How to Release or Stop an IRS Bank Account Levy

When you fail to respond to IRS notices about a balance due, the IRS eventually sends a final notice of intent to levy. You have 30 days to request an appeal or CDP hearing, which will stop levy action temporarily so you can work out a resolution with the IRS (discussed below). If you don’t take action during this time, the IRS can confiscate just about anything you own. Usually, the IRS starts with wages or bank accounts.

One of the IRS’s most popular options is to seize the funds you have in your bank. Sometime after the 30 days have passed, the IRS bank levy process begins, whereby the IRS sends a notice or contacts your bank. The bank freezes your account, and if you do not make arrangements within 21 days, the bank sends the funds to the IRS on the 22nd day.

To avoid an IRS bank levy, you should call the IRS or work with a licensed tax pro. It is important to do so once you receive the final notice of intent of levy. If your bank has already frozen your funds, you need to take action during the 21-day holding period. Once the IRS garnishes your bank account, it is difficult to get it back. Below are some ways to stop a levy but with the exception of financial hardship, you will need to have filed all required tax filings with the IRS. In other words, you need to be compliant with tax filings. 

Ways to Stop or Release an IRS Bank Account Levy

Before investigating ways to release an IRS bank levy, it is important to understand that generally, you must have filed all of your returns. Therefore, if you are currently experiencing an IRS bank levy, the first step is to determine if you are in filing compliance. Generally, the IRS will not release a bank levy until all outstanding tax returns have been filed. If you have filed all of your tax returns but are still facing a levy, there are a few options available for releasing the levy. Below, we will review some of those options (not exhaustive). 

• Request a CDP Hearing

  If you have received a Final Notice of Intent to Levy from the IRS, you can stop the bank levy by requesting a Collection Due Process hearing. You have to do so within 30 days of the date of the letter or notice. Once you appeal, you will have some time to work out a resolution with the IRS (options discussed below). You can use a licensed EA, tax attorney, or CPA to work on your behalf. In some cases, you may appeal because you are currently in bankruptcy proceedings, or the collection statute of limitations has expired.

• Pay in Full

  If you pay your taxes in full, the IRS will not move forward with the levy or they will release the hold on the funds in your account. Paying in full helps you avoid any more interest or penalties.

• Amend Your Tax Return(s)

  If you owe taxes you believe because of a mistake on a tax return, you can elect to amend your tax return showing you do not owe the taxes the IRS claims you owe. 

• Enter into an Installment Agreement

  If you agree to make monthly payments on your tax, the IRS will also remove the freeze on your account. Tax payments have to be enough to pay off the taxes owed before the statute of limitations on collection for a particular tax period expires. Usually, the IRS gives taxpayers several years. If you default on your installment agreement, the IRS may levy your bank account again.

• File for an Offer in Compromise

  An offer in compromise allows you to lower the amount of taxes you pay to less than the full amount. The IRS only accepts this arrangement for taxpayers who qualify. If the IRS believes it can obtain what you owe them in other ways or thinks you can pay more, they will send you a rejection letter. As this option is complicated, it’s best to work with a tax professional. Take a look at these IRS OIC FAQs to learn more.

• Prove Financial Hardship

  When seizing money from your bank account, the IRS does not make sure you have enough money left to pay your other bills. However, if you can prove that you cannot live on the remaining funds, that’s a different story.

  To prove the bank account levy affects your health and well-being or limits your ability to put a roof over your head, you need to provide the agency with detailed financial information. If the IRS approves your hardship application, your account gets labeled as a CNC or uncollectible. It is only a temporary resolution. The IRS reviews this CNC status every two years and uses your tax returns to assess your ability to pay.

• Prove Identity Theft

  If you believe you are a victim of tax-related identity theft, then the IRS is willing to help. In many cases, you will need to set up another resolution with the IRS as this process can take time. You will also need to fill out IRS Form 14039 (Identity Theft Affidavit) and mail it to the IRS. It is always a good idea to have a tax firm or professional help you with tax-related identity theft.  The fees usually far outweigh the cost of having the tax amount remain, especially if you are not responsible.

Your Financial Situation in Many Cases is Used to Release an IRS Bank Levy

If you decide to pursue a partial payment installment agreement, Offer in Compromise, or a Hardship status, the IRS in most cases will verify monthly expenses and income along with your assets and liabilities. The IRS will want you to complete a 433-A or 433-F (Collection Information Statement) to assess your financial situation. Because of the complexity of filling out one of these forms, it is best to leverage a licensed tax pro who can provide assistance in completing Form 433. 

Can the IRS Take All the Money in Your Bank Account?

The answer is maybe. If you have a delinquent tax debt, the IRS can place a levy on your bank account. This gives them a legal claim to the funds in your account and allows them to withdraw money to pay toward your outstanding tax debt.

How Long Will the IRS Levy Your Bank Account? 

It is important to understand that the bank must hold your funds for 21 days before releasing them to the IRS once your bank account is levied. However, an IRS bank levy (unlike IRS wage garnishment), is a one-time levy. After the IRS levies your bank account, you can use your bank account as normal. However, the IRS can issue another bank levy in the future targeting the same bank account to pay off an unpaid tax debt. 

Get Help from a Tax Professional

No matter what method you choose, you must act quickly with an IRS tax levy. Once you discover your bank has frozen your account, you have up to 21 days before the IRS receives the funds. Once the money is taken, it is usually not returned.

Even if you set up an installment agreement or qualify for an offer-in-compromise, it’s often too late once the IRS has taken the funds. To get through this situation, you should reach out to a tax professional that has experience in resolving IRS bank levies by visiting the link or beginning your search below.

