If you have been struggling to pay the bills or your taxes, you may receive a notice that a garnishment or levy has been placed on your wages or bank account. Even if you make every effort to pay your back taxes, your circumstances may make paying your taxes difficult, such as a job loss or a business downturn.
The IRS has the authority to place a garnishment or levy if it can prove you owe the agency money. To help you understand garnishments and levies, we cover the differences between the two.
What Are Levies and Garnishments?
Garnishments and levies both allow creditors to obtain payments from your paycheck or bank accounts.
What Is a Levy?
A tax levy or bank levy refers to the process in which the IRS seizes the money in your bank account. After the IRS sends your bank the notice of the bank levy, you cannot withdraw money. The IRS can seize all of the funds in your account up to the amount you owe in back taxes, interest and penalties. Though you may be able to stop the levy by negotiating with the IRS, your safest option may be working with an experienced tax professional.
The following are examples of creditors that can issue a bank levy:
- The IRS
- Child support recipients
- The Department of Education
- Private creditors like credit companies, mortgage lenders and bank lenders
If you do not dispute the levy, the IRS can legally take all the funds from your account, which can affect your ability to cover everyday expenses or save for a goal.
What Is a Garnishment?
Wage garnishment refers to an IRS order for your employer or bank to withhold a percentage of your earnings, assets or the funds in your bank account to pay off your back taxes. While other creditors must initiate the process of wage garnishment by filing a lawsuit against you, the IRS does not need a court order to garnish your wages for federal taxes owed. The IRS will, however, send you a written notice that outlines the proposed wage garnishment before proceeding.
Wage Levy vs. Garnishment
Wage levies and garnishments are both tools used to collect funds to cover a tax liability. Because both are used as collection tools, taxpayers can find it confusing to distinguish between the two. When you owe back taxes or a bill, the IRS or creditors can take steps to collect the funds to cover what you owe.
The key difference is that a garnishment is used to allow creditors to contact your employer and take part of your wages from your paycheck, while a levy permits a creditor to withdraw funds from your bank account directly. With a garnishment, your employer sends this portion of your paycheck to the creditor, who then applies to the amount you owe.
With a levy, a creditor can take funds from your savings or checking account, which typically means your account is frozen. The creditor will then continue taking payments from the account until removing the levy when the amount owed is recovered in full.
What Are the Limits on Garnishments and Levies?
There are limits regarding both garnishments and levies.
Limits on Garnishments
There are limits on the amount of your earnings that creditors can garnish. The amount of your pay that can be subject to garnishment depends on your disposable earnings, which is how much of your earnings are left after required deductions are made.
For alimony or child support, up to 50% of your disposable earnings can be garnished if you are also supporting an additional child or spouse. If not, up to 60% of your disposable earnings can be subject to garnishment. These limits on garnishments do not apply to federal or state back taxes, however.
Limits on Levies
In the case of a levy, some of your wages may be sent to the IRS every pay period. This will continue until one of the following situations occurs:
- The levy is released.
- You pay the amount of taxes you owe.
- You set up an arrangement with the IRS to pay your back taxes in another way.
A portion of your wages may be exempt, and this exempt amount may be paid to you. How much will be exempt from the levy will be detailed in Publication 1494 that the IRS mails to your employer.
Types of Income Exempt From Garnishment or Tax Levy
Under federal and state law, certain types of income are protected from garnishments or levies from creditors. After you receive a notice regarding a garnishment or levy, you should get paperwork that allows you to claim an exemption. For example, if you object to your levy, and the court grants this exemption, your financial institution should protect these exempted amounts.
Some examples of protected funds may include:
- Child support
- Student financial aid
- Social Security benefits
- Unemployment benefits
- Pension or retirement amounts
- Welfare benefits like SNAP or TANF
- Workers’ compensation disability payments
Part of your personal property may also be protected from a levy. Keep in mind that a creditor may still be able to place a levy on funds that do not meet the exemption.
Impact of Filing for Bankruptcy on Levies and Garnishments
Filing for bankruptcy can mean you immediately get relief from an automatic stay. Creditors must stop collection activities after your attorney informs them that you filed for bankruptcy. This means the creditor should end garnishments, lift bank levies, and stop emailing, calling or sending letters. If the creditor continues with their collection efforts, they could face penalties.
Typically, federal bankruptcy law protects your car, house and household up to a certain value when the court grants your bankruptcy petition.
Contact Us at Polston Tax for Assistance
At Polston Tax, we aim to resolve tax debts, liens, levies and IRS or state audits. We can help prepare your tax return, and if you are a business owner, we’ll assist with your business accounting and solve the issues you don’t have the time to deal with. Our services include:
- Accounting and bookkeeping
- Tax planning and preparation
- State tax debt resolution
- IRS tax debt resolution
- Audit representation
When it comes to solving tax liability cases, we take a team approach, so when you hire us, you get the advantage of having an entire team to support you. Contact us at Polston Tax or call 844-841-9857 today to learn more about our services for wage levies and garnishments.
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