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IRS Wage Garnishments

Find Out Your Rights and Learn How the IRS Will Handle Your Wage Levy

A wage levy is the same as a wage garnishment. 

Here is information taken directly from the IRS's Internal Revenue Manual (IRM). The IRM is the IRS's book of instructions for handling levies. 

Levy on Wages, Salary, and Other Income:

• 1   Introduction

• 2   Employer Threatens to Fire Taxpayer Because of a Levy

• 3   Continuous Effect of Levy

• 4   Exempt Amount

• 5   Levy Payments

1.   Introduction

1. An individual's wages, salary, and other income can be levied. Wages, salary and other income include payment for personal services in a work relationship.

2.   Employer Threatens to Fire Taxpayer Because of a Levy

1. Sometimes an employer threatens to fire an employee to avoid handling a levy. This might be a violation of 15 USC 1674.
2. If the employer fires the taxpayer because of this, the employer might be fined $1000. There may also be a one year prison term.
3. Refer the taxpayer to the Wage and Hour Division of the Department of Labor (DOL). DOL, not IRS, must decide if the employer violated the law.

3.   Continuous Effect of Levy

1. Unlike other levies, a levy on wages and salary has a continuous effect. It attaches future paychecks, until the levy is released. Wages and salary include fees, bonuses, and commissions. All other levies only attach property and rights to property that exist when the levy is served.

Example:

If a bank account is levied, it only reaches money in the account when the levy is served. It does not affect money deposited later.  

2. When other income is levied, the levy only reaches money the taxpayer has a fixed and determinable right to. Also see 6.1, about retirement and benefit income.

Example:

A levy is served to take an author's royalties. The author has a fixed and determinable right to royalties for books that have already been published. The levy reaches royalties for sales of those books in the future. The levy does not reach royalties for books that are written and published later. A new levy must be served to take those royalties.  

3. Also, see 5.11.6.11 when a levy is served on a non-liable spouse in a community property state.

4.   Exempt Amount

1. Part of the taxpayer's wages, salary, and other income is exempt from levy.
2. The weekly exempt amount is:

A.   The total of the taxpayer's standard deduction and the amount deductible for exemptions on an income tax return for the year the levy is served.  

B.   Then, this total is divided by 52.

3. Income that is not paid weekly is prorated, so the same amount is exempt.
4. In addition, the amount the taxpayer needs to pay court ordered child support is exempt. However, the order must be before the date of the levy.

Note:

The support order can be from a court or administrative process under the laws and procedures of a state, territory or possession.

Reminder:

If support is allowed, the same child can not be claimed as an exemption for figuring the exempt amount. See 5.11.5.4 (2)a.  

5.    The taxpayer is not entitled to the support exemption, unless the support is being paid.

• Consider getting the taxpayer to have the payment withheld and sent directly to the person with custody.

• Instead, the taxpayer may make the payment through the Service, which will forward the payment. When there is no open assignment, have the payments sent through Submission Processing. This may happen if the payments are being monitored in the service center.

Claiming the Exempt Amount

1.    The Notice of Levy on Wages, Salary, and Other Income includes a Statement of Exemptions and Filing Status. The employer gives this to the taxpayer to complete and return within three days. If it is not received by then, the amount is figured as if the person is married filing separate with one exemption. The taxpayer can give the statement to the employer later to change the exempt amount.

Note:

The employer needs to use this Statement rather than the employee's W–4. Taxpayers may claim different exemptions for withholding from those claimed on their return.

2.    Publication 1494 is sent with the levy to help figure the exempt amount.

3.    The taxpayer can give a new statement to the employer later to have the exempt amount computed again.

Example:

The taxpayer's filing status or personal exemptions may change.

Example:

There may be a change in exempt rates in a new year.

4.    The statement is completed under penalty of perjury. Generally, accept the information on the statement, unless there is reason to question it. If it is disallowed, notify the employer and the taxpayer in writing. The taxpayer can show evidence that the statement is right and ask for a manager's review.

Employers with Centralized Payrolls

1.    Some employers have a centralized payroll, so the payroll is not handled where most employees work.

2.    Consider mailing the Statement of Exemptions and Filing Status directly to the taxpayer. This avoids the delay of the employer re-mailing it.

A.   Send Part 1 of the levy and Notice 484 to the employer.

B.   Send the other parts of the levy and Notice 483 to the taxpayer.

Joint Liabilities

1.    For joint liabilities, generally, levy the income of the spouse with the larger income.

2.    Levy both incomes only in flagrant cases of neglect or refusal to pay. Get manager's approval to do this. If taxpayers are separated, consider collecting from the both spouses before allowing the entire amount to be paid by levy on one person's income.