IRS Wage Garnishment Frequently Asked Questions (FAQs)

Below you fill frequently asked questions (FAQs) regarding IRS wage garnishments or wage levies. We have also included some information on state wage garnishment as well. Please contact us if you would like us to answer additional questions.

What Is a Wage Levy In Regards to Taxes?

Also called wage garnishment, an IRS wage levy is when the Internal Revenue Service legally takes money directly from your paycheck to satisfy taxes owed. The IRS contacts your employer, tells them how much to pay you, and instructs them to send the rest of the money to the agency.  The states have the same enforced collection action with the ability to levy wages just like the IRS.

What if My Employer Received IRS Form 668-W?

If your employer receives IRS form 668-W, this notice is notifying them that you owe taxes and instructs them to withhold some wages to send to the IRS to make payments towards the taxes owed. Your employer must comply with this notice or they can face serious penalties if they don't comply.

How Much of My Wages Can the IRS Take?

When the IRS tells your employer to garnish your wages, the agency sends publication 1494 to your employer. The table dictates how much you get paid, and the IRS takes everything over that amount. Your filing status, pay frequency, and the number of dependents you claim determine the amount per paycheck you get to keep. Furthermore, whether the taxpayer reached the age of 65 and/or is blind also affects the amount a taxpayer can exempt from levy.

For example, as of 2022, if you are a single person claiming two dependents and your employer pays you weekly, the IRS allows you to keep $418.28 per week, and the agency garnishes the rest. If you are married filing jointly with three dependents and you get paid weekly, you keep $751.94 per week. All wages and bonuses over that amount go to the IRS. See the table link above to determine what the IRS will leave you with based on your filing status, dependents, and frequency of pay.

Can the IRS Levy Bonus Payments?

Yes, the IRS can levy a bonus check that your employer pays separately from your regular paycheck. In this case, if you still owe taxes, your employer will send your whole paycheck to the IRS since the amount exempt from the levy was paid to you already for the particular pay period in question.

Can You Stop IRS Wage Garnishment?

Yes, once the IRS has started to garnish your wages, you can stop the process. You need to contact the IRS to set up some agreement or resolution. Alternatively, you can apply for an offer in compromise or try to get declared as uncollectible. See this page for more information on stopping and releasing IRS wage garnishment.

Can You Stop State Wage Garnishment?

Every state, for the most part, works differently. Some states will lower the wage levy but not completely remove it until you pay off your tax balance or show hardship. For example, CA’s Franchise Tax Board and North Carolina’s Department of Revenue will usually not release a wage garnishment (only reduce it) unless you can prove severe financial hardship.

What Are the Laws on IRS Wage Garnishments? What Are My Rights?

Legally, for the IRS to garnish your wages or levy any of your assets, the following three things must happen (with exceptions in some cases):

• The IRS must assess a tax liability and send you a notice to demand payment.
• You must ignore the notices or refuse to pay the amount due.
• The IRS sends a “Final Notice of Intent To Levy and Notice of Your Right To a Hearing,” at least 30 days before the levy starts.

If you ignore that final notice, the IRS can start to garnish your wages once the 30 day period has elapsed. There are exceptions whereby the IRS does not need to give you 30 days from a Final Notice of Intent to Levy.

If the IRS feels the collection of tax is in jeopardy, they don’t have to follow the rules above. If you are a federal contractor with taxes owed, or the IRS issued a Disqualified Employment Tax Levy, they do not have to offer you a hearing 30 days in advance of the levy taking place.

What Section of the Internal Revenue Code Gives the IRS Authorization to Levy?

Section 6331 of the Internal Revenue Code authorizes the IRS to levy taxpayers to collect back taxes.

What Kind of Wages Can the IRS Take or Levy?

The IRS can seize wages, salaries, commissions, dividends, and payments on promissory notes held by someone else. The IRS can also levy your bank account, someone else’s bank account (if you are a joint account holder), federal retirement annuity income from the Office of Personnel Management, federal contractor payments, retirement accounts, your house, car, and other property.

What Types of Property Are Exempt from an IRS Levy?

The IRS cannot levy unemployment benefits, Social Security Disability Insurance, specific annuity and pension payments, workers compensation, certain public assistance payments, assistance under the Job Training Partnership act, and court-ordered child support payments. Furthermore, the IRS cannot levy necessary schoolbooks and clothing, as well as precise amounts of fuel, furniture, books, and tools for business, professions, and trades.

How Can I Avoid a Tax-Related Wage Garnishment?

The best way to avoid tax-related wage garnishment is to stay on top of all required tax filings. Pay all amounts owed to the IRS and State (if applicable). If you cannot afford to pay the IRS or State, contact a licensed tax professional for help. You can request one by calling our free tax consultation number above.  Realize that the IRS and many states have tax options depending on your financial and tax situation. For example, payment plans, settlements, penalty reduction, and so forth.

How Can a Tax Professional Help With IRS or State Wage Garnishment?

Tax professionals analyze the situation and help you come up with the best resolution for your needs. In particular, a tax professional can put a hold status on a levy and negotiate an agreement on your behalf. The hold stays in place during the entire negotiation. Therefore, you don’t have to worry about the IRS garnishing wages during this timeframe. If you don’t agree with the amount due, a tax professional can submit an appeal for you. Furthermore, they can analyze your financial situation to get you the best resolution with the IRS or state. Reach out to a licensed tax professional by clicking here that has experience resolving garnishment cases with the IRS. Or start your search below by selecting the appropriate agency and filtering for your unique tax problem.

