What Is an IRS Levy and When Does It Happen?

What is an IRS levy

An IRS levy is the legal seizure of property to satisfy a tax debt. When the IRS levies, it takes your property—money from your bank account, a portion of your wages, or in some cases, physical assets. This is the IRS's most powerful collection tool.

A levy is not a lien. Many people confuse these terms. A lien is a legal claim against your property that protects the government's interest. A levy is the actual taking of that property. The lien says "the IRS has a claim." The levy says "the IRS is taking it now."

The IRS has broad levy authority under Internal Revenue Code Section 6331. This authority extends to nearly all property and rights to property—bank accounts, wages, retirement accounts (with limitations), accounts receivable, rental income, dividends, licenses, and physical property.

Levy vs. lien — the difference

Understanding the distinction is critical:

The IRS can file a lien and also levy. They're not mutually exclusive—often both occur in active collection cases.

Legal requirements for levy

The IRS cannot levy without following specific procedural requirements. Under IRC Section 6331, three conditions must be met:

1. Assessment and Notice: The IRS assessed the tax and sent a Notice and Demand for Payment
2. Neglect or refusal to pay: The taxpayer did not pay after receiving the demand
3. Final Notice: The IRS sent a Final Notice of Intent to Levy at least 30 days before levy action

These are mandatory. A levy issued without proper notice or before the required waiting period is procedurally defective. Taxpayers can challenge improper levies through Collection Due Process hearings.

The notice sequence before levy

The IRS follows a escalating notice sequence before levy:

CP14 — Initial Balance Due Notice

First notice of unpaid tax after filing. Includes balance, penalties, and interest.

CP501 — Reminder Notice

First reminder that balance remains unpaid.

CP503 — Second Reminder

More urgent reminder. Warning of potential collection action.

CP504 — Intent to Seize (Levy) Notice

Warns that the IRS may seize state tax refunds and certain federal payments. This is a serious escalation.

Letter 1058 or LT11 — Final Notice of Intent to Levy

This is the critical notice. It's the IRS's final warning before levy action on bank accounts, wages, and other assets. It includes notice of your right to request a Collection Due Process (CDP) hearing within 30 days.

CP90 — Final Notice with CDP Rights

Similar to Letter 1058, notifies of intent to levy and Collection Due Process rights.

After the final notice, the IRS must wait 30 days before levying. If you request a CDP hearing within that 30-day window, levy action is suspended until the hearing is resolved.

What assets can be levied

The IRS has authority to levy nearly all property and rights to property, including:

• Bank accounts: Checking, savings, money market, CDs
• Wages and salary: Continuous garnishment until debt is paid
• Accounts receivable: Money owed to you by customers or clients
• Social Security benefits: Up to 15% can be levied
• Retirement accounts: IRAs and 401(k)s (with certain limitations)
• Dividends and interest: From investments
• Rental income: Payments from tenants
• Cash value of life insurance: Amounts that can be borrowed against
• Commissions: Earned compensation
• Vehicles: Cars, boats, motorcycles
• Real estate: With special procedures and court approval in some cases

Property exempt from levy

Certain property is protected from levy:

• Necessary clothing and schoolbooks
• Fuel, provisions, furniture, and personal effects up to $10,000 in value
• Books and tools necessary for trade, business, or profession up to $5,000
• Unemployment benefits
• Certain public assistance payments
• Workers' compensation
• Child support payments
• Minimum weekly exempt wages (based on standard deduction and dependents)

Bank account levies

Bank levies are common and impactful. Here's how they work:

1. The IRS sends a levy notice to your bank
2. The bank immediately freezes funds up to the amount owed
3. The bank holds the funds for 21 days
4. After 21 days, the bank sends the frozen funds to the IRS

The 21-day holding period exists to give you time to resolve issues—whether the levy was sent in error, you've worked out a payment arrangement, or you need to claim exemptions. Once the 21 days pass, the money is sent to the IRS and is very difficult to recover.

Important: A bank levy is a one-time snapshot. It captures funds in your account at the moment the levy is received. If you deposit more money later, that's not covered—unless the IRS issues another levy. However, wage levies work differently.

Wage garnishment

An IRS wage levy is continuous—it remains in effect until the debt is satisfied, you arrange an alternative, or the IRS releases it.

When your employer receives a wage levy:

1. They must comply—failure to do so makes them liable for the tax
2. They send you a Statement of Exemptions form (Form 668-W)
3. You have three days to complete and return the form
4. Based on your exemptions, an amount is calculated as exempt from levy
5. Everything above the exempt amount goes to the IRS each pay period

The exempt amount is based on your standard deduction and number of dependents. For someone filing single with no dependents, the exempt amount is relatively small—often leaving most of the paycheck subject to levy.

How to stop or release a levy

Levies can be stopped or released in several ways:

• Full payment: Pay the entire balance owed
• Installment Agreement: Establish an approved payment plan
• Offer in Compromise: Settle for less than owed (if approved)
• Currently Not Collectible status: Demonstrate financial hardship
• Collection Due Process hearing: Challenge the levy procedurally
• Bankruptcy: Automatic stay halts most collection (with exceptions)
• Levy released in error: If the levy was procedurally improper
• Economic hardship: Demonstrate the levy prevents meeting basic living expenses

Act quickly. For bank levies, you have 21 days before funds are sent to the IRS. For wage levies, the garnishment continues until you take action.

Collection Due Process rights

Before levying, the IRS must notify you of your right to a Collection Due Process (CDP) hearing. This is a critical taxpayer protection.

At a CDP hearing, you can:

• Challenge whether you actually owe the tax
• Propose alternative collection methods (installment agreement, OIC)
• Raise procedural issues (improper notice, etc.)
• Request Currently Not Collectible status

You must request a CDP hearing within 30 days of the final notice. If you miss this deadline, you can request an equivalent hearing, but it doesn't stop collection while pending.

Once you request a CDP hearing, levy action is suspended until the hearing is completed. This gives you time to resolve the issue without immediate asset seizure.