What Is a Levy?
A levy is the legal act of seizing property to settle an outstanding debt. Individuals indebted to tax authorities may face levies on refunds, property, bank accounts, rental incomes, or retirement funds. Whether the task falls to institutions like the Internal Revenue Service (IRS) or banks, this mechanism ensures that dues are eventually collected.
Key Takeaways
- Levies grant tax authorities or banks the authority to seize property to resolve debt.
- Items that can be levied include cash, vehicles, real estate, and future wages.
- A levy actively seizes property to fulfill a debt, differentiating it from a lien which serves as a claim used for debt security.
- Garnishment is a distinct legal action where a court orders an employer to divert a portion of an individual’s wages to meet a debt.
Types of Levies
Levies can be imposed by tax authorities, financial institutions, or governmental agencies, targeting various forms of property and income.
Tax Levy
In the U.S., the IRS can levy assets to settle tax dues. Seizable properties include cash, houses, cars, boats, wages, retirement accounts, dividends, and rental income. After assessing taxes, the IRS sends a ‘Final Notice - Notice of Intent to Levy and Your Right to a Hearing,’ typically 30 days in advance.
If taxes remain unpaid after multiple notices, intangible assets like wages and bank accounts are not exempt. State tax levies function similarly, applying to unpaid state tax dues, including state tax refunds.
Bank Levy
Creditors must secure court authorization to levy bank accounts. This freezes accounts until debt repayment is completed. If not rectified, funds are extracted to offset the debt. A bank levy can be triggered by unpaid taxes or personal debt. Certain accounts, like Social Security Income and child support, cannot be levied. Federal debts like student loans bypass court orders, making levies imminent if debts are delinquent.
In the UK, ‘bank levy’ denotes taxes on financial bodies due to overarching economic risks they present.
Climate-Based Levy
Green levies aim to curb pollution by taxing greenhouse gases or similar deleterious activities. Carbon taxes are prevalent; their primary intent is to incentivize environmentally sustainable behaviors by raising the cost of pollution.
Mill Levy
The mill levy, also known as a mill tax, is a property tax based on real estate valuations. It funds local public services like schools and parks. Each property is annually assessed and taxed proportionately based on its value.
Garnishments and Liens
Both the IRS and private creditors utilize garnishments and liens for debt recovery. While a levy seizes funds directly, garnishments instruct employers to allocate portions of wages to creditors. Garnishments require court orders for private debts; however, prescriptive rules can vary for government-related debts.
Liens usually precede levies, indicating security claims over property pending debt payment. Once the payment remains unjustified, levies efficiently convert the claim into asset seizure.
Avoiding Levies
Timely tax filings and payments foster levy avoidance. Extensions or installment agreements can be arranged with the IRS for manageable debt settlements. Immediate contact with the IRS upon receiving a ‘Final Notice’ is crucial.
IRS Errors
Errors partially contribute to unjust levies; the IRS can compensate eligible taxpayers for errors via Form 8546, reclaimable for IRS blunders not worsened by taxpayer action.
The Sixteenth Amendment
This amendment empowers Congress to levay direct income taxes irrespective of population metrics. Established in 1909, it facilitates federal income tax calculations and collections, diversifying federal revenue sources previously reliant on customs and excise tariffs.
Preventing Bank Account Levies
Debt settlement nullifies prospective levies. Disputes proving erroneous levies or identity theft can restore access. IRS levies are indefinite, though limited to specific benefits like Social Security.
Ad Valorem Tax Levy
Ad Valorem taxes depend on property or vehicle valuations within local taxation departments. They support public services by distributing tax loads equitably based on value assessments.
The Bottom Line
Levies serve as powerful mechanisms for debt recovery, operational across a variety of property and income sources, uniquely structured versus liens or garnishments. Recognize their legal grounds and methods to avert or manage impending levies effectively.
Related Terms: Tax Lien, Garnishment, Property Seizure, Debt Collection, Income Tax, Bank Account Levy
References
- Internal Revenue Service. “Levy”.
- Consumer Financial Protection Bureau. “Can a Debt Collector Take My Social Security or VA Benefits”?
- Internal Revenue Service. “What Is a Levy?”
- U.S. Government Publishing Office, GovInfo. “Title 26—Internal Revenue Code”, Pages 3303-3304.
- Consumer Financial Protection Bureau. “Can a Debt Collector Take or Garnish My Wages or Benefits?”
- Internal Revenue Service. “5.11.4 Bank Levies”.
- Internal Revenue Service. “Information About Bank Levies”.
- Center for Climate and Energy Solutions. “Carbon Tax”.
- Experian. “What Is a Mill Rate and How Will It Affect My Home Costs?”
- Internal Revenue Service. “Information About Wage Levies”.
- Internal Revenue Service. “What if a Levy Is Causing a Hardship”.
- U.S. Department of Labor. “Fact Sheet #30: The Federal Wage Garnishment Law, Consumer Credit Protection Act’s Title III (CCPA)”.
- Experian. “What Is a Lien and How Does It Work?”
- Internal Revenue Service. “Understanding a Federal Tax Lien”.
- Consumer Financial Protection Bureau (CFPB). “A New Retrospective On the Removal of Public Records”.
- Experian. “Tax Liens Are No Longer a Part of Credit Reports”.
- Internal Revenue Service. “Additional Information on Payment Plans”.
- Internal Revenue Service. “Let Us Help You”.
- National Archives. “16th Amendment to the U.S. Constitution: Federal Income Tax (1913)”.
- Internal Revenue Service. “The Federal Levy Payment Program”. Page 2.
- Cornell University, Legal Information Institute. “Ad Valorem Tax”.
