What is a Bank Levy and How it Works
- Bank levies can be used by creditors to access bank account funds to collect on a debtor’s outstanding tax debt.
- When a creditor requests a bank levy, your account will immediately be frozen – and you may not be notified.
- A money judgment is a court-issued document indicating limits on how much a creditor can seize from a debtor’s bank accounts.
- Judgment creditors can try to collect on unpaid debts through wage garnishments, tax liens, and writs.
- The best way to remove a bank levy is to pay your tax debt or settle with the IRS.
- When an individual accumulates unpaid taxes, a bank levy can be used by creditors to legally seize funds from the debtor’s bank account to pay off the unpaid debt, such as from an unsecured loan or a medical bill.
How do Bank Levies work?
Bank levies allows creditors to access your bank account funds. Your bank will freeze funds in your account and require the bank to send this money to creditors to pay your debt.
To request funds from your bank account from a creditor, you must send a request to your bank proving there is a legal judgment against you. Some government creditors like the Internal Revenue Service (IRS) don’t require a court judgment.
Here are some things you must know:
Warning: After your creditor requests it, your bank will immediately freeze your account and examine the situation – and you may not be notified. Financial institutions can provide contact information to the creditor if you aren’t sure who is levied on your account.
Dispute options: You should be able to contest a levy. You can stop creditors from taking money out of your account or reduce it. Lenders can take your account and make it difficult to pay for essential expenses if you don’t act. You could end up paying late fees to other organizations and bouncing your checks. Your bank may charge you fees to process the levy.
Bank levies are usually followed by less formal collection attempts like collection calls. To levy an account, most lenders need to file a lawsuit against your account to obtain court approval. If the creditor is successful, the court will issue a money judgment stating how much you owe. This is your best and most important opportunity to dispute the amount owed.
A money judgment allows the lender to collect in a variety of ways, including levying your accounts. The state law will dictate how the lender can collect money from your account and determine if there are limits on how much they can take and exempt funds. Creditors must have all the legal documentation required to levy an account, including the money judgment and any other required state law documents. For example, some states require a separate writ for execution (like a court or judge) that identifies the accounts to be levied.
The bank will immediately freeze the account if the creditor gives the bank the levy documents. This will stop all withdrawals. The lender will only allow you to withdraw funds if you have more money than you owe. The freeze will remain in effect for approximately 21 days. The levy may be too severe for you, so banks might charge you fees to process it.
Bank levies can remain on an account until the debt has been paid or the levy lifted. A levy may be used multiple times on the same account. Creditors can retry the debt as many times as necessary if they don’t have sufficient funds on their first attempt.
You must pay off the entire debt or prove funds in the account are exempt from the levy to remove or lift the levies.
Tax Levies vs. Tax Liens
A tax levy is different from a tax lien in that a lien is security in support of tax debt, whereas a levy is a process of actually taking property used to satisfy a tax liability. If you have unpaid debt, and you have not made arrangements to pay that debt, the IRS may seize any of the following:
If the IRS determines you are available to be levied, this method is usually only issued after certain requirements are met by the IRS.
You Received A Notice And Demand For Payment
You Refused Or Neglected To Pay Your Tax Bill
You Received An Intent To Levy And Failed To Respond Within 30 Days
Other Ways Judgment Creditors Can Try To Collect On Tax Debt
A judgment creditor may also levy your bank account to collect outstanding debts, and although this levy gives the lender access to large amounts of cash, each state has its own rules about what it can and cannot take, as well as the ways you can protect yourself. Some examples include:
Creditors may use a wage garnishment and levy a percentage of an employee’s wage. Before garnishing your wages, lenders will need to obtain the appropriate legal documents from a court. An employer might have to give back a portion of your wages if they do. Federal and state laws determine the maximum amount that can be garnished. It is often set at 25%. It may vary depending on the type of debt and the applicable state law.
Mortgage lending can also forbid the sale of real estate. They can put a lien on your house and force you to sell it (called foreclosure sales) or pay you when you sell it. The proceeds of the sale are used to “lift” the lien. To force a sale, the mortgage lender must jump through many hoops. You may be able to protect your home from foreclosure.
A writ can be obtained from a court to seize personal properties. A writ allows a sheriff, or another public official, to enter your home or business to seize assets (such as cash registers, boats, jewelry, etc.). In certain circumstances, they can take your vehicle. The proceeds can be applied to the debt by selling the property at a public auction. This is called a “writ to enter”. However, not all property can be taken. It can help to understand what types of personal property are exempt from a judgment and which personal property can be taken.
