Here are the words straight from the horse’s mouth, i.e., the IRS: “If you do not pay your taxes (or make arrangements to settle your debt), the IRS may seize and sell any type of real or personal property that you own or have an interest in. For instance … We could levy property that is yours but is held by someone else … such as your wages." Emphasis added.
It doesn’t take a professional to tell you that federal and state taxing authorities do not mess around. They mean business. But that does not mean you are helpless. Resisting IRS wage garnishment for unpaid taxes is not always a futile endeavor. But, you have to know where you stand, and what you are doing.
Tax-Based Wage Garnishment
The IRS and most state taxing authorities DO NOT have to take the taxpayer employee to court and first obtain a judgment to initiate the wage garnishment process. All they have to do is follow a simple notification process.
Notice of Intent to Garnish
One reason resistance is not futile is that the IRS rarely acts by surprise. Before the IRS initiates a wage garnishment, it will (1) assess the tax and provide the employee taxpayer a formal “Notice and Demand for Payment," (2) give the employee taxpayer an opportunity to pay the tax, and (3) send the employee taxpayer what’s called a “Final Notice of Intent to Levy and Notice of Your Right to A Hearing." This levy or garnishment notice affords the taxpayer at least 30 days to address the situation. Many states follow a similar process.
Normal Federal Protections from Garnishment
Let’s start with the basic federal protection provided against wage garnishment. Title III of the Consumer Credit Protection Act, also known as the CCPA, protects borrowers in all 50 states, in both federal and state court, against the debilitating burden of wage garnishment. All garnishments subject to the CCPA are limited in amount.
An employer can only withhold 25% of an employee’s wages, or 30 times minimum wage, whichever is greater, to satisfy a garnishment order levied on an employee’s wages. The employer cannot retaliate by terminating the employee for the hassle or irresponsibility it might suggest, either.
And the Act prohibits employers from terminating employees based on wage garnishments, to the extent the garnishment is based on the same debt (no matter how many times an ongoing garnishment must be applied).
Normal Federal Protections Do Not Apply to Tax-Based Garnishments
Unfortunately, the CCPA includes an express exclusion from its protections for federal and state wage garnishments. The Field Operations Handbook states: “There is no CCPA earning’s protection in cases of garnishment due to any debt for federal or state tax… Any amount may be garnished in such cases…" Emphasis added.
In other words, the CCPA’s limits on garnishments to 25% of “disposable earnings," or 30 times the minimum wage, do not apply in the case of tax-based garnishments.
When it comes to the collection of state taxes though, that is another matter. Each state has its own set of protections against excessive wage garnishment. Some limit the amount of the garnishment to 10%; others go much further. In every case, consult the specific state laws and regulations that apply.
The IRS and many state tax authorities do listen to cries of hardship. The federal tax code obligates the IRS to leave untouched an amount sufficient for the taxpayer to pay for basic living expenses and necessities. (But be aware: basic living expenses is a far cry from the manner in which the taxpayer is accustomed to living).
Be prepared to provide evidence of hardship, such as bank statements, rent or mortgage due, or shut-off notices. Obviously family size, income being earned and expenses needed to survive without being tossed out on the street are highly relevant. However, the amount of wages protected will most closely correspond to the number of exemptions claimed for tax purposes. If the tax authority accepts this proof, the wage garnishment can be turned off immediately. Have the fax number or email address of the employer handy.
Suppose a single person gets paid weekly and claims five exemptions. He keeps $479.81. A married person filing jointly with a monthly salary and claiming two exemptions keeps$1,625. In either case, that’s not much, not in most places and certainly not in any large city with a high standard of living. Any amount above that goes to the IRS, regardless of the how much that is.
Short Reprieve for Employer& Hearing Rights
When served with a Form 668-W, the Notice of Levy on Wages, Salary and other Income, the employer has one full pay period before it is required to withhold the employee’s wages. That’s not a ton of time, but it does provide some breathing room. During that time the employee has the opportunity to contact the taxing authority to work out a repayment plan and have the levy or garnishment lifted.
The employee taxpayer has two options at the IRS level. He may request an IRS manager to review the case, or he may request a so-called “Collection Due Process Hearing with the Office of Appeals." At that hearing, the officer will consider many factors in determining how to proceed, reduce or terminate the garnishment. These include: prior payments, bankruptcy, procedural errors in the assessment, the statute of limitations, any prior opportunity to dispute the assessment, and repayment/collection options.
If the taxpayer disagrees with the hearing officer’s decision, he may file a lawsuit to challenge the determination.
Without question, contacting a tax professional is the best advice for dealing with tax authorities effectively, as he or she will know best how to navigate these troubled waters. However, that is not required. The taxpayer can contact the IRS or state authority directly at the phone number stated on the Notice of Intent to Levy.
IRS Wage Exemption Table: http://www.irs.gov/pub/irs-pdf/p1494.pdf
Federal Statute: Title III, Consumer Credit Protection Act (CCPA), 15 USC, §§1671 et seq.
Code of Federal Regulations: 29 CFR Part 870
Explanatory Brochures and Regulatory Materials Online: www.dol.gov/whd
U.S. Wage and Hour Division: Fact Sheet #30 – The Federal Wage Garnishment Law, Consumer Credit Protection Act’s Title III (CCPA)
Field Operations Handbook – 02/09/2001, Rev. 644, Chapter 16, Title III – Consumer Credit Protection Act (Wage Garnishment)
General Consumer Information: http://www.debt.org/garnishment-process/
Listing of Garnishment by state: http://www.small-claims-courts.com/Wage-Garnishment-Laws.html