Tax Wage Garnishment Help: Resolve an IRS or State Levy on Wages

Are your wages being garnished? Wondering what a wage garnishment is? Has the IRS or a state threatened to garnish your wages? If so, get professional wage garnishment help if the garnishment is tax-related.  A tax professional can help you avoid garnishment by negotiating an arrangement with the IRS or state. If the IRS is already garnishing your wages, they can in some cases lift the levy quickly while they work out an arrangement for you.

If you don’t do something, the IRS or State will continue to garnish your wages until:

• You pay off the entire taxes owed, including penalties and interest
• You negotiate an agreement with the IRS or state
• The statute of limitation on collection or the timeframe to collect on the taxes owed has expired

How Can a Tax Professional Help with Wage Garnishment?

Working with a licensed tax professional increases your chances of getting a favorable resolution or settlement. Consequently, there are many benefits to using a tax professional. Here are a few of them:

They Call the State or IRS for You

A licensed professional will call the IRS or state on your behalf.  Hold times with the IRS and many U.S. states are very long.  However,  a tax professional has a dedicated practitioner line to call with the IRS and most states.

They Know Your Tax Rights

He or she won’t unnecessarily disclose your financial details to the IRS or State. Unfortunately, many taxpayers over-disclose information to the IRS and state taxation authorities, which can complicate cases. When negotiating with the IRS or State, a tax professional has your best interests at heart. Remember, the IRS intends to collect what is due as quickly as possible. The latest tax gap report from the IRS attributed $32 billion to non-filing and $39 billion to non-payment for the 2008-2010 tax years.

They Can Remove IRS and State Wage Garnishment Quickly

If your goal is to remove or prevent a state or IRS wage garnishment quickly, then work with a tax professional. In many cases, an experienced and licensed tax professional can resolve a wage levy quickly, depending on your taxes owed and financial situation. In some states, the result may only be a reduction in your state tax wage garnishment.

Illustrates Your Eagerness to Resolve Your Tax Problems

The IRS and various states usually enforce wage levies because you have not responded to numerous letter and notices regarding your taxes. When you hire a tax professional, that gives the IRS and many state tax departments a signal that you are eager to resolve the situation. Consequently, many IRS revenue officers and representatives prefer to work with a tax professional because it means a case may come to a resolution.

Ensure You Get the Best Tax Resolution or Agreement

You may not know all your tax options. At the same time, the IRS and most state tax representatives will not give advice. Therefore, a tax professional should analyze your financial situation and determine if you meet the qualifications for various IRS and state tax programs. As a result, the tax analysis can be invaluable. If you can qualify to settle your taxes for less, why push for a payment plan you can’t afford?

They Understand Deadlines, Forms, and Documents Needed for a Specific Tax Resolution

Tax professionals and tax resolution firms have a lot of experience negotiating with the IRS and states. They know what and when to file it.  They understand time frames and deadlines. Their expertise improves your chances of an optimal resolution.

They Prepare Tax Returns

Most licensed tax professionals (EAs, CPAs, and Tax Attorneys) are capable of filing tax returns. Our diverse partner has licensed tax professionals specifically for filing individual and business tax returns. Moreover, they will ensure you only file a tax return if it is required or if it benefits you over any tax preparation fees.

How Does the Tax Wage Garnishment / Tax Relief Process Work?

Here’s what happens with many tax professionals (not all) when you request a free consultation for help with state or IRS wage garnishment.

Free Tax Consultation

First, you should connect with a licensed tax professional who will review your tax and financial situation. The tax pro or their assistant will ask you specific questions as to when the wage garnishment began, for how much, and the start date of the wage garnishment. If you are calling because you received a letter, when did you receive it? Was it certified?

The tax pro or their assistant will also ask you if you filed all tax returns, what letters the IRS or State sent you, and the details about your financial situation. To prepare, try to obtain specific numbers regarding your monthly income, expenses, assets, and liabilities. Assets include your house, cars, bank accounts, retirement accounts, brokerage accounts, and so forth. Liability comprises your mortgage loan (if any), car loan (if applicable), student loans, and so forth.

Investigation (If necessary)

If you are unsure about some of your tax details, the tax professional or firm will do an investigation generally. Specifically, an investigation entails requesting account transcripts from the IRS or State to check your filing and payment compliance records. As a result, you will know what years you have to file (if any), how much you owe for each tax year, and the penalties and interest that have accrued.

Tax Options Provided 

After a licensed tax professional reviews your case details, the firm will provide you with tax options you can pursue. If you qualify for different tax resolution programs, the tax pro assigned to your case or a representative of the firm will review the benefits and drawbacks of each option with you. Moreover, they will explain the flat service fees involved to get you into good standing with the IRS or state.

If You Decide to Hire

If you decide to move forward with a tax pro's help to stop or prevent an IRS garnishment or state tax wage garnishment, the licensed tax professional will send you a limited power of attorney (POA) to communicate with the IRS or state on your behalf. Consequently, the POA instructs the IRS and state to talk directly with your assigned tax professional. Furthermore, any mail or letters will be sent to the tax professional as well.  If there are tax filings involved, you will need specific information to complete the filing. If you cannot find old w2s or 1099s, the tax professional can request a wage and income transcript.

Finally, once the resolution is complete, the licensed professional will provide future guidance to prevent tax problems from arising again.

If you are looking for tax professionals that have experience resolving tax-related wage garnishment, visit this link or start as search below. 

What Is IRS Wage Garnishment? 

The IRS has many ways to collect money if a taxpayer doesn't pay their taxes. At first, the agency will send you notices and try to work with you. But if you ignore the notices and don't make arrangements on your tax debt with the IRS, the agency can come after you and involuntarily take the money you owe. One method of forcibly taking money for unpaid taxes is called an IRS wage garnishment. Here is an overview of the IRS wage garnishment process.

What Is IRS Wage Garnishment?

