What is a Levy?
A levy is the legal seizure of property to satisfy an outstanding debt. In the U.S., the Internal Revenue Service (IRS) has the authority to levy an individual’s property, such as a car, boat, house. Property belonging to the individual that is held by someone else, including wages, retirement accounts, dividends, bank accounts, licenses, rental income, accounts receivables, commissions or the cash loan value of a life insurance policy can also be levied.
The Internal Revenue Code (IRC) authorizes levies to collect delinquent tax. However, certain procedures must be followed and requirements met before enforcing a levy. In the U.S., for example, the Internal Revenue Service (IRS) must first assess the tax and send a Notice and Demand for Payment (a tax bill) to an individual owing federal taxes. If the individual still neglects or refuses to pay the tax, the IRS will send a Final Notice of Intent to Levy and Notice of Your Right to a Hearing (levy notice). This is typically sent at least 30 days prior to 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.
As a measure of last resort, the taxing authority may impose a federal tax lien to inform other creditors of the taxing authority’s legal right to a taxpayer’s assets and property. A tax lien goes up on the debtor’s credit report and remains there for 10 years. If the taxes remain unpaid, the tax authority can use a tax levy to legally seize the taxpayer’s assets (such as bank accounts, investment accounts, automobiles, and real property) to collect the money it is owed. The IRS is also authorized to garnish the taxpayer’s wages until the debt is paid off
A state tax levy applies to unpaid state taxes. Note that the IRS can also levy a debtor’s state tax refund, in which case, s/he may receive a Notice of Levy on Your State Tax Refund, Notice of Your Right to Hearing after the levy.
In some cases, the IRS can seize the taxpayer’s property without notice. This could occur if the taxing authority believes that the debtor is a flight risk or that s/he is dissipating assets by moving them outside the country or transferring them to other persons. For federal contractors, the IRS does not need to provide any notification of the levy until after the tax levy is applied.
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. In other words, while a lien secures the government’s interest or claim in an individual’s or business’ property when the tax debt remains unpaid, a levy actually permits the government to seize and sell the property to pay the tax debt.
A creditor that obtains a court judgment against a debtor may be able to have the court issue a bank levy. The bank levy freezes the bank account(s) of the debtor until all the 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. A bank levy is not a one-time event. A creditor can request a bank levy as many times as needed until the debt has been satisfied. In addition, most banks charge a fee to their customers for processing a levy on their account.
A bank levy can occur due to either unpaid taxes or unpaid debt. Some types of accounts, such as Social Security Income, Supplemental Security Income, Veteran’s Benefits, and child support payments, generally cannot be levied. However, a debtor who owes money to the federal government would not have as much protection as he would if he owed a private creditor.