If you owe back taxes and haven’t made a plan with the IRS to pay them, the IRS can levy your wages or bank account or record a lien against your property. This means the IRS can take money directly from your paycheck or bank account. You can stop a levy by setting up a payment plan with the IRS. If the tax debt meets certain requirements, you can also discharge it in Chapter 7 bankruptcy.
Written by Lawyer John Coble.
Updated March 31, 2022
If you have an unpaid tax debt with the Internal Revenue Service (IRS), you’ll get several warning letters. If you don’t reply and work out an installment payment plan or another option to deal with the back taxes, the IRS can levy your wages. This is more commonly known as wage garnishment. The IRS can also levy your bank account or record a tax lien against you.
In this article, we’ll cover how to know if you’re at risk of a wage levy, how much the IRS can take from your paycheck each pay period, and what options you have for debt relief.
The IRS Will Contact You Before It Takes Collections Action Against You
Before the IRS takes any collections actions, it must follow procedures to ensure yourcollections due process rights. That means the IRS can’t start garnishing your wages without warning to collect back taxes. You’ll receive IRS notices stating that you have a balance due. If you don’t reply or pay the balance, the IRS will eventually issue an LT 11 or Letter 1058. This letter lets you know the IRS plans to proceed with collection actions like a levy or lien unless you pay the balance due.
If you get a letter that says "Final Notice of Intent to Levy and Notice of Your Right to a Hearing" or something similar, you have 30 days to respond. You can respond by requesting a hearing or paying the debt. If you don’t respond within 30 days, the IRS can seize the funds in your bank accounts or garnish your wages.
If you’re experiencing financial hardship and can’t pay your back taxes, you may be tempted to ignore these letters. But it’s best to take control of the situation and contact the IRS to work out a plan to address the tax debt.
How Much of Your Wages Can the IRS Take?
The IRS can’t take your entire paycheck, but it isn’t limited by the federal law that governs other creditors and lenders that get wage garnishment court orders against borrowers. The IRS makes its own calculation for how much of your take-home pay can be garnished and how much of your income is exempt from garnishment. The calculation is based on the number of dependents you have, your filing status, and the standard deduction. You can find your exemption amount in the IRS’s exemption table.
For example, let’s say you’re a single mother of two filing as a head of household, and you’re paid biweekly. This means $1084.61 of your biweekly take-home pay is safe from the IRS levy. Any amount you make above that will be levied until:
You pay the back taxes in full.
You contact the IRS to make other payment arrangements.
You request a levy release.
If you make court-ordered child support payments directly instead of having your employer deduct these payments from your paycheck, it’s important to inform the IRS. In this case, the IRS will reduce your garnishment by the amount of your child support payments.
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How To Stop an IRS Garnishment
If you know you owe back taxes, but you can’t afford to pay them, you can stop a garnishment by applying for an installment agreement (payment plan) or an offer in compromise. If your paycheck or bank account is being levied, but you don’t agree that you owe back taxes, you disagree with the amount the IRS says you owe, or you believe the debt’s statute of limitations has expired, you’ll have a different set of options. You may even want to consider filing bankruptcy.
What if You Owe Back Taxes But Can’t Pay?
If you know you owe back taxes, but you don’t have the funds to pay them in full, the IRS has a few options to avoid a levy. You can:
Settle your IRS tax debt for less than you owe through an offer in compromise (OIC). You have to meet certain eligibility requirements for an OIC. For example, you have to be current on your tax returns and you can’t be in a bankruptcy proceeding. The IRS will also ask for information about your income, assets, and expenses to see if you qualify.
Taxpayers who can’t afford to pay anything can request currently not collectible (CNC) status. If the IRS grants your request, they’ll suspend their collections efforts. But your debt doesn’t go away. This often only provides temporary tax relief. If and when your financial situation improves, the IRS collections can begin again. Also, while this can provide temporary relief during a difficult financial situation, be aware that your back tax debt will increase while you’re in CNC status because of penalties and interest.
You can use these to stop a garnishment before it starts or after the levy has started, but you’ll need to contact the IRS if you’re already being levied.
What if You Don’t Agree You Owe Back Taxes?
If you already paid off the debt the IRS says you owe, you can file an appeal to have the levy released. If you don’t think the IRS calculated your tax liability correctly, you can request anaudit reconsideration. This essentially asks the IRS to reconsider how they calculated the taxes due. If the IRS is trying to collect on your spouse's tax debt, you may qualify forinnocent spouse relief.
Statute of Limitations for Tax Debt
The IRS’s statute of limitations for assessing taxes and for collecting taxes differ.
The IRS has three years to assess taxes against you. This is extended to six years if the gross income you put on your return is off by more than 25%. The statute begins on the date you filed the return or the return’s due date if you filed early.
There’s a 10-year statute of limitations for IRS collections. The collections statute of limitations begins to run on the assessment date. This is usually the date you file your taxes or sometime shortly after.