IRS Wage garnishment is when the IRS collects unpaid taxes directly from an employee's earnings. A wage garnishment allows the IRS to collect money when you haven't been paying your tax liability. With the typical wage garnishment process, the IRS contacts your employer and instructs them to take funds out of your paycheck using IRS Form 668-W. Next, your employer must send the money to the IRS. If your employer fails to send payment to the IRS, liabilities may pass to your employer. As a result, once your employer receives this notice, you can rest assured that they will do as requested.

How Much of Your Wages Can the IRS Garnish?

If you owe money to the IRS, the agency can garnish salaries, wages, bonuses, commissions, and possibly even retirement or pension earnings. Unlike garnishments for private debts or student loans, the IRS doesn’t garnish a particular percentage of an employee's earnings. Instead, the agency decides how much you need to live and takes the rest. The IRS utilizes a table to determine how much they cannot levy from your paycheck each pay period. Even if you just earn minimum wage, the IRS may still be able to garnish some of your wages.

The standard deduction and the number of dependents you have determine the amount of income exempt from IRS levy, under federal law. Consequently, your filing status, the number of dependents you claim and your pay frequency help your employer calculate the amount of money to leave you with each pay period. Typically, if you're single, the amount the IRS lets you keep is a little more than the federal minimum hourly wage. For example, if you work full-time at the federal minimum hourly wage, your earnings should be about $290 per week, and the IRS leaves you $234.62 per week if you're single with no dependents. Note that at the time of writing, the federal minimum wage is $7.25 per hour.

In most cases, this amount is probably less than you spend on a regular basis. As of 2022, if you get paid weekly and you file single with three dependents, the IRS leaves you only $502.90 a week. If you get paid weekly and file as married filing jointly with three dependents, you get to keep $751.94 per week or $3,258.34 per month. The federal law allows the IRS to take any money you earn over these thresholds. Moreover, these amounts go higher if the taxpayer takes an additional standard deduction for their age and/or blindness.

Here is a subset of the table the IRS provides your employer so they can calculate your IRS wage garnishment for 2022. The table below only expresses the amounts exempt from an IRS wage levy based on filing as a single person. If you file as head of household or married filing jointly, your exempt amount will be higher for the same number of dependents.

If you have two jobs and one covers your “living expenses,” the IRS may garnish 100% of your paycheck from the other job. Additionally, if your boss issues a bonus, the IRS may take all of that.

This levy stays until you pay off your taxes owed or until you make other arrangements with the agency. Alternatively, the IRS will release a levy if the statute of limitations on collection arrives.

How Do You Know the IRS Is Going to Garnish Your Wages?

The IRS will send you a notice that they are going to garnish your wages. The notice will include the amount of money that they plan to take from your paycheck and where the money will be sent. If you do not agree with the IRS's decision to garnish your wages, you can appeal the decision or try to negotiate a payment plan. You must respond by the deadline noted on the letter or the IRS will move forward with the wage garnishment. Note this is never the first notice that you receive from the IRS. Usually, by the time the IRS garnishes your wages, the agency has sent you several notices.

If the IRS does garnish your wages, they will send a notice to your employer with instructions on how much money to withhold from your paycheck. Your employer will give you a form to fill out so that they can figure out exactly how much to withhold. If you don't return the form on time, your employer will withhold the maximum amount from your check. Usually, you have three working days to return the form. At this point, whether you returned the form or not, your employer is required to withhold the money and send it to the IRS.

When Will the IRS Impose a Wage Levy and Garnish Wages?

A tax levy is typically the next collection step following a tax lien. However, sometimes the IRS skips the tax lien and begins to levy right away instead. A levy is when the IRS takes your assets to satisfy your taxes owed. Most private creditors have to go through a legal process to become a judgment creditor. The IRS doesn't go through this same process. As long as the IRS sends you the correct notices, the agency can start to garnish your wages.

The IRS can legally seize an employee's wages, bank accounts, Social Security benefits, retirement accounts (rare), commissions, property, rights to property, and more. For the IRS to levy an employee's wages or other assets, however, the IRS must meet the following three requirements:

• The IRS assessed a tax liability and sent you a notice demanding payment
• You neglected or refused to pay the tax amount due.
• The IRS sent you a Final Notice of Intent to Levy and Notice of Your Right to a Hearing (must be sent to you 30 days before they a levy ensues)

The IRS must deliver these notices by hand or send them via registered mail to your last known address or place of employment. Once you receive the Final Notice of Intent to Levy and Notice of Your Right to a Hearing, the IRS can begin to levy after 30 days.

Exceptions to the IRS Levying Without Providing 30 Days Notice in Advance

The IRS doesn’t always have to provide you with a 30-day notice of your right to a hearing before levying your property. Furthermore, here are some situations where they do not have to notify you in advance:

• Jeopardy Levy  – If the IRS feels that they are in jeopardy of collecting the tax, they can levy your property without providing notice in advance.
• A Disqualified Employment Tax Levy – If you have previously requested a collection due process hearing for payroll or employment taxes for a specific tax period within the last two years, the IRS can levy for other tax periods without providing you notice in advance.
• Federal Contractor – If you are a federal contractor, then the IRS can seize property and provide you notice afterward.
• State Tax Refund Levy – The IRS can seize a state tax refund without offering you 30 days' advance notice

The IRS does not like to impose wage levies. They are costly, and the IRS prefers to use them as a threat. However, if you don’t respond, the IRS will carry through on that threat. If you receive a final notice, request a free consultation to get help from a tax professional to understand all your options. A licensed professional can contact the IRS and apply for a payment plan, settlement, or hardship status, just to name a few tax relief options.

