Many people ask the same question time after time: why does the IRS use bank levies? This is a great question, and one that has one main answer. The IRS uses levies as a way of collecting money to satisfy a tax debt. You may feel that this is a bit harsh, but the IRS does not move forward with a bank levy until they give the taxpayer several warnings and chances to get back on track. An IRS bank levy is typically a last resort action used by the IRS and they will only do this if they feel they have pursued all other options and they have all failed.
Contrary to popular belief, a bank levy is different than a lien. With a bank levy the IRS actually takes property to satisfy the tax debt. A lien is a claim used as security for the debt.
If you decide not to pay your taxes the IRS has the right to seize and sell any type of property in order to collect what is owed to them. A couple of examples include:
1. Levying property that is yours but is held by somebody else. This includes retirement accounts, wages, bank accounts, rental income, and accounts receivable among others.
2. Seize and sell property that you currently hold including car, home, boat, etc.
But why does the IRS have to go as far as taking property from people? Again, the reason for this is simple: the taxpayer did not pay the money they owe after being repeatedly reminded by the IRS. A bank levy is not something the IRS uses the day after they realize that a taxpayer owes money. Instead, they send out several notices letting them know how much money is owed and what they can do about it.
Most taxpayers get in the situation of a bank levy because they cannot pay their taxes. Even if the taxpayer cannot pay their taxes they can resolve their taxes and prevent a levy from ever going into effect by working with the IRS on a resolution. Below are a few possibilities to avoid an IRS bank levy if taxes cannot be paid.
1. Pay the IRS in Full: If you do not have the money to pay the IRS you can consider selling some assets that you own, refinancing your home, or borrowing from family or friends. Borrowing from family or friends should be seen as a last resort option and really should only be used if you know you can pay them back in the very near future.
2. Enter into a payment plan: A payment plan will allow you to pay back your taxes owed in monthly increments. This is one of the most commonly used solutions to individuals that cannot afford to pay their taxes in full. If you enter into an installment agreement you will still be responsible for paying interest on the amount owed and also some other minor penalties, but you will be considered in good standing with the IRS as long as you can keep up on your monthly payments.
3. Settle your taxes owed: If you are really in a bad financial situation it is a possible that you may qualify for a tax settlement. The most common tax settlement is an offer in compromise. With an offer in compromise the IRS allows the taxpayer to settle their taxes for less than the total amount owed. Qualifying for an offer in compromise is difficult process because you are required to prove to the IRS that the amount you are settling for is equal to or greater than the amount they would ever expect to collect from you, even through an IRS bank levy.
The IRS would much rather collect in a traditional manner, but some taxpayers make this difficult. To collect what is owed by those who are bucking the system, the IRS has the right to issue a bank levy and take money direct for the taxpayer's bank account.