All About Levies: Legal Seizures Explained

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A levy is the legal seizure of property to satisfy an unpaid debt. In U.S. tax collection, it is the step where the Internal Revenue Service (IRS) or a state tax agency stops asking for payment and takes the money or assets itself: funds in a bank account, part of a paycheck, a tax refund, a vehicle or real estate. The word has a second, older meaning in taxation: to levy a tax is to impose it, as when Congress levies an income tax or a county levies a property tax. Context tells you which sense applies. A “notice of levy” means seizure. A “property tax levy” means an amount imposed.

What a levy means

As a collection tool (noun or verb): a levy is a seizure. The IRS “levies” a bank account when it orders the bank to freeze and turn over funds. The property is applied to the debt, or sold with the proceeds applied to it.

As a taxing power (verb): to levy is to impose a tax, fee or duty, as a legislature or school district does. “Taxes and levies” in a budget or on a bill usually means charges imposed by an authority. In accounting, an amount “levied” is one formally charged or assessed.

How an IRS tax levy works

The Internal Revenue Code authorizes the IRS to levy for delinquent federal taxes, and it sets out a sequence the agency follows:

1. Assessment. The IRS assesses the tax, formally recording the amount owed.
2. Notice and Demand for Payment. The taxpayer receives a bill for the assessed amount.
3. Failure to pay. The taxpayer neglects or refuses to pay.
4. Final notice. The IRS sends a “Final Notice, Notice of Intent to Levy and Your Right to a Hearing.” This is typically sent at least 30 days before the levy. It can be handed over in person, left at the taxpayer’s home or business, or mailed to the last known address.
5. Levy. If the debt is still unresolved, the IRS serves a levy on the property or on whoever holds it, such as a bank or employer.

The hearing referenced in the final notice is the taxpayer’s chance to challenge the proposed collection or propose an alternative before property is seized. For a federal levy on a state tax refund, the order differs: the IRS can take the refund first and then send a “Notice of Levy on Your State Tax Refund and a Notice of Your Right to Hearing” afterward.

State tax agencies run their own levy programs for unpaid state taxes under state law, and the notice steps and timelines vary by state.

What can be levied

The IRS can seize property the taxpayer holds directly, such as a house, car or boat. It can also levy property held by third parties on the taxpayer’s behalf, including:

• Wages, commissions and other compensation
• Bank account balances
• Retirement accounts
• Dividends
• Rental income
• Accounts receivable
• The cash loan value of a life insurance policy
• Licenses

A wage levy works differently from a bank levy. Instead of capturing one balance on one date, it directs the employer to send part of each paycheck to the IRS until the debt is paid or the levy is released.

What is protected

Not everything is reachable. Supplemental Security Income, child support payments and certain veterans’ benefits are protected from bank levies in many situations. Social Security retirement benefits are not fully shielded from the IRS: under its federal payment levy program, the agency can take up to 15% of Social Security benefits. Private debt collectors face stricter limits on federal benefits than the IRS does.

Bank levies

A bank levy freezes money in a debtor’s account so a creditor can collect it. Who can start one, and how, depends on the type of debt:

• Private creditors (credit cards, personal loans, medical bills) must first win a court judgment, then ask the court to direct the bank to freeze and turn over funds.
• Federal agencies collecting debts such as delinquent taxes or defaulted federal student loans need no court order. They generally send delinquency notices and give the debtor a chance to resolve the debt before levying.

Once a levy is served, the bank freezes the funds it covers. If the levy is not lifted, the money goes to the creditor and is applied to the debt. For an IRS bank levy, the bank holds the frozen funds for 21 days before sending them, giving the taxpayer time to resolve the debt or show that the levy is wrong. The levy reaches only the balance on deposit when it is served, so later deposits are not captured unless a new levy is issued. Banks may also charge a fee for processing a levy.

Example of a bank levy

Hypothetical, for illustration only. Dana owes $6,000 in assessed federal income tax. She received the notice and demand, then the final notice of intent to levy, and did not respond or arrange payment. The IRS serves a levy on her bank on a day when her checking account holds $4,200.

• The bank freezes $4,200. Dana cannot spend it.
• During the 21-day holding period, Dana can contact the IRS to pay, set up an installment agreement or show an error.
• If nothing changes, the bank sends $4,200 to the IRS, reducing her balance to $1,800 plus any additional penalties and interest.
• A paycheck deposited the following week is not caught by that levy. The IRS could, however, issue another bank levy or a wage levy for the remaining $1,800.