IRS Wage Garnishments and Child Support

Many people have their wages garnished for child support. Child support wage garnishments take precedence over most over garnishments. This means that your employer will withhold amounts for a child support garnishment before most other garnishments. However, there is an exception for IRS garnishments. If the IRS wage garnishment was entered before the child support wage garnishment, the IRS wage garnishment will take precedence. In other words, your employer will take out the garnishment for the IRS garnishment first, and then, they will take out the child support garnishment. If the child support garnishment was received first, it will typically take precedence over the IRS wage garnishment.  

IRS Wage Garnishments and Garnishments for Federal Student Loans

Another common wage garnishment is for student loans. Typically, IRS tax garnishments take precedence over garnishments for federal student loans. If your employer receives a request to garnish your paycheck for both IRS taxes and student loans, they will typically follow through with the IRS tax garnishment first. Note that under federal law, your employer cannot terminate your employment for a single garnishment, but there is no federal law that prohibits them from firing you if you have multiple garnishments. 

How to Stop an IRS Wage Garnishment

A wage garnishment can be a major financial burden. It can leave you with less money than you need to cover your basic living expenses. If you are facing an IRS wage garnishment, there are a few things that you can do to stop it. You can stop a wage garnishment by paying your taxes in full. If that's not possible, you can contact the IRS and try to negotiate a payment plan. If you arrange to pay back your taxes over time, the IRS may stop the garnishment. You can also request an offer in compromise, which is when the IRS lets you pay back your taxes for less than you owe. If you cannot afford to pay anything, you can request to have your account labeled as currently not collectible. When you have that status on your account, the IRS pauses all collection actions. 

The IRS may also stop the wage garnishment if you can prove that it's causing financial hardship. In some cases, you may also want to prove that stopping the garnishment will allow you to pay off the tax liability faster. If you can prove that fact, the IRS will also stop the garnishment. You can even stop a wage garnishment by quitting your job. But this is not ideal because the IRS will find you at your next job.

Get Help Stopping an IRS Wage Garnishment

There are several ways to stop wage garnishments with the IRS. The method you choose to use depends upon your financial and tax situation. It is a good idea to understand the various options so you can ensure the best financial outcome for your situation. It is generally a good idea to talk with a tax professional about your wage garnishment to get the best outcome. You can start your search below using the form to find the highest-rated local tax professionals from our large network of tax problem experts around the country.

How to Stop IRS Wage Garnishment in Six Ways

If you owe money to the IRS or receive a tax bill and do not pay it or set up a resolution with the IRS, they can collect taxes owed through wage garnishment. Once you receive a final notice of intent to levy, you have 30 days to take action. If you do not reach out to the IRS by that deadline or request a hearing, the agency can contact your employer and move forward with the wage garnishment or wage levy. This means that the IRS will instruct your employer to withhold a certain portion of your paycheck each week or month and send it directly to the IRS. Once your employer receives this notice from the IRS, your employer must give you the Statement of Dependents and Filing Status that you must complete and give back to your employer within three days. If you fail to return the statement, your employer must compute what amount is exempt by levy by assuming your filing status is married filing separately with zero dependents. 

The garnishment (a form of a tax levy) generally starts the next pay period after your employer receives Form 668-W(ICS) or 668-W(C)DO. It continues until you pay the back taxes owed in full (aka tax debt), you set up an agreement or resolution with the IRS, or until the arrival of the Collection Statute Expiration Date for tax years that carry a liability. Luckily, there are some resolutions to stop IRS wage garnishment.

The best resolution or resolutions, or the best course of action, is mostly based on your total balance, as well as your tax compliance and financial situation. In almost all the options below, you will need to be current on all your tax filings. In other words, you need to file all tax returns required before the IRS will consider setting up a tax resolution with you.

Ways to Stop or Release an IRS Wage Garnishment or Wage Levy

Request a Collection Due Process Hearing

If you believe that the IRS has made a mistake by sending you a letter of an intent to levy your wages, you can file an appeal within 30 days by requesting a Collection Due Process (CDP) hearing. A Collection Due Process or CDP hearing is a procedure of the IRS Office of Appeals. It is an independent organization within the IRS that is separate from the collection office that initiates the wage levy.  If the IRS sends you a final notice of their intent to levy, you can request a CDP hearing 30 days from the date of the IRS’s notice of your right to a hearing.  If you move forward with a CDP hearing, collection activity will usually cease (exceptions for jeopardy, a federal contractor, DET, and state refund levies).

You need to fill out form 12153 and send it to the address on the letter or the IRS revenue officer on your case. As you wait for your hearing,  it is a good idea to work with a tax professional who can represent you and work out a tax resolution with the IRS on your behalf.

If you don’t propose a collection alternative, or offer a defense (e.g., innocent spouse relief) or claim hardship (discussed below), the wage garnishment can resume once the IRS issues a determination. See publication 1660 for more information.

File for an Offer in Compromise

An offer in compromise is a “collection alternative” the IRS will accept (if approved) to stop or release an IRS wage garnishment. The Offer in Compromise (OIC) program is designed to give taxpayers who are unable to pay their full tax debt an opportunity to settle for less than the full amount owed. To qualify, taxpayers must first meet certain criteria set forth by the IRS. If approved, an OIC can help the taxpayer pay less or even eliminate the tax debt entirely. In addition, an OIC can stop IRS wage garnishment and other collection activities. As a result, the OIC program provides a much-needed lifeline for taxpayers who are struggling to pay their tax debt. If you think you may qualify for an OIC, contact a tax professional on TaxCure today to learn more about this powerful tool for resolving taxes owed.