If one of these statutes of limitations has expired, you may have a defense to the IRS collecting the debt. There is no statute of limitations for assessments for fraudulent returns, false returns, or missing returns.
Will Filing Chapter 7 Bankruptcy Stop the IRS From Garnishing Your Wages?
Bankruptcy is a powerful tool for dealing with IRS wage garnishments and tax debt. Depending on your financial and tax situation and the type of bankruptcy you file, you cancompletely eliminate your tax debts or make the payments more manageable.
The Automatic Stay Protects You Temporarily
As soon as you file a bankruptcy case, you get protection from theautomatic stay. This stops most collections activity from creditors and debt collectors. But theBankruptcy Code lists some exceptions to the automatic stay for government tax authorities such as the IRS.
For example, the IRS can notify you of the amount it’s determined you owe and issue a demand for payment. This tax bill isn’t considered collections since it's the initial communication of the amount due. The IRS can also continue efforts to determine how much you owe through audits.
But, the IRS can’t attempt to get you to pay the tax debt by sending collection notices or through other means. If the IRS sends bills or makes collections calls, it’s a violation of the automatic stay. It’s also a violation of the automatic stay for the IRS to start or continue garnishing your wages or to record new notices of federal tax liens.
How To Determine if Your Tax Debt Is Dischargeable in Chapter 7
Bankruptcy can also eliminate an IRS garnishment by eliminating the debt the IRS is trying to collect through the bankruptcy discharge. There are three important issues to consider when determining if bankruptcy can discharge tax debt.
Is the tax an income tax? Income taxes are dischargeable in bankruptcy if they meet the 3/2/240 requirement.
Does the tax meet the 3/2/240 requirement? If your tax return was due more than three years before you filed your bankruptcy case and you filed the tax return more than two years before you filed your bankruptcy case, you’ve met the first part of this requirement. To meet the final requirement, the taxing authority must have assessed the tax at least 240 days ago. If all this is true, the tax is considered an unsecured debt and can be discharged in Chapter 7.
Is there a tax lien? Even if an income tax meets the 3/2/240 rule, the tax can’t be discharged in a Chapter 7 bankruptcy if the taxing authority has recorded a tax lien. Thefederal tax lien turns the tax debt into asecured debt, which can’t be discharged in a Chapter 7 bankruptcy.
What if the debt doesn’t meet the 3/2/240 requirement?
If the tax debt doesn’t meet the 3/2/240 requirement, it’s considered apriority debt and you must pay it. You can still file Chapter 7 bankruptcy to discharge other unsecured debt like credit cards or medical bills, which may help free up some money for you to pay off your tax debt. After your Chapter 7 bankruptcy is discharged, you’ll have to set up a payment plan with the IRS.
You still may be able to pay less than the full amount if you can negotiate an offer in compromise with the IRS. The automatic stay expires when the Chapter 7 bankruptcy discharge is entered, so act quickly to resolve the issue with the IRS after you get your Chapter 7 discharge.
How Are Tax Debts Handled in a Chapter 13 Bankruptcy?
If your tax debt is considered a priority debt or a secured debt, you can still address it through a Chapter 13 bankruptcy. Chapter 13 won’t discharge these debts outright, but it can help reorganize your debts into a more manageable 3-5 year repayment plan. If you have a tax lien, you can have the lien stripped in some rare cases. This turns a secured debt into an unsecured debt that can be discharged in bankruptcy.
A few courts allow you to strip a federal tax lien away from a tax debt in a Chapter 13 bankruptcy. Most courts don’t allow this, and since exemptions don’t apply to tax liens, it can be tricky to do so. You can hire an experienced bankruptcy attorney to help you do this if you think this may apply to you. This situation can get really complicated, so most filers get professional help.
Who You Can Turn To for Professional Help
If you have a tax garnishment and you need to know whether to negotiate with the tax authorities or file bankruptcy, it's best to find abankruptcy attorney that also handles tax cases. Most of these professionals offer free consultations. There are a few different types of tax professionals, including tax attorneys, certified public accountants, and enrolled agents.
If you already know that your case won’t benefit from bankruptcy, an enrolled agent may be the best choice to get your tax issue resolved. Enrolled agents are often former IRS agents, so they know the tax procedures well and have better contacts than most lawyers or accountants.
If you don’t pay back taxes, the IRS can levy your wages or bank account or record a lien against your property. The IRS is required to send notices prior to beginning a levy. You can prevent a levy by contacting the IRS and asking to get set up on a payment plan or to settle the debt with an offer in compromise. If you’re being levied but don’t believe you owe the tax debt, you can file an appeal or request an audit reconsideration.
In some cases, filing Chapter 7 bankruptcy can eliminate tax debt. The debt must be from unpaid income taxes and pass the 3/2/240 requirement. You can’t eliminate a tax lien in Chapter 7. If your tax debt doesn’t pass the 3/2/240 requirement, you may be able to repay it under a Chapter 13 bankruptcy plan.