IRS Levy Release Overview
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IRS Levy Release Overview

Business Entity Selection and the Tax Consequences of Converting

IRS Levy Release Overview

The IRS it seems is issuing liens and levies with substantial gusto lately. I’ve grown reasonably skilled at getting these burdens timely released and felt compelled this evening to share some of my experiences in this blog post.

A levy on a bank account attaches only to funds in your account at the time the bank processes the levy, future deposits are not subject to the levy. Usually banks offer a 21-day hold on your account before turning over funds to the US Treasury to provide an opportunity for you to get the levy released. If you may be at risk of a levy you should be duly notified and it is best to be nimble as it were with bank accounts referencing your social security number.

A levy on wages is continuous and impacts every paycheck you receive until it is released. IRC 6334(a)(9) provides for an amount of wages that are protected from levy. With the notice of levy, the IRS will provide your employer with a Statement of Exemption and Filing Status as part of IRS Form 668-W(c)(DO). The amount of exemptions are found in IRS Publication 1494.

Sometimes letting the levy stand with a claim of exemptions provides a better result than incurring the expense of getting a negotiated levy release. This is measured in terms of your time or the $$ needed to hire an Enrolled Agent to negotiate on your behalf. 

Levies are also immediately released upon the filing of a bankruptcy petition. If the IRS does not release a levy upon filing for bankruptcy call the IRS Centralized Insolvency Unit at 800-973-0424.  No further paperwork should be required, but then again it is the IRS.  The bankruptcy filing also temporarily precludes the IRS from filing future federal tax liens.

If you owe $25,000 or less to the IRS, you may qualify for a streamlined installment agreement to release a levy which requires little financial disclosure. These agreements can be completed over the phone with an IRS Automated Collection Officer if he or she isn’t a complete idiot. Don’t be surprised though, some of them are so stupid it makes my head spin. Sometimes it is worthy of consideration to pay down the amount owed to $25,000 or under so as to qualify to get the quick levy release and avoid financial disclosures.

A streamlined installment agreement does not require IRS managerial approval; there is no application of the IRS living expense allowances; and, asset disclosure is avoided. The IRS will however require all delinquent returns be filed before releasing the levy unless you are claiming economic hardship.

The filing of an offer in compromise or innocent spouse claim can also result in a levy release without negotiation. The IRS is required by law to suspend collection efforts when either a compromise or an innocent spouse claim is filed.

The Internal Revenue Manual provides for the allowance of all your reported living expenses if an installment agreement can pay off the liability in full within five years according to IRM If more than $25,000 is owed and there is not enough cash flow to repay the taxes in five years, IRM permits allowing the excess living expenses for one year.

In the Tax Court case of Vinatieri v. Commissioner, 133 TC 392 (2009) the Court held that IRC Sec. 6343(a)(1)(D), which provides for release of an IRS levy upon the finding of economic hardship, had no requirement that delinquent tax returns had to be brought into compliance as a condition of release. The court also found that the IRS was unreasonable in deciding to pursue levy action in an economic hardship case, regardless of the compliance issues. If the IRS refuses to recognize Vinatieri, reference the fact that IRS chief counsel acquiesced with the Vinatieri decision as it relates to unfiled returns and economic hardship according to Chief Counsel Notice 2011-005.

If you do not fall into one of the above categories you need to prepare a statement of financial position on either IRS Form 433-A, 433-B, 433-D, or 433-F and be prepared to negotiate a reasonable collection potential. This is for lack of a better phrase a royal pain in the proverbial hinder because it can be woefully time consuming to gather all the necessary substantiating documentation.

It really is best to consult a professional with experience to help shepherd you through this process as it can be frustrating and anxiety prone. Reputable practitioners with experience will tell you up front if the levy can be released and if so exactly what needs to be done to make it happen. Plan on about 10 hours worth or work or less.  Most practitioners working in this area bill their services out for about $150/hour.