Enter into a Payment Plan or Installment Agreement

The IRS has various payment plans, often referred to as Installment Agreements. You can work with a licensed tax pro or call the number on your levy notice. An installment agreement or payment plan requires you to make monthly payments toward your IRS tax debt. Once the IRS approves your tax payment plan, you are in good standing, and the wage garnishment stops. Installment agreements are a great way to avoid or stop IRS wage garnishment and other enforcement actions if you have tax debt or unpaid taxes you cannot pay off. If you think an installment agreement might be right for you, contact the IRS or find a local tax professional on TaxCure.

Prove Financial Hardship

If you can prove that the levy causes financial hardship, the IRS will declare you uncollectible. If your case is approved, the agency will temporarily pause all collection actions until your financial situation improves. This includes wage garnishment, levies, or property seizures. To prove financial hardship or prove uncollectible status, you may have to provide a lot of detailed financial information to the IRS.

Innocent Spouse Relief

If you file jointly or did so in the past, you and your spouse are jointly responsible for back taxes owed. However, if the tax levy pertains to a year, you filed together, and you do not feel you are responsible, you can dispute the tax liability. One way to do this is by applying for Innocent Spouse Relief (ISR). If you qualify for innocent spouse relief, the IRS will release any wage garnishments that have been placed on your wages and will also possibly forgive all or part of any taxes that you may owe. It is highly advised you work with a tax professional in proving your innocent spouse claim.

File for or Declare Bankruptcy

Filing for bankruptcy automatically stops the wage garnishment. In some cases, bankruptcy provides a means for a taxpayer to erase old income taxes owed or get tax debt discharged. However, if you have remaining taxes owed, the IRS can start the wage garnishment after the bankruptcy is complete. It also has a severe impact on your credit, and it should be a last resort. If you are considering this option, work with a bankruptcy attorney.

What Is the Maximum Amount the IRS May Garnish from Your Wages?

Generally, the IRS can garnish up to 25% of your disposable earnings for unpaid taxes. When the IRS orders your employer to garnish your wages, it sends a Form 668-W(ICS) or 668-W(C)DO with the enclosed table (Publication 1494). The IRS takes everything over the amount mandated by the table, which is how much of your earnings are exempt from garnishment. The amount you get to keep is set by your filing status, pay frequency, and the number of dependents you claim. Furthermore, the amount a taxpayer can exempt from levy is dependent on their age and/or blindness.

For example, in 2022, if you are a single person with two dependents and your employer pays you weekly, the IRS allows you to keep $418.28 each week and the rest is garnished.

Ways to Negate the Effect of an IRS Wage Garnishment or Wage Levy

Reduce Your Income Enough to Be Declared Uncollectible

If you don’t qualify for hardship status under your current salary, you can cut back on hours until you fall below the threshold. Be careful with this option—if the IRS can’t garnish your wages, it may try to seize your bank account or other assets. Most importantly, having less income is not going to help your situation.

Change Employers or Temporarily Quit Your Job

Again, this is an option, but not a good one. Some people even quit their jobs or move to another employer to avoid wage garnishment. They assume that the IRS or state will take months to find them. Unfortunately, this is not a great idea. As soon as the IRS realizes that another employer is paying you, the wage garnishment will start up again.

A wage garnishment is one of the IRS’s most serious collection actions. If you have received a final internet to levy or if the tax wage garnishment has already started, you should get help from a tax pro as soon as possible. Browse our network's top-rated wage garnishment professionals who understand tax laws. Request a free consultation. 

 

Appeal an IRS Installment Agreement

Taxpayer Rights To Appeal An IRS Installment Agreement

If you request an Installment Agreement and the IRS rejects it, you have the right to appeal. Furthermore, as long as you appeal within 30 days, the IRS cannot levy your property or garnish your wages. The IRS cannot take any serious action until the appeal is complete.

If you are paying an Installment Agreement and the IRS terminates the agreement, you can also appeal. Fortunately, you have 76 days to appeal, but you should try to appeal within 30 days.

How to Appeal a Rejected IRS Installment Agreement

If the IRS rejects your Installment Agreement, a Revenue Officer may contact you directly. In other cases, you may receive a letter or phone call that is not from a Revenue Officer. Here’s how to appeal in both situations.

If the IRS notified you but a Revenue Officer is not involved, here’s what to do:

1. Call the IRS using the phone number in your letter.
2. Tell the IRS why your Installment Agreement should be accepted.
3. If the agent refuses your request, ask to speak with a Revenue Officer or a manager.
4. If they are not willing to work with you, say you would like to appeal.
5. Move to step 3 below.

If an IRS Revenue Officer notified you of your rejection, here’s how to appeal:

1. Call the phone number on your notice and explain why you want to appeal the decision.
2. If the Revenue Officer still refuses to accept your Installment Agreement, ask to speak to their manager.
3. If you have no success with the Revenue Officer’s manager, ask to speak to a Collections Manager.
4. Explain your case to the Collections Manager.
5. Fill out Form Form 9423 (Collection Appeal Request).
6. Attach a written explanation of your appeal with Form 9423.
7. Send in Form 9423, postmarked at least 30 days within the date on the rejection letter.
8. Wait for the decision.

The decision on your appeal is binding. If the Office of Appeals rejects your appeal, you cannot appeal again. It is always a good idea to work with a licensed tax professional who has experience appealing installment agreements.

Common Reasons for the Rejection of an IRS Installment Agreement

The most common reasons for Installment Agreement rejections:

1. 1. You didn’t complete Form 433 (Collection Information Statement)
   2. The IRS believes your living expenses are too high—for example, the IRS may reject a plan if you have kids in private school, really high car payments, or other “unnecessary” expenses.
   3. Form 433 was inaccurate or incomplete.
   4. You defaulted on installment agreements in the past.
   5. You have outstanding past tax returns.