Other kinds of levies

Because “levy” also means “impose,” several taxes carry the word in their names.

Mill levy

A mill levy (or mill tax) is a property tax rate expressed in mills. One mill equals one-tenth of a cent, or $1 of tax per $1,000 of assessed value. Local governments use mill levies to fund school districts, parks and other services. A tax assessor values each property in the district, typically every year, and the levy is applied to that assessed value.

Formula: Property tax = (Assessed value ÷ 1,000) × Mill rate

Hypothetical example: a home assessed at $250,000 in a district with a combined 40-mill levy owes ($250,000 ÷ 1,000) × 40 = $10,000. The assumption is that the levy applies to the full assessed value. Many jurisdictions apply it only to a taxable portion after assessment ratios or exemptions, which lowers the result.

Ad valorem levy

An ad valorem tax is levied according to value, which is what the Latin phrase means. It is assessed on property, usually real estate or a vehicle, so each owner’s share tracks the value of what they own. A mill levy is one way of expressing an ad valorem rate. Value-added tax is also charged as a percentage of value, but on transactions rather than on property owned.

Green levy

A green levy is a tax on greenhouse gas emissions or other pollution, meant to make cleaner choices cheaper by comparison. Carbon taxes are a common form, charged either on emissions themselves or on greenhouse gas-intensive goods such as gasoline.

Bank levy in the United Kingdom

In the UK, “bank levy” also names a tax on banks themselves, charged because large financial institutions pose risks to the wider economy. It has nothing to do with seizing a customer’s account.

Levy vs. lien vs. garnishment

These three terms describe different stages and methods of debt collection:

A federal tax lien protects the government’s interest in a taxpayer’s property while the debt is unpaid and notifies other creditors of that claim. It makes the property harder to sell or refinance. If the tax still goes unpaid, a levy is the step that actually collects.

Garnishment is available to both private creditors and the government and is often used for defaulted loans and unpaid child support. An IRS wage levy functions much like a garnishment, and federal agencies need no court order to levy or garnish. Debtors may qualify for relief if a garnishment would cause financial hardship.

Tax liens used to appear on credit reports for up to 15 years. Since April 2018, the major credit bureaus no longer include tax liens on credit reports.

How to avoid or release a levy

When taxes cannot be filed or paid on time, the options include:

• Requesting an extension to file, which buys time for the return but does not extend the time to pay.
• Setting up an installment agreement to pay the balance over time.
• Settling the debt for less than the full amount through an offer in compromise, if the taxpayer qualifies.
• Responding to the final notice. Anyone who receives a Final Notice, Notice of Intent to Levy should contact the IRS rather than wait. The notice also carries the right to request a hearing.

If a levy is already in place, the IRS may release it when the seizure creates an economic hardship, meaning it prevents the taxpayer from meeting basic living expenses. Paying the debt in full also ends a levy. Access to a frozen account is restored if the taxpayer shows that the levy resulted from the creditor’s error or from identity theft.

When the IRS makes a mistake

If an erroneous IRS levy causes bank charges, the taxpayer can seek reimbursement by filing Form 8546, Claim for Reimbursement of Bank Charges, sent to the IRS address shown on the taxpayer’s copy of the levy. All of these conditions must be met:

• The IRS caused the error.
• The taxpayer did not contribute to continuing or compounding the error.
• Before the levy, the taxpayer responded promptly and provided the information the IRS requested to establish their position.

Limitations of a levy

A levy reaches only what the law allows. Protected benefits, the 15% cap on IRS levies of Social Security and the court-judgment requirement for private creditors all restrict what can be taken, and a single bank levy captures only one point-in-time balance. Those protections are narrower than many debtors expect, though. The IRS faces no limit on how many levies it can issue, so a levy that falls short of the debt can be followed by others, with penalties and interest still accruing. Rules in other countries differ.

The Bottom Line

Anyone with unpaid federal or state taxes should treat a final notice of intent to levy as a deadline to act. Contacting the IRS, requesting a hearing, or arranging an installment agreement or offer in compromise can stop a seizure before it happens. Once a levy is in place, relief is limited to hardship, full payment or proof of error, and the IRS can keep issuing new levies.