When you fail to pay your taxes, either intentionally or non-intentionally, you expose yourself to collection actions by the IRS. They can use different approaches to collect what you owe the government. Of course, the type of collection approach depends on your tax debt. So often, the IRS opt for either wage levy or wage lien. These two terms are used to describe legal means that the IRS employs to collect backed taxes. However, they are very different from each other and affect different people. Let’s understand them comprehensively.
What’s Wage Levy?
This is a direct way for the IRS to collect back taxes from the employee. It’ also known as Wage Garnishing and it happens when the government obliges the employer to hold and pass a part of the employee’s wages to the IRS as an aim of recovering the tax debt that the employee owes. It’s a forceful action that has a tremendous impact on the employee’s earnings. Since the money is gotten directly from the employee’s paycheck, the employer is legally obliged to notify the employee about the deductions.
What’s Wage Lien?
When the IRS establishes that the employer has not paid wages to employees, they take it tax evasion. The first thing that they do is send the employer a legal notice indicating the offense. The employer is required to pay the tax debt in full before the indicated due date. Failure to oblige means that the IRS needs to take action. They may attach a special document (called lien) to the employer’s asset indicating that the government has some right on them. Basically, the IRS can claim proceeds from the employer’s property as a strategy to collect back taxes. It’s meant to force the employer to pay the unpaid wages to the employee and this includes unpaid taxes.
Things to Know About the Two
As mentioned, these two terms differ in a number of ways. However, they also share some similarities. Let’s look at the basics.
- Things Affected
The IRS can bring lien actions against the employer with reference to the following:
- Fixed properties such as a building or business land.
- Personal properties (collectibles) like vehicles and machines.
In this case, the IRS can either seizes the property or claims proceedings from these assets until the lien is withdrawn or the employer pays up.
In the case of a wage levy, the IRS can garnish the following:
- Employee’s Pension
- Employee’s retirement income
- Employee’s wages
- Employee’s bonuses
- Employee’s commissions
However, there are a few exemptions when it comes to wage garnishing. For example, the government may not garnish the earnings of a worker if they have recently served time in prison (applies to the last 6 months). Other exemptions include:
- When the worker is receiving government aids in the form of food stamps, energy assistance or supplemental assistance.
- In the case of child support
- A case of bankruptcy
- Steps Followed in Issuing the Notice
In the case of a wage lien, the IRS may file the notice at a local court and it’s put on the public records. Upon filing the record, the government gets right to the employer’s property and not any other person. This means that creditors will have to be notified of the developments. However, it takes time before a wage lien is recorded. Usually, the following steps are involved:
- The first notice – It’s meant to inform the employer about possible unpaid wages and taxes.
- Lien establishment – It’s sent to give the employer 30 days to appeal the lien or else pay up.
- Lien recording – The lien is attached to the employer’s property and the information becomes public record.
In the case of a wage levy, the IRS issues three different types of notices. Namely:
- Notice of Tax Payment Demand
- Notice of Intent to Levy
- Notice of Collection
Basically, the first notice is followed by the second and the third one comes last. There’s usually a time gap between them. What all these notices have in common are a noticeable number and a date.
- What’s Expected When Served with the Notice
In the case of a wage levy, the employer is expected to file a levy disclosure electronically within 10 days of receiving the notice. Then, he or she should continue paying up the tax debt on behalf of the employee until the levy is withdrawn. Normally, the limit amount for wage levy is 25% of the wages that the employee receives.
With respect to the wage lien, the employee is supposed to pay up the tax debt in full. However, there’s always a chance to either appeal or seek for a comfortable payment pal.
- How to Avoid Legal Actions
Usually, the IRS requires you to pay your tax debt before any of the legal action is withdrawn. Even after paying up, it may take up to 30 days for the withdrawal to be released. If you can’t pay up, here are the options to consider:
- A payment plan – You need to talk to them if you are looking to stop them from taking any legal action against you. You need to discuss a possible tax payment plan that’ll help you clear your debt. Ask for an extension. It’s usually for 20 days. If the extension plan is not ideal, you should ask for an installment plan. By agreeing to the streamlined agreement, you can be able to pay the debt in small installments over a period of 6 years.
- Make an appeal – There are several ways to appeal the decision when you are not ready to pay the tax debt in full. Normally, you have 30 days from the time of receiving the intent to Levy Notice to file an appeal. The aim of the appeal is to ask for a hearing. So, the IRS cannot take legal action against you until the hearing is complete. In the case of a wage lien, you can apply for a withdrawal to remove it. You’ll need legal help with this.
- File for possible hardship – You can claim hardship to avoid either action. However, you have to back this by proof. You should show your income and expenses.
- How They Affect You
Both the wage levy and the wage lien have serious implications. For example, the lien could:
- Stain your creditworthiness
- Jeopardize home refinancing or selling rights as you may be forced to use a part of your home equity to offset the tax debt
As for a wage levy, it can affect you in the following ways:
- Shrinks your paycheck
- Freezes your individual bank account
- May mean losing your house
Cleary, there’s so much to know about wage levy and wage lien. What they have in common however is the power to affect you financially. Let the experts at Tax Crisis Institute help you in your time of need!