Every year, the Internal Revenue Service (IRS) sends out nearly two million wage garnishment notices and notices to levy bank accounts. The President’s official 2016 Fiscal Year Budget boasted that the federal government had collected $56 million from wage garnishments alone in 2014.
Simply put, if you owe back taxes to the IRS and don’t respond to their payment notices or phone calls, you may be subject to an IRS wage garnishment. Wage garnishment, also referred to as wage attachment or wage levy, is a legal way for those who are owed a debt to withhold a specific sum from an employee’s wages to be paid directly to them.
Wages can be garnished by other agencies or even private parties, but IRS wage garnishments aren’t subject to the same rules and regulations as other wage garnishments. For one, no court order is required. In addition, the federal and state regulations pertaining to the amount of wages exempt from garnishment provide exceptions for IRS garnishments.
Key Insights and Overview to Understanding the IRS
Understanding key IRS myths, facts and processes empowers your ability to tackle garnishment issues. First and foremost, it is not illegal to owe taxes; but it is illegal not to file your tax return. And if you don’t file, the IRS will file for you, usually assessing vastly more taxes than you owe, then seek wage garnishment when you don’t or can’t pay. So file honestly and to the best of your ability and nip that issue in the bud.
Once you are tax delinquent, the IRS proceeds in three moves. Initially you get the bill, notifying you of what the IRS thinks you owe on what year or return, plus penalties and interest. This is followed by a second bill, tacking on additional interest and penalties. Finally you receive your last notice, after which the IRS yells “charge" if you will and unleashes their collection actions.
As the most aggressive collection agency in the country, the IRS means business. It collects by levying your property and garnishing your wages. The first reaches your house, car, boat, furniture, stocks, bonds, jewelry, bank accounts and the like. The second, which we analyze in this article, reaches your pay check through the wage garnishment process.
The IRS Wage Garnishment Process
First, the IRS will determine the amount that you owe in back taxes. After this is done you’ll receive several payment notices in the mail, and likely more than one phone call regarding payment of the debt. If you fail to respond to the notices and phone calls, a “Notice of Intent to Levy" will be sent. You have 30 days to contact the IRS about this notice before they will proceed to forward this notice to your employer. Once the notice is sent to your employer, you do get an additional two weeks to respond before the garnishment of your wages begins. If no response is received, your employer is required to adhere to the garnishment order and garnish your wages.
IRS Garnishment Rules
It’s typical for the IRS to garnish 70% or more of an employee’s wages, largely in an effort to convince the employee to contact them to resolve the debt. Other types of garnishments are subject to much smaller garnishment limits (typically around 25% of take-home pay) but the regulations regarding tax debt and IRS garnishments are different.
The exact amount of earnings that are exempt from garnishment depends on the garnishee’s tax filing status (single, married, filing jointly, etc.) and number of dependents listed on their tax return. The IRS uses a chart, found at http://www.irs.gov/pub/irs-pdf/p1494.pdf) to determine this amount, based on those factors as well as the employee’s pay periods.
For example, based on the above chart, for a single person who has no exemptions and is paid weekly, $182.69 of each paycheck is exempt from garnishment. Someone who’s married and filing jointly, has two dependents, and is paid biweekly would be required to be left with at least $730.77 per paycheck after the garnishment is applied. Additional exemptions can apply for those who are over age 65 or blind.
Administrative Wage Garnishment Calculator for Employers
If you are an employer who receives an IRS Wage Garnishment, you have a legal obligation to to withhold the employee’s wages and pay the appropriate amount over to the IRS in accordance with the law. Refusing to properly garnish an employee’s wages puts you, the employer, in the wrong, subject to civil penalties and potential criminal prosecution. The same is true for making side-deals to pay the employee under the table.
To help you do this, the IRS has provided employers with a handy “Administrative Wage Garnishment Calculator." This Calculator can be found online at irs.gov/irm/part5/irm_05-011-005.html.
How to Stop IRS Garnishment
In general, it’s much easier to prevent rather than stop an IRS wage garnishment. Thus, if you receive a notice from the IRS advising you of tax liability, it’s best to contact them as soon as possible to discuss payment arrangements.
Once a wage garnishment is in place, you’ll need to obtain an IRS Wage Garnishment Release to stop the garnishment. One way to obtain this release is to simply pay your back taxes that are owed. If you’re unable to pay these all at once, the IRS will arrange a payment plan with you, and once that’s in place, the garnishment should stop. Depending on the size of your debt, the IRS may require financial statements when arranging your payment plan.
