IRS levies and wage garnishment: notices, release and return of property

What must happen before a levy

IRM 5.11.1.2 opens with a point that clears up a lot of confusion: “There is no legal distinction between levy and seizure.” A notice of levy (Form 668-A, 668-W or 668-R) is used to take property held by a third party that can be turned over by check, such as bank accounts, wages and receivables; seizure procedures under IRM 5.10 are used for property the taxpayer holds, such as a car or a house.

An administrative levy or seizure sells only the taxpayer's interest. When the government wants the whole of a co-owned asset, it must sue to foreclose the lien under IRC 7403, and the Supreme Court has held that the suit can reach a non-liable co-owner's share. In United States v. Rodgers, 461 U.S. 677 (1983), involving Texas homesteads owned with non-liable spouses, the Court held “that the statute does grant power to order the sale, but that its exercise is limited to some degree by equitable discretion.” The non-liable spouse is paid from the proceeds for the value of her interest, and the district court weighs the prejudice to the government from selling only a partial interest, the co-owner's expectation that the property would not be sold, the dislocation and undercompensation the co-owner faces, and the relative value of the two interests. The Court contrasted IRC 6331, which limits the administrative remedy to the taxpayer's own interest. Rodgers is therefore why an administrative seizure of a co-owned home can sell only the taxpayer's undivided interest, and why a referral to the Department of Justice for a lien foreclosure suit, rather than a Form 668-B seizure, is the step to watch for when the IRS wants the whole property sold.

In most cases IRM 5.11.1.3.2 requires four things before a levy:

The CDP notice can be issued after the levy for state income tax refund levies, jeopardy levies, disqualified employment tax levies and federal contractor levies (IRC 6330(f)). Restrictions also apply: no levy while an offer in compromise or installment agreement request is pending, for 30 days after rejection and during a timely appeal (IRC 6331(k)); while a timely CDP hearing is pending (IRC 6330(e)); or in violation of the bankruptcy automatic stay. A levy issued in violation of the Code or regulations, such as one issued while a CDP hearing is pending, must be released (IRM 5.11.2.3.1(4)). See the collection process and CDP hearings.

Bank levies

A bank levy reaches only the funds in the account when the levy is served, not later deposits (IRM 5.11.5.3). The bank holds the money before paying it over: per IRM 5.11.4, “Under IRC 6332(c) a bank must wait 21 calendar days after a levy is served before surrendering the funds in the account”, and on the next business day after the hold it must surrender the funds up to the amount of the levy. The depositor can waive the hold.

The 21 days is the window to act. During it the IRS can release the levy for any IRC 6343(a) reason, and a third party who owns the funds can raise a wrongful levy claim before the money moves. Once the IRS has the money, the remedy changes from release to return.

Joint accounts. A levy reaches a joint account in full if the taxpayer could withdraw the whole balance under state law, even though the other depositors contributed the money. In United States v. National Bank of Commerce, 472 U.S. 713 (1985), a bank refused to honor a levy on accounts the taxpayer held jointly with his wife and mother; the Supreme Court held the IRS had the right to levy because the taxpayer's unrestricted right to withdraw was “property” or a “right to property” under IRC 6331, and the bank had only two defenses under IRC 6332: that it held no property of the taxpayer, or that the property was subject to a prior judicial attachment or execution. “The IRS acquires whatever rights the taxpayer himself possesses.” Competing ownership claims are not a defense for the bank because the levy “does not determine whether the Government's rights to the seized property are superior to those of other claimants”; the co-owner asserts ownership afterward through the wrongful levy procedures described below. The practical sequence for a non-liable co-owner is a call to the revenue officer or ACS during the 21-day hold with proof of whose money it is, then an administrative wrongful levy claim or suit if the funds are paid over. The same state-law-then-federal-law analysis governs the lien; see federal tax liens for Drye and Craft.

Wage levies and the exempt amount

Wage levies are different. IRM 5.11.5.3: “Unlike other levies, a levy on a taxpayer's wages and salary has a continuous effect.” Under IRC 6331(e) the levy continues from the date it is first made until released. Wages include fees, bonuses and commissions; the IRM directs use of Form 668-W to capture real estate agents' commissions through the brokerage. Payments the taxpayer has a fixed right to receive, such as royalties on published books and retirement income, are also reached going forward.

Part of each paycheck is exempt under IRC 6334(a)(9) and (d). The IRS sends Form 668-W with a Statement of Dependents and Filing Status and Publication 1494, Tables for Figuring Amount Exempt From Levy on Wages, Salary, and Other Income (IRM 5.11.5.4.1). The amount is based on the taxpayer's standard deduction and dependents, prorated for the pay period (IRM 5.11.5.4). The employer gives the statement to the employee to complete within three days: “If it is not received by then, the exempt amount is figured as if the taxpayer is married filing separate with no dependents (zero).” The taxpayer can submit a new statement later to recompute it, for example after a change in filing status or dependents. Court-ordered child support entered before the levy is also exempt, if it is actually being paid (IRM 5.11.5.4).

