Tax Controversy & Resolution: Tax Debt Wage Garnishment
Stop Tax Debt Wage Garnishment
When the IRS or a state taxing authority has failed to collect back taxes, they may pursue alternative action and seize delinquent taxpayer assets. This action of property seizure is known as a “levy”. A levy enables tax authorities to legally seize bank accounts, payments from accounts receivable, control of property for auction, and assume title on personal property (e.g. equipment, vehicles, machinery).
Wage garnishments are another form of tax levy, though the seizure of assets from the delinquent taxpayer's ongoing wages. The Internal Revenue Code allows for continuous levies with respect to wages, salaries and certain other types of property. This means that a levy on wages / salaries continuously attaches until it is released. Examples of property continuously attached include, salary, wages, and deferred compensation payments (e.g. retirement or pension income).
However, wage garnishments may be removed through tax resolution and negotiation by developing a regular and approved installment plan with the IRS. Other alternatives to reduce, eliminate, or stop wage garnishments derived from tax issues are further outlined below. Stopping wage garnishment can ease additional burdens to your employer and create a payment plan considerably less than the original wage garnishment amounts.
The IRS Wage Garnishment Process
Before the IRS initiates a wage garnishment, the IRS will generally (1) assess the tax and provide the employee taxpayer a formal “Notice and Demand for Payment," (2) give the employee taxpayer an opportunity to pay the tax, and (3) send the employee taxpayer a “Final Notice of Intent to Levy and Notice of Your Right to A Hearing." This levy or garnishment notice generally provides the taxpayer at least 30 days to address the situation.
See IRS Publication 5.11.5 Levy on Wages, Salary, and Other Income for additional details.
IRS Garnishment & Consumer Credit Protection Act (CCPA) - Federal Protections (Tax Levy/Garnishment Exception)
The IRS generally will initially attempt to garnish a high portion of an employee’s wages to incentive the delinquent taxpayer to resolve the debt and enter an agreed repayment plan. The specific amount of earnings subject to garnishment depends on the taxpayer's tax filing status (single, married, filing jointly, etc.) and number of dependents listed on their tax return. See IRS chart (http://www.irs.gov/pub/irs-pdf/p1494.pdf) and IRS publication Publication 1494 for additional details.
Title III of the Consumer Credit Protection Act (CCPA) protects borrowers in all 50 states, in both federal and state court and all wage garnishments subject to the CCPA are limited (greater of 25% of an employee’s wages or 30 times minimum wage) in amount. The CCPA also provides restrictions on employers from terminating employees based on wage garnishments.
Regarding owed tax debts, the CCPA includes an exclusion from its protections for federal and state tax wage garnishments. However, each state does generally have its own protections against excessive wage garnishment which may be helpful against state tax wage garnishment collection efforts.
Options to Stop IRS Garnishment
Once a formal wage garnishment is formally brought by the IRS, an IRS wage garnishment release request will generally need to be brought by the taxpayer in order to begin the process to stop the garnishment. The IRS is generally required to release a levy based on the following:
Tax liability owe is fully paid;
Period for collection ended prior to the levy being issued;
Releasing the levy will help you pay your taxes;
Installment Agreement is entered and the terms stop the levy from continuance;
Levy creates an immediate economic hardship (IRS confirms the levy prevents taxpayer from meeting basic, reasonable living expenses); or
Value of levied property is greater than the amount owed and releasing the levy will not hinder the IRS to collect.
When the levy is paid in full and/or released, the IRS will issue a Form 668-D, Release of Levy/Release of Property from Levy. Note, generally the release of a tax levy does not eliminate the balance due. The taxpayer may still need to enter other arrangements with the IRS to fully resolve the tax debt or a levy may be reissued.
If the IRS denies the request to release the levy, the taxpayer may appeal the decision before or after the IRS places a levy on your assets and/or wages. Even after the levy assets have been sent to the IRS, the taxpayer may still file a claim to its assets returned. If the request for levy release is denied by the IRS, the taxpayer may also appeal the denial of the request to have levied property returned. For additional details on appeal rights held by taxpayers, see IRS Publication 1660, Collection Appeal Rights.