3.    When both spouses' incomes are levied, neither spouse can claim the other one as a personal exemption.

Taxpayers with More Than One Source of Income

1.    Consider income from all sources when a taxpayer has more than one source.

2.     See Exhibit 5.11.5–1, for a copy of Letter 1697(P).

Taxpayer's Payroll Deductions

1.    A levy legally attaches the taxpayer's gross income minus the exempt amount. However, see Policy P–5–29. By policy, a levy only attaches the taxpayer's usual take home pay.

Exception:

Voluntary deductions can be disallowed, if they are so large they defeat the levy.

2.    Generally, allow the taxpayer to maintain deductions they already have when the levy is served. Notify the employer and the taxpayer of deductions that must stop while the levy is in effect. The taxpayer can ask for a manager's review of this.

Example:

The taxpayer has a deduction used to buy shares in a mutual fund.

3.    Generally, employers should not allow new voluntary deductions after receiving the levy. Exceptions can be allowed on a case by case basis, with the Service's approval.

Example:

The taxpayer cannot join the company insurance plan, until he is on the job six months. The levy is served before then. The amount of the premium is not unreasonable.

Severance Pay

1.    The taxpayer may leave a job and get severance pay.

Example:

Severance pay is one week's pay for each year on the job. A taxpayer on the job for ten years gets ten weeks' severance pay. The taxpayer gets a paycheck every two weeks for ten weeks. Two weeks' exempt amount is subtracted from each check, just like the person was still working for ten weeks.

Example:

The same facts as above, but the taxpayer gets the amount in one payment. The payment is attributable to ten weeks' pay. The employer is just making an "advance" payment, instead of writing a series of checks. The taxpayer gets ten weeks' exempt amount.

Example:

A taxpayer gets a lump sum that is not attributable to a period of time. This could be, for example, an incentive payment to retire early. The exempt amount is based on the taxpayer's regular pay period. If there is no regular pay period, use one week's exempt amount. Similarly, if the taxpayer gets $1000 for each year on the job, this is not attributable to pay periods. A person getting $10,000 for being on the job ten years does NOT get ten years' exempt amount.

2.  This assumes the person is not already getting the exempt amount for a pay period at the same time. If both are being received, the taxpayer does not get the exempt amount twice.

Example:

The taxpayer is paid for both the last pay period worked and severance on the last pay day. The taxpayer only gets the exempt amount once.

5. Levy Payments

Here are instructions for giving you credit for payments levied found in the IRS Internal Revenue Manual:

1. Credit levy payments on the date they are received. Apply the money in the most advantageous way to the government. Generally, apply it to the oldest assessment, first. The taxpayer can not designate how to apply the money, because this is not a voluntary payment.

Note:

Levy payments should only be applied to those periods listed on the original levy. If these periods have been satisfied, a levy release should be immediately prepared and issued to the levy source.

2. Use designated payment code (DPC) 05 for levy payments. Use DPC 15 for other payments caused by a levy, if they are not levy proceeds.

Example:

A wage levy prompts the taxpayer to pay the amount owed, to get the levy released. Code this payment with DPC 15.

3. Payments for these levies may be small. Decide if the amount owed should be paid from the levy proceeds. When the payments are small compared to the amount owed, though, consider other enforced collection.

A Quick Summary of Wage Garnishment

An IRS Wage Levy Is Often Called a Wage Garnishment - They are the same thing.

For wage earners and salaried employees, wage garnishments are a very effective IRS "collection activity".

What is an IRS Wage Garnishment (IRS Wage Levy)?

An IRS wage garnishment is an order from the government directing your employer to withhold a specified amount from your pay and send it to the IRS. The total wage garnishment can be up to 80% of your wages and continues every pay period until the back tax debt is paid in full.

The IRS includes with the Notice of Wage Garnishment a chart your employer must use to determine how much to garnish from your pay for the IRS. The actual amount of the IRS wage garnishment is determined by your pay rate, dependents, and frequency of pay. You can expect the IRS to garnish from 30 to 80 percent of your total wages. In addition to the loss of income for you it is a major headache for you employer and can seriously damage your work situation.

For additional information, please contact me.

Ralph Sayers, CPA

(877) 316-4331

ralphs@tampabay.rr.com