Levy: What It Is and How It's Used

What Is a Levy?

A levy is the legal seizure of property to satisfy an outstanding debt. Individuals who fail to pay taxes may be penalized by levies on tax refunds or property by the Internal Revenue Service (IRS). Tax authorities can also levy other assets, such as bank accounts, rental income, or retirement accounts.

Types of Levies

Levies can be exercised by a tax authority, such as a state treasury, the Internal Revenue Service (IRS), or a bank.

Tax Levy

In the U.S., the IRS can levy an individual's property to satisfy a tax debt. Property that can be levied includes real property like cash in a bank account, a house, a car, or a boat. The Internal Revenue Code (IRC) authorizes levies for delinquent tax payments to the federal government. The IRS must assess the tax and send a Notice and Demand for Payment to an individual owing federal taxes.

If the individual neglects or refuses to pay the tax, the IRS will send a "Final Notice - Notice of Intent to Levy and Your Right to A Hearing." This is typically sent at least 30 days before the levy and can be given in person, dropped at the tax debtor's home or place of business, or mailed to the individual's last known address.

A state tax levy applies to unpaid state taxes. The IRS can levy a debtor’s state tax refund and receive a "Notice of Levy on Your State Tax Refund and a Notice of Your Right to Hearing" after the levy.

Bank Levy

A creditor must obtain a court judgment against a debtor to issue a bank levy. The bank levy freezes the debtor's accounts until outstanding debt is repaid in full. If the levy is not lifted, the creditor can take the money from the bank account and apply it to the total debt owed.Banks may charge a fee to their customers for processing a levy on their accounts.

A bank levy can occur due to unpaid taxes or unpaid personal debt. Some accounts, such as Social Security Income, Supplemental Security Income, Veteran’s Benefits, and child support payments, cannot be levied. Unlike private debt from credit cards, debt owed to the federal government, such as student loan debt or delinquent taxes, does not require a court order to levy an individual's bank account. Agencies like the IRS generally provide notice of delinquency and allow the taxpayer to resolve the issue before securing a levy.

In the United Kingdom, the term "bank levy" also refers to taxes assessed on financial institutions due to the higher risk they pose to the economy at large.

Climate Based Levy

A green levy is a tax on greenhouse gases or other sources of pollution. These levies are intended to incentivize environmentally-friendly behaviors by raising the costs of polluting businesses. Carbon taxes are among the most common green levies. Taxes on greenhouse gases are commonly assessed as an emissions tax or a tax on goods or services that are greenhouse gas-intensive, such as gasoline.

Mill Levy

A mill levy or mill tax is a property tax based on the assessed value of real estate and used by local governments to allocate funding for school districts or parks. Every year, each property in the district is valued by a tax assessor, and taxation is based on a percentage.

Garnishments and Liens

The IRS and private creditors may use garnishment. A levy allows creditors to withdraw money from a bank account, but a garnishment redirects a portion of an individual's wages or income to repay a debt.Both garnishments and levies are available to private creditors and the government.

Federal agencies like the IRS do not need a court order to levy or garnish assets. Garnishments are frequently used to pursue defaulted loans or delinquent child support. Debtors may be entitled to some relief if the garnishment would cause them financial hardship.

A levy differs from a lien because a levy takes the property to satisfy the tax debt, whereas a lien is a claim used as security for the tax debt. A lien secures the government’s interest or claim to an individual’s or business’s property while the tax debt remains unpaid, and a levy permits the government to seize and sell the property to pay the tax debt.

The IRS may impose a federal tax lien to inform other creditors of the taxing authority’s legal right to a taxpayer’s assets and property. If the taxes remain unpaid, the tax authority can use a tax levy to legally seize the taxpayer's assets to collect the money owed.A tax lien once remained on a credit report for up to 15 years, but tax liens are no longer listed on credit reports as of April 2018.

Avoiding Levies

Taxpayers should file returns on time and pay taxes when they are due. Individuals can request an extension or contact the IRS and arrange to pay the balance in installments. Debtors may be able to set up a payment plan or settle tax debt for less than the amount owed. Those who receive an IRS bill titled "Final Notice - Notice of Intent to Levy and Your Right to A Hearing" should contact the IRS.

IRS Errors

The IRS may reimburse a taxpayer for bank charges caused by erroneous levies by submitting Form 8546, Claim for Reimbursement of Bank Charges, to the IRS address on the taxpayer's copy of the levy. To be eligible to recover bank charges from the IRS, all of the following conditions must be satisfied:

• The IRS must have caused the error.
• The taxpayer must not have contributed to continuing or compounding the error.
• Before the levy, the taxpayer must have responded promptly and provided the information requested to establish the taxpayer's position.

The Bottom Line

Levies are used by a taxing authority or a bank to seize property for an outstanding, unpaid debt. Property can include cash, cars, houses, and wages. A levy differs from a lien because a lien only represents the claim used as security for the debt. A garnishment directs an employer to move part of an individual's salary to a creditor.