An Offer-in-Compromise (OIC) may also help stop IRS wage garnishment, if the taxpayer is unable to pay the tax debt owed, due to unforeseen issues and circumstances (medical bills, job loss). OIC often function as an settlement agreement to pay the IRS a lesser amount than the owed tax liability for full release. Requesting a Collection Due Process (CDP) Hearing with the Office of Appeals is another potential option for relief. Also, if a taxpayer can show that the tax liability legally belongs to someone else (e.g. ex-spouse), the taxpayer may be released from the liability belonging to the other party.
For Employers - Levy Against Employees, Vendors, Customers, or Other Third Parties
If a levy is received against your employee(s), vendor(s), customer(s), or other third party, the levy attaches to property or rights to property held by the employer, that belongs to the party levied against and the employer must generally provide such property held in custody to the IRS. The IRS generally uses the following forms to levy property based on its classification:
Form 668–W(ICS) or 668-W(C)DO to levy an individual's wages, salary (e.g. fees, bonuses, commissions) or other income;
Form 668-W(ICS) and/or 668-W(C)(DO) provides notice of levy on a taxpayer's benefit or retirement income; or
Form 668–A(C)DO to levy other property that a third party is holding (e.g. bank accounts and business receivables).
When served with a Form 668-W, the Notice of Levy on Wages, Salary and other Income, employers generally have at least one full pay period after receiving before they are required to send any funds from their employee’s wages to the IRS. During this period, the employee should work with the taxing authority to work out a repayment plan and have the levy or garnishment released.
For Employers - Administrative Wage Garnishment Calculator
For employers receiving an IRS Wage Garnishment notice, there is legal obligation on employers (refusal may create civil/criminal penalties) to withhold the employee’s wages and pay the appropriate amount to the IRS. In the case of a levy on wages, the employer will pay the employee any amounts exempt from levy. The IRS calculates the exempt amount based on the standard deduction and an “amount determined” calculated in part based on the number of dependents allowed for the year the levy is served. A levy generally includes a Statement of Dependents and Filing Status. If the statement is not timely completed by the employee, the exempt amount may be calculated with the employee's status as married filing separately with no dependents. The IRS will also generally notify the employer when the taxpayer is not entitled to levy exemptions.
If the employee being levied is scheduled to receive a bonus separately from their paycheck, the IRS may attempt to collect the entire bonus toward repayment since the exempt wage amount is based on the time-period the employees wages and bonus are paid. For wage levy purposes, the term salary / wages includes compensation for services paid in the form of fees, commissions, bonuses, and similar income items.
Regarding child support payments and exempt employee wages, if the employer did not include child support as exempt amounts, the employee being levied may contact the IRS to release from levy the child support payment pursuant to a court order, executed before the levy was received by the employer. If support is allowed, the same child may not be claimed as an exemption for figuring the exempt amount.
If a wage levy continues from one calendar year to the next, the employee may submit a new Statement of Dependents and Filing Status and ask their employer to re-compute the exempt amount.
See IRS “Administrative Wage Garnishment Calculator" (irs.gov/irm/part5/irm_05-011-005.html).
Banks and Other Tax Levies
When a tax levy attaches to a bank, credit union, or similar account, the Internal Revenue Code will generally provide a 21-day waiting period before the banking institution must comply with the levy. This 21-day period provides the taxpayer time to work with the IRS to arrange a repayment plan or contest the levy.
Generally, IRS levies and notices are delivered through U.S. mail. The date and time of delivery (receipt) of the levy notice determines the specific date and time the funds in the account are frozen. However, generally the levy may not affect funds deposited to the account after the date of the levy.
If a release of levy from the IRS is not received within 21-days of receipt of the levy, the funds in the account as of the date and time the levy was received must be sent to the IRS.
Contacting a tax professional is the best option for quickly resolving tax issues with applicable taxation authorities effectively. Although Levies and wage garnishment can force taxpayers into willful compliance, AndreTaxCo can help your claim to release your wages from garnishment and/or possibly stop the levy in the most cost-effective manner.