How to Appeal the Termination of an Installment Agreement or Reinstate It

If the IRS plans to cancel your Installment Agreement, or your payment arrangement is in default, you will receive a termination warning notice in the mail. Usually, this is a CP 523 notice. The IRS notice notes that your agreement is in default, and it tells you the IRS can levy assets or file a tax lien.

You have 76 days to request an appeal. However, if you don’t appeal by the 30th day (after the notice was issued), the agreement will be terminated on the 46th day. Moreover, if you appeal after that point, the plan will be reinstated if your appeal is accepted.

Generally, you can only appeal a termination notice once in a 76-day period. It’s important not to let your agreement lapse twice in that short of a time period.

If an IRS Revenue Officer notified you of the termination, here’s how to appeal:

1. Call the IRS number on your notice and tell them why you want to appeal the termination. Make sure to call within 30 days at best or 76 days at worst.
2. If the IRS Revenue Officer refuses to reinstate your Installment Agreement, speak to their manager.
3. If you have no success with the Revenue Officer’s manager, ask to speak to a Collections Manager.
4. Talk to your Collections Manager and explain your case.

If your rejection letter came in writing, here’s how to appeal:

1. Complete Form 9423 (Collection Appeal Request).
2. Preferably attach a written letter of your request for appeal with Form 9423
3. Send in Form 9423, postmarked at least 30 days within the date on your CP 523 notice.

Common Reasons for the Termination of an IRS Installment Agreement

An IRS Installment Agreement termination happens for a few reasons:

1. You missed a payment. The IRS waits 30 days before terminating your agreement if it is only your first or second missed tax payment
2. The IRS realized information on your Form 433 was incorrect or untruthful
3. You failed to file a current return.
4. You didn’t pay a current tax bill.

The process of appealing a denial or termination of an IRS Installment Agreement is not straightforward. As a result, many taxpayers choose to work with a licensed tax professional. Form 433 (Collection Information Statement) and Form 9423 (Collection Appeal Request) can be confusing.

Ideally, you should work with someone who does this regularly for taxpayers. You need a professional who has the experience and track record of getting most requests and appeals accepted.

Disclaimer: The content on this website is for educational purposes only and does not serve as legal or tax advice. For specific advice regarding your tax situation, contact a licensed tax professional or tax attorney.

How to Release or Withdraw a Federal Tax Lien

A federal tax lien is the IRS’s legal claim to your current and future assets. If a company or an individual does not pay their first tax bill, the IRS may file a Notice of Federal Tax Lien (NTFL), which provides public notice to creditors. The IRS establishes priority rights. Usually, the IRS only places liens on tax liabilities over $10,000, but they do file them for lower balances.  Fortunately, there are ways to get liens released and withdrawn.

Difference Between a Tax Lien Release and a Withdrawal?

Before understanding how to release or withdraw an IRS tax lien, you should understand the difference between the two.

When the IRS releases a tax lien, it clears the statutory tax lien for your taxes as well as the public NTFL. The IRS does this by filing a Certificate of Release of Federal Tax Lien. However, your credit report will have references to the tax lien for up to seven years unless the IRS withdraws it.

When the IRS withdraws a tax lien, it removes the Notice of Federal Tax Lien from the public record and thereby your credit report (individual or business). The IRS informs creditors they are abandoning their lien priority with regards to your assets or your business’s assets.

Update: Since the major credit bureaus started removing tax liens from credit reports in 2017, other solutions emerged for reporting on tax liens.

How to Withdraw a Federal Tax Lien

There are a few ways to get the IRS to withdraw a tax lien. Operationally, the IRS will file a document called the Withdrawal of Filed Notice of Federal Tax Lien. It is also known as Form 10916(c) which the IRS utilizes to withdraw an active NTFL. In order for the IRS to file Form 10916(c), an Application for Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien must be filed, which is form 12277

Set Up a Direct Debit Installment Agreement (DDIA)

If you set up a direct debit installment agreement, in some cases the IRS will withdraw the lien from public record under the following conditions:

• You are an individual, a business with income tax liabilities only, or you are out of business (for which any type of tax qualifies).
• The unpaid balance originally assessed, which includes tax, penalties, and interest is less than $25,000. Remember, interest and penalties that have accrued since you filed (unassessed), do not count toward the tax amount limitation. Moreover, if you are above $25,000 you can pay it down to qualify.
• You agree to a direct debit installment agreement with a 60-month term or less. What this means is that the payment is directly taken each month from your bank account. If the IRS can only legally collect for say 30 months, then you must pay off the balance in 30 months or less.
• You are in filing and deposit compliance

Convert a Regular Installment Agreement to a DDIA

If you have an installment agreement already with the IRS, and you are under the $25,000 threshold, you can convert it to a DDIA. You will now qualify to have the lien withdrawn. Again, if you the original assessed balance was over $25,000, you can pay it down once you convert to a DDIA.

The IRS Didn’t Follow Their Procedures

If the IRS doesn’t follow their procedures or files the tax lien prematurely, you can request a lien withdrawal.

Here are some examples:

• An IRS employee knows you have a carryback, overpayment or adjustment that will satisfy the tax lien and files the tax lien anyway.
• You filed for bankruptcy, and the IRS filed an NTFL while an automatic stay was in place.
• You were in a Combat Zone, away from active military outside the U.S. on a contingency mission, or hospitalized while serving in a Combat Zone
• The IRS filed an NTFL for an Obamacare shared responsibility payment (penalty for not carrying health insurance).
• The IRS filed a duplicate NTFL

If Withdrawing the Tax Lien Will Help Facilitate IRS Collection

If withdrawing the tax lien will facilitate the collection of tax, you can request a withdrawal using Form 12277.

