There are various strategies for responding to a wage levy:
- Claim the highest exemption possible. Generally, the IRS will levy based on 1 exemption and single-filing status. A taxpayer who is married or has children may claim a higher exemption amount and a more favorable filing status. The amount the taxpayer pays for support established by court order is exempt from levy. If the taxpayer or the taxpayer’s spouse is at least 65 years old or blind, an additional standard deduction is available. Use Form 668-W.1
- Ask for a reduction of the levy based on economic hardship. If the levy will cause economic hardship, but the taxpayer can afford to pay a lesser amount, file for a reduced levy. The IRS will require the taxpayer to complete and sign a Form 433-A and list income, expenses, and assets.
- File or call for “Currently Not Collectible” (CNC) status if the taxpayer cannot afford to make any payments toward the tax liability after paying basic expenses and does not have an asset that can easily be liquidated to pay the liability. Many low-income taxpayers can be placed in CNC status if collection would cause undue hardship by leaving them unable to meet necessary living expenses. Basic living expenses include food, household items, rent or mortgage payments, a car note, gas, homeowners or car insurance, and funds for medications. The IRS website contains the list of standard costs for each of these expenses, which may be based on the number of people in the household or the parish in which the taxpayer lives. These costs are known as Collection Financial Standards. If your client’s expenses are higher than these standard amounts, you will have to submit documentation of the expense and argue that it is justified. The IRS will usually not expect taxpayers to sell their residence. The agency also allows one vehicle per taxpayer, and so a married couple with joint liability can keep two vehicles. This analysis may change if the home or vehicle has a lot of equity. The IRS may then require the taxpayer to obtain a mortgage if the taxpayer can afford to make the monthly payments and pay the liability with the loan proceeds. If a vehicle is very valuable, the IRS may require the taxpayer to sell it for a cheaper vehicle and give the IRS the difference. If the tax liability is less than $10,000, the attorney can request CNC status by calling the number on the collection form and providing the financial information. You may be asked to fax supporting documentation to the IRS agent. This could be Social Security award letters, paycheck stubs, bills, or recent bank statements. If the taxpayer owes more than $10,000 for all years of liability, the IRS will require a Form 433-A or 433-F that is signed by the taxpayer. This can be faxed to the IRS agent when you call in. The IRS must release a levy upon a determination of CNC status.2 The IRS agent may say that the taxpayer needs to file missing tax returns before the request for CNC status can be processed, but this is not true. The IRS may not deny a release for hardship because the taxpayer has failed to file tax returns.3 If an agent makes this demand, you should ask to speak with a manager. You may need to enlist the help of the Taxpayer Advocate Service if the IRS refuses to release a levy on the ground of the taxpayer’s failure to file returns. Although CNC status will stop most collection actions, the IRS can still file liens after CNC status has been approved, and it often does, which may be a consideration when seeking this remedy. The IRS can also still seize tax refunds for past liability even if the taxpayer is in CNC status.
- File a collection due process appeal on Form 12153 if you need more time to gather information or financial documentation. A collection due process appeal will generally stop the IRS from making a levy while the appeal is pending. Collection alternatives and other defenses can be pursued in a collection due process appeal.4
- Ask for a brief suspension of the levy if the taxpayer can pay the liability. The IRS has authority to suspend collection activity for up to 120 days for individuals to allow the taxpayer to gather the funds to pay the liability.5 This is often referred to as the “Fresh Start” program. Interest and penalties will not accrue during the 120-day period. If the taxpayer fails to pay the liability in full by the requested deadline, however, all accrued interest and penalties will be added to the amount owed.
- Submit a proposal for an Installment Agreement or Offer in Compromise. Levies are suspended while an Installment Agreement or Offer in Compromise is under consideration or in effect. The suspension continues if denial of the Installment Agreement or Offer in Compromise is appealed to an IRS appeals officer.
- 1See IRS Pub. 1494.
- 2I.R.C. § 6343(e).
- 3Vinatieri v. Comm’r, 133 TC. 392 (2010); IRS Notice CC-2011-005; I.R.M. 5.11.2.2.1, .19.1.7.1.5.
- 4The taxpayer has 30 days to appeal a levy to an IRS Appeals Officer. I.R.C. § 6330(b); 26 C.F.R. § 301.6330-1(b)(1). If a taxpayer timely requests an appeal, the IRS may not levy while the appeal is pending. I.R.C. § 6330(e). Use Form 12153 to appeal.
- 5I.R.M. 5.14.5.5.