Another option is to complete an Offer of Compromise. This is most useful when you’re simply unable to pay the amount owed, due to issues such as medical bills or a job loss, and is basically a settlement agreement whereby you agree to pay the IRS a smaller amount than what’s due for full release from the liability.
Also, if you can show that the tax liability belongs to someone else (such as an ex-spouse) you could be released from the liability for at least a portion of the debt.
Here is another article that explains the basic outline of resisting IRS wage garnishment orders, and a summary of the different steps that you can accomplish either alone or with the help of tax professionals such as CPAs, tax preparers, or attorneys:
Hire a professional to contact the IRS to drop the garnishment as things are worked out (or try to do it yourself);
Address issues that may eliminate the tax owed: file an amended return that includes valid deductions previously overlooked, file your own return if the IRS filed for you, or show that the tax due (or part of it) is time-barred or discharged in bankruptcy; and
Pursue official methods of resolution known as an Offer in Compromise or an Installment Agreement.
Role of CPAs and other Professionals in Stopping IRS Wage Garnishments
Wage garnishments can result from many things. These include: the failure to file one or more tax returns, with a resulting IRS tax assessment; a tax audit, with a resulting IRS tax assessment; and the failure to pay past-due taxes, interest and penalties.
Engaging a CPA or other tax professional can be very useful in all of these situations. First, CPA is an abbreviation for Certified Public Accountant. A CPA is a individual who has taken and passed a demanding accountancy exam and then become licensed in the state or territory where he or she does business. There are also attorneys who specialize in tax, many of them having obtained LLMs in tax at major universities.
Everyone knows the old adage, “an ounce of prevention is worth a pound of cure." It applies with great force in the area of IRS wage garnishments, and a good CPA or tax professional can be your “ounce of prevention." Here’s how:
If you’ve failed to file federal tax returns for prior years, your CPA or tax professional can properly prepare and file those returns for you now, before any tax assessment or garnishment takes place. In doing so, he or she can optimize your tax saving strategies. In one situation, a individual had failed to file tax returns for many years, as he was going through hard times. When he got on his feet and hired a CPA to file his past returns, he learned he had tax credits which resulted in a substantial tax refund.
If you’ve received an audit notice, that means you are one of hundreds of thousands of individuals and businesses that are audited each year. An audit simply means one or more of your tax returns is being examined, line-by-line, for correctness. It does not mean you owe past taxes – at least not yet. What often triggers an audit is a deduction or deductions taken that do not jibe with normal returns of that kind. A CPA or tax professional can help you justify that deduction and thus avoid an assessment, or can rework your return and find other deductions you failed to rightfully take, thus offsetting your mistaken deduction. Of course, by hiring a CPA or tax professional to prepare your tax return, you can often avoid the high-risk return that triggers an audit in the first place.
Sometimes, of course, it is too late for the above prevention options. The IRS may already have issued you a Notice of Intent to Levy your Wages, sent a Garnishment Order to your employer, or started garnishing your wages. The tax professional also comes into play here. That is because professionals who work in this area usually have good relationships with IRS; know the rules, procedures, time deadlines and forms like the back of their hands; and know exactly what to do to stop the garnishment if grounds therefor exist.
First and foremost, a CPA or tax professional will explore all of your options with you. These may be a simple as filing a past return, recalculating the past taxes allegedly due, and of course contacting the IRS. The latter is the key. Once your professional contacts the IRS, resolution options can be addressed and agreements can be reached, thus resulting in the cessation of the garnishment (and, if wages have already been garnished, sometimes their return).
In short, working with a good CPA or tax professional can result in many happy returns.
Good to know
The IRS would prefer not to have to enact wage garnishment – it costs them time and money – and in most cases will be very accommodating in making arrangements for the debt to be paid without resorting to this step. If you need assistance in handling an IRS garnishment, it’s best to contact an experienced CPA, attorney, or other tax professional.
Textbooks and publications:
Complete Guide to Federal and State Garnishment, 2008 Edition, by Amorette Nelson Bryant, Aspen Publishers
Internal Revenue Service, Publication 1494, Tables for Figuring Amount Exempt from Levy on Wages, Salary, and Other Income, 2011
IRS Online: irs.gov
Administrative Wage Garnishment Calculator: irs.gov/irm/part5/irm_05-011-005.html
IRS Formula for Garnishing Wages: irs.gov/irm/part5/irm_05-011-005.html