Lenders have many options when it comes to collecting unpaid debt, including seizing and selling personal property and foreclosing the real property. These situations may lead to debt collectors offering to negotiate a repayment plan with you or writing off the debt as uncollectible. There may be other options, such as defenses against collection efforts.
How tax levies could affect you
These are some possible outcomes if you get hit with IRS bank levies.
Wage garnishment: Your paycheck could shrink when your employer withdraws a percentage of your earnings each payday.
Frozen bank accounts: For recouping taxes, your bank can place a 21-day hold on your account. The bank might send part or all of your money to IRS if you don’t reach an agreement with them.
Your house may be at risk. The IRS states it cannot seize unemployment benefits and certain annuity and pension benefits, certain disability payments, workers’ compensation, public assistance payments, or child support payments. Undeliverable mail, certain items needed for school or work, as well as certain furniture and household goods, are all out of reach.
How to stop a bank account levy?
There are many ways you can stop the IRS from taking your assets that almost always involve filing all tax returns. These are the most common arrangements the IRS debt forgiveness program will accept:
Pay your tax bill
This is the best way to stop a tax levied if you have the funds to do so. Some taxpayers borrow money from family or friends to make the full payment. You may be able to find a loan at a lower interest than what the IRS charges for penalties or interest. This will allow you to pay your back taxes fully.
An installment agreement allows you to make monthly payments to pay your taxes over time. You must complete the installments within 84 months or less. The interest will continue to accrue but the IRS will reduce the penalty for failure to pay by 50% if you make timely payments. Taxpayers must request the tax levy cease once an installment agreement has been reached.
Partial Payment Installment Agreement
Like regular installment agreements, you only pay what you can afford monthly. The IRS will assess your financial situation to determine how much you can afford monthly. Most cases will see the end of the collection.
Offer in Compromise
For those who meet the stringent financial eligibility requirements, the Internal Revenue Service will allow you to pay less tax than you owe, and you can then pay it off. The IRS will usually accept a compromise offer if there is no alternative way to obtain more money.
Innocent Spouse Relief
This type of tax settlement is rare as spouses are usually liable for taxes returns filed jointly, but if you can show you are innocent and not responsible for the tax, you might be eligible for relief.
CNC Status: Currently Not Collectible
If you are unable to pay the IRS or meet basic living standards the IRS may place you in a CNC status. Most cases will end collection activities once you are in this status, however, interest and penalties will continue to accrue.
Prove tax identity theft
This happens when someone takes your identity and requests a refund by using incorrect deductions or credits. In certain situations, the employer may not withhold taxes, but someone could steal your identity to get 1099 income and W2 wages. You should request proof of identity theft if this is the case.
It is also good to find the source of funds. It is possible creditors might not have access to the money depending on how it was obtained. Financial institutions will determine if your account balance includes protected funds. If you have deposits from multiple sources, it can make things more complicated. This special treatment is available to:
Benefits such as Social Security payments and federal employee pensions are usually protected. You don’t get the same protection if your federal government owes money as if it owed money to a private creditor.
Money received from child support payments could also be exempted from the collection. If you are behind on payments, it might be easier for your ex to tap your bank accounts.
How To Defend Against a Bank Levy?
You can limit or prevent IRS levies from being applied to your account. Talk to a professional tax attorney same as Ideal Tax to learn about your options (laws differ from one state to the next). There are several options:
You can challenge the levy to stop the creditor from moving forward if you have already paid the outstanding debt or the amount is incorrect, or if bank levies on accounts aren’t listed in the writ.
An old debt
Your creditor may not be able to collect from your account if the statute of limitations has expired. However, it could depend on where you live, and the law of the specific state mentioned in the credit agreement.
If you were not properly served by your creditor, it may be possible for you to stop any future legal proceedings against them.
Filing bankruptcy could temporarily halt the process.
You might try to negotiate with your creditors so you have some control over the situation if the process causes “immediate economic hardship.”
Get Legal Help
It is important to seek advice from an attorney in your area if you are facing legal problems in regard to your taxes and personal finance. Many laws vary from one state to the next, and they change all the time. Each situation is different. Appealing bank levies is a complex process and you might need to present your case, so developing an attorney-client relationship can provide monumental help when creditors try to convince you that the funds in your account do not qualify for the exemption.
Ideal Tax can assist you if you need to deal with a tax levied related to filing a business tax return. Ideal Tax can help with a variety of tax and small business issues to find a solution such as the IRS fresh start initiative program. Whether you require an offer in compromise or an installment agreement, please contact us for a free consultation (888) 224-3004
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