When you have unsettled tax debt, the Internal Revenue Service (IRS) has the legal obligation to follow you up and claim the money. Sometimes, it may mean compelling your employer to hold a part of your wages until the debt is cleared. This is what happens during an IRS wage levy, also known as IRS wage garnishment. The problem with it is that it does more harm than deny you your hard-earned money. An IRS wage levy is a public notice that can be accessed by creditors anytime they want to.
According to the IRS’s website, “An IRS levy permits the legal seizure of your property to satisfy a tax debt. It can garnish wages, take money in your bank or other financial account, seize and sell your vehicle(s), real estate and other personal property.”
IRS Wage Levy and Your Credit
Generally, not all wage levy cases are reported to credit bureaus. Most wage garnishments are not reported and so the information remains with the IRS. If they decide to report you, then there’s the possibility that your credit reputation may be affected. Here are some of the things to expect:
- Poor credit score – Even if you decide to pay off your tax debt today, your credit score doesn’t improve immediately. On the contrary, you may have to wait for a while. Dealing with a poor credit score has huge impacts on your credit applications.
- Loan rejection by Lenders– Since you already have a bad credit reputation, lenders will not feel secure giving you’re a loan. So, you’ll have a very hard time trying to find one. They are in the finance business to make money and so they expect to have their money back with interests. This forces them to grant loans to only reliable individuals who have proven a history of paying back.
- Loan rejection by the employer – Though your employer knows that they can deduct your wages to pay what they have loaned you; they may feel insecure giving you a loan when you have been served with an IRS wage levy. The levy shows that you can’t be trusted to pay back your dues.
We’ve already covered poor credit score and loan rejection as major risks attached to an IRS wage levy. Others include:
- Job security – Legally, you can’t lose your job because of an IRS wage levy. However, it doesn’t stop your employer from using a different excuse to fire you.
- Stain on employment records – Having an IRs wage levy is a public issue. The information is likely to turn up in your employment records if someone decides to dig up your past. So, there’s always the chance that your job opportunities may be limited in the future because of a wage garnishment history.
- Hefty penalties – In addition to paying your outstanding tax debt, you also have to worry about paying hefty interests that keep on accumulating every month.
How Long an IRS Wage Levy Lasts
As of today, the IRS can garnish at least 25% of your wages. This may leave you with so little to pay your bills and support your family. But before a wage garnishment takes effect, your employer has to be informed about your outstanding tax debt. You simply can’t take it against them if they hold a part of your income as they are legally obliged to do so.
You are expected to continue enduring the pay cut until your outstanding tax debt plus the accumulated interests are paid back. Ordinarily, the IRS sends you a couple of notices demanding payments for your outstanding tax debt before resorting to this route. It’s when you ignore their notices that they decide to involve your employer.
Ways to Release it
The positive thing about an IRS wage levy is that you can have it released. Here are some practical ways to go about it:
- Pay in full – If you can, find some money to pay the taxman off. You can sell a property or procure a loan from somewhere. All you have to do is find a legal way to raise the amount that the taxman is asking. Once the garnish is released, you can think of ways to pay the loan back or replace your property.
- A compromise offer – Just because the IRS is demanding a certain amount doesn’t mean that they can’t settle for less. If you are struggling financially and you could only afford a certain lower amount, you can apply for an Offer in Compromise (OIC). It allows you to clear your tax debt for less and have the IRS wage levy stopped.
- Pay in installments – If you can’t pay the taxman in full, you should consider paying them in installments. Although this option comes with the burden of paying high interests, it’s a flexible way to clear the debt and stop the garnishment. Even if your credit score is not impressive but you have been compliant in your recent tax filings, the taxman can agree to this payment plan.
- Declare poverty – In case the IRS wage garnishment has made it difficult to cater for your basic family needs, then you should consider pleading poverty. It’s generally advisable to talk to a tax relief professional about this if you decide to take the route to get more information on how to go it. If the IRS is convinced, they may hold off the garnishment for some time until your financial status improves.
- Find a new employer – This may appear like cheating the taxman but it can temporarily prevent wage garnishment. Before the taxman can follow you at your new job to apply for a fresh tax levy, it could take several months or a year. By then, you would have made plans to have your tax debt cleared and wage garnishment plans by the IRS stopped.
- Insolvency – This should come as your last resort. Pleading insolvent or bankrupt can be ugly but can also be the only way to stop an IRS wage levy. One major downside of this option is that it doesn’t clear your tax debt but only stops the tax levy for some time. The other downside is that your finances and assets may be exposed to unlimited scrutiny by the IRS.
As an employee, the last thing you would want to deal with is an IRS wage levy. It’s detrimental to your finances and more importantly, it damages your credit score. You should try to avoid it by paying your taxes promptly. In case you are served with the notice, need to contact the professionals at Tax Crisis Institute. Our team of experts has decades of experience in handling tax crises like these!