When the IRS must release a levy

IRC 6343(a)(1) says the IRS “shall release” a levy on all or part of the property if:

IRM 5.11.2.3.1 tells employees to move quickly: “Release the notice of levy as soon as one of the circumstances in this section is identified to prevent payments from being received after the notice of levy should have been released.” Its example is a wage levy that leaves a taxpayer unable to pay for basic necessities; the levy is released at once so the employer does not send the next payment. IRC 6343(a)(2) requires an expedited determination for tangible business property essential to carrying on the business.

Economic hardship. Hardship means the levy leaves the individual unable to pay reasonable basic living expenses (IRM 5.11.2.3.1.4). The IRS will want a collection information statement, sometimes taken over the phone. “In order to obtain a release of levy for economic hardship the taxpayer must act in good faith”, which the IRM says excludes failing to disclose assets, inflating expenses and falsifying information. The IRM's example: a taxpayer whose only income is Social Security, deposited in the levied account, who shows an eviction notice for the same amount, gets the levy released. Hardship release often leads to currently not collectible status; for wage levies, IRC 6343(e) requires release “upon agreement with the taxpayer that the tax is not collectible”.

Release does not end the debt or bar a later levy on the same property (IRC 6343(a)(3)).

Getting levied money back

There are two return provisions, for two different people.

Third parties: wrongful levy, IRC 6343(b). When the IRS levies property that belongs to someone other than the taxpayer, it may return the property, the money levied, or the sale proceeds. Specific property can be returned at any time; money must be requested within two years of the levy for levies on or after March 23, 2017 (nine months for earlier levies) (IRM 5.11.2.3.2.1). Interest is paid at the overpayment rate (IRC 6343(c)). After the IRS has the funds, the third party files an administrative claim with Advisory under Publication 4528 (IRM 5.1.9.4(3)); a wrongful levy suit under IRC 7426 is the judicial route, and it is the only one. In EC Term of Years Trust v. United States, 550 U.S. 429 (2007), a trust whose bank account was levied for its creators' taxes missed the wrongful levy deadline, then sued for a refund under 28 USC 1346(a)(1), which allows roughly four years. The Supreme Court held that “Section 7426(a)(1) provides the exclusive remedy for third-party wrongful levy claims,” reasoning that a precisely drawn statute preempts more general remedies and that otherwise third parties “could effortlessly evade §7426(a)(1)'s much shorter limitations period.” The period at issue in that case was nine months; for levies made after December 22, 2017, IRC 6532(c)(1) as amended by Pub. L. 115-97 allows two years from the date of the levy, and an administrative claim filed within that time extends it by the shorter of twelve months from the claim or six months from the IRS's disallowance (IRC 6532(c)(2)). A third party who lets the two years run has no refund suit to fall back on.

Taxpayers: IRC 6343(d). The IRS may return levied property to the taxpayer, without interest, if the levy was premature or not in accordance with procedures, the taxpayer entered an installment agreement (unless it provides otherwise), return will facilitate collection, or return is in the best interests of the taxpayer and the government with the consent of the taxpayer or the National Taxpayer Advocate. The discretionary nature matters: IRM 5.11.2.4.1 gives the example of a levy mailed to the wrong address of a company that forwarded it, and says it is within IRS discretion to treat the error as trivial. IRM 5.11.2.4.2 lists factors such as the significance of the error, whether the levy would have been released had all facts been known, and whether the taxpayer is a pyramiding trust fund repeater.

Return is not discretionary when the levy broke the law. IRM 5.11.2.4.1(3): “Erroneous levy proceeds will be returned to the taxpayer if the levy is in violation of the law per Treas. Reg. 301.6343-3(d).” The IRM's examples are a levy made without the IRC 6330 hearing notice and a levy made while an offer in compromise was pending. Returned retirement plan funds can be recontributed under IRC 6343(f) by the due date of the return for the year of the return, and are treated as a rollover.

Appeal routes

A levy can be appealed through the Collection Appeals Program whether or not CDP rights exist (IRM 5.11.1.2.1). There is no CAP deadline in most cases, but seizure appeals must be made within 10 business days of the notice of seizure, and timing still matters: IRM 5.1.9.4.2 notes that “The taxpayer cannot appeal a levy after the IRS has already received the levy payment.” At that point the taxpayer files a claim for return and can appeal a denial through CAP. Denials of IRC 6343(b) and (d) return requests are both CAP-appealable (IRM 5.1.9.4(1)).

When a client calls about a levy

1. Get the levy notice and the transcripts. Confirm the CDP notice date and whether a hearing or equivalent hearing window is still open (CDP deadline calculator). For a pending CDP hearing or offer, a levy may be invalid outright.
2. Identify the type. A bank levy has a 21-day hold; a wage levy will keep taking money every pay period until released.
3. Pick the release ground: installment agreement, hardship, facilitation, satisfaction, or excess value. Call the number on the levy or the assigned revenue officer with a Form 2848 on file.
4. For hardship, prepare a collection information statement with proof of the emergency (eviction, utility shut-off, medical bills). See collection information statements.
5. For a wage levy that will stay in place, have the client complete the 668-W statement of dependents promptly and resubmit when circumstances change.
6. If money has already been paid over, evaluate a return request under IRC 6343(d) or, for a third party, a wrongful levy claim within two years.
7. If Collection refuses, request a manager conference and CAP, or use the CDP or equivalent hearing if available.

Questions practitioners ask