a private creditor’s request, the court can issue a levy. However, the Internal Revenue Service (IRS) can levy an individual’s property to meet the tax debt.
So, if anyone fails to pay taxes, their assets, such as bank accounts, retirement accounts, or partial income, will be seized.
How Does a Levy Help the Creditor of the Debt?
If a levy is issued, the IRS or a Debt Collector has full rights to legally seize the debtor’s assets to pay off the outstanding debt. Usually, creditors resort to this process when debtors have not responded or tried to pay off the balance even after receiving a 30 days notice about the levy. So, it helps the creditor get their money from the debtor.
How Does Levy Function?
Tax authorities, a bank, or the IRS can exercise the power of a levy to collect a debt. For any private creditors, the levy has to be a legal issuance from a court.
Once the levy takes place, the creditor can halt the debtor’s bank accounts or any other financial accounts, resulting in the debtor being unable to withdraw any cash.
The creditor will collect the capital or any other deposits from the account until the debt is fully paid. After the debt is paid off, the creditor will activate the account again for the debtor to use.
Rarely the court decides to levy physical assets or personal possessions. But, if a physical levy takes place, the creditor can take the debtor’s personal belongings into custody to sell off and clear the debt.
When Does the Internal Revenue Service (IRS) Issue a Levy?
Whenever an individual does not pay the taxes or does not try to pay off their debt within a period, the IRS finds no other way than to issue a levy.
During this period, the IRS will confiscate any owned property, property rights, or assets that are not in the debtor’s name but go to them. This includes income, dividends, licenses, rental income, retirement accounts, insurance, investment accounts, savings accounts, pensions, etc. The IRS can also seize and appraise your house, car, boat, land, etc.
Does the IRS Notify the Debtor Before a Levy?
Yes, the IRS is required to alert the debtor with an official notice. They follow a four-step alert system before finalizing a levy.
The IRS sends the debtor a “Notice and Demand for Payment” or a Tax Bill after assessing the tax.
Suppose an individual ignores or denies paying the outstanding balance. In that case, the IRS will warn them of the consequences and send advance notification of “Third Party Contact,” notifying them that the IRS will contact third parties to collect the outstanding payment.
If the debtor still doesn’t pay the taxes, the IRS will send a “Final Notice of Intent to Levy” and a “Notice of Your Right to a Hearing” 30 days before the official levy.
After 30 days, the levy will take place, and the debtor will not be excused from it.
How Can One Avoid a Levy?
Prevention is the answer to avoiding a levy. It is better to take action beforehand, so an individual must file their tax returns correctly and pay the taxes on due time to avoid a levy.
If an individual cannot pay the total tax amount, they should immediately contact the IRS and settle on an installment plan. They can also apply for an extension to file tax returns.
What Does a Bank Levy Mean?
A bank issues a levy on the debtor’s accounts to collect the payable amount. This levy gives the bank authorization to freeze a debtor’s bank account until the debt is paid. But, the bank must notify the debtor beforehand about the levy to provide an opportunity for debt settlement.
How Are Tax, Levy, and Duty Different?
Tax, levy, and duty are all interrelated but have differences.
Tax: The government collects tax from an individual or a business. It is a compulsory payment that goes to the benefit of federal or state revenue. Moreover, the government solely conducts taxes for the country’s developmental purposes.
Duty: The tax charged on the price of services and goods is known as duty. Although it is also a government-imposed tax, it is solely taken when someone buys something. VAT is an example of the term.
Levy: Levy is a mandatory payment to an organization or the government if someone has an outstanding debt for a long time. Unlike tax and duty, a bank or a non-governmental institution can issue a levy. It results in the forceful confiscation of assets from the debtor to pay off the debt.
How Is a Levy Different From a Garnishment?
A garnishment and a levy are methods for creditors to settle the debtor’s owed amount of money by taking it from their accounts. Although both of them are tools for debt collection, they work differently.
Levy gives the right to the creditors to freeze the debtor’s account and compensate for the payable amount until it is fully covered. During this period, the debtor will not be able to access the account, and any amount deposited will also be taken away.
Garnishment allows the creditor to take a small percentage of the debtor’s salary each month, which the employer will deduct and forward to the creditor. In this method, creditors can’t take more than 25% of the monthly paycheck of the debtor.