For example, say you have no assets, you don’t think you will acquire them in the future, and you have no other secured creditors. In this situation, you may agree to make more significant payments to the IRS through payroll deduction than they otherwise would receive through wage garnishment. Therefore, withdrawing the NTFL will facilitate IRS collection.

If Withdrawing the Tax Lien Is In Your Interest and the Government’s

If you, or the Taxpayer Advocate Service acting on your behalf, believe withdrawing the tax lien benefits the taxpayer and the U.S government, the IRS may remove it. For example, in many states, professionals can lose their license or job if they have a tax lien. In many cases, if the IRS has released the tax lien, it may approve a withdrawal request if it helps the taxpayer’s credit. Moreover, it indirectly will increase the probability of future tax compliance.

Paying Your Taxes In Full Along With Other Conditions

If you pay your taxes in full, the IRS will release your tax lien within 30 days of payment. However, withdrawing your tax lien after a release also requires:

• Filing compliance for the last three years of tax returns. The rule applies to business, individual and information returns.
• You are current with estimated tax payments and federal tax deposits (business)
• You request the withdrawal in writing (Form 12277)

How to Release an IRS Tax Lien

The IRS files a “Certificate of Release of Federal Tax Lien” with the same local or state authorities that received the NFTL when you obtain a “release.” Usually, that means the local county recorder or secretary of state receives the Certificate of Release. When you meet any of the following conditions below, the IRS usually releases the tax lien.

Pay Taxes Owed in Full

If you pay the IRS all of your taxes owed plus any interest and penalties, the agency will release the tax lien. Therefore, the IRS will file a Certificate of Release. However, unless the IRS withdraws the tax lien, traces of it will show up on your credit report.

Settle Taxes Through an Offer in Compromise

An offer in compromise (OIC) is when you settle your taxes owed for less than you owe. You have up to two years to pay off an OIC that’s accepted. Consequently, you make payments on the settlement amount.

To qualify, you must meet strict requirements and disclose a lot of financial information. The IRS only accepts offers if the agency believes that amount is the most it can get. Recently, the IRS relaxed the requirements for the offer in compromise program.
If you meet the payment requirements on an Offer in Compromise, the IRS will release the tax lien.

Let the Statute of Limitations Expire

Like most liabilities, IRS taxes have a statute of limitations on collection, and if the Collection Statute Expiration Date arrives, the IRS can no longer enforce the tax lien. Typically, taxes owed expires ten years after you file your return or after the IRS assesses the taxes owed. The IRS usually extends the statute of limitations on collection if you file bankruptcy, you file an offer in compromise, or if you sign Form 900 (Tax Collection Waiver).

When the statute of limitation on collection arrives on a specific tax year, the IRS lien does not become enforceable anymore so as long as the IRS did not refile the tax lien and the deadline for refiling has passed. As long as all liabilities shown on the NTFL have reached their self-release point, creditors and the IRS will consider the tax lien fully released.

Give the IRS a Bond Guaranteeing Payment

You can also post a bond guaranteeing payment. It has the same effect in many cases as paying your taxes in full. Taxpayers rarely leverage surety bonds because it is usually challenging to qualify for one because of the adverse effects on one’s credit. Moreover, in most cases, the cost of the bond would be the same as paying off the taxes.

Once you have met one of the above requirements, the IRS should release your tax lien. In many cases, the IRS doesn’t automatically release the lien. If that happens, contact the Centralized Lien Unit at (800) 913-6050. 

Partial Releases of a Tax Lien

In many cases, the IRS will file a Notice of Federal Tax Lien with more than one taxpayer’s name on it. In such situations, if one taxpayer on the NTFL satisfies part or all of their liability while the other does not, the IRS may issue a Certificate of Release with the word “partial” annotated on it. For example, you could accomplish a release with many of the same reasons as above.

Alternatives to a Lien Release or Withdrawal

Sometimes a lien release or lien withdrawal will not be an option. Below are a couple of other options that are available.

Appealing an IRS Tax Lien

When the IRS files a lien, they will send you a Notice of Federal Tax Lien and your right to a collection due process hearing. It is possible to appeal the lien and get the lien released using the methods mentioned above as well as some other reasons, the full list of reasons to appeal a lien can be found in this guide to appealing an IRS tax lien. 

Subordinate an IRS Tax Lien

Subordination of a tax lien is when the IRS allows a new creditor to move ahead of the IRS in priority. This can help get financing in certain situations and will be allowed by the IRS if it is in their best interest. For example, this can help you or your business refinance a mortgage when this type of refinancing will increase your ability to repay the IRS in the future.

When In Doubt, Work with a Licensed Tax Professional

In any event, we highly recommend you work with a licensed tax professional to ensure you navigate the IRS collection process, avoid levies, and obtain the most beneficial resolution for you or your business. At TaxCure, our goal is to simplify the process for taxpayers to find tax professionals. We have a unique ranking algorithm that takes into account tax professional experience to ensure you see the pros with experience that match your unique problem. You can view the list of top-rated professionals that help with tax liens, this list is for IRS tax liens, if you have a specific state agency that has filed a tax lien, please be sure to select that agency in the filter to see the professionals that have experience helping that that particular agency. You can also use the form below to start your search today.

Sample IRS Penalty Abatement Request Letter

Here are sample letters to request IRS penalty abatement. You can use these two templates as a guide to help you write a letter depending on your situation. However, if you want to improve your chances of your request being accepted, you should work with a tax professional and you can find one by doing a search here. If you are making a first-time penalty abatement request for a year, please see this page. If you are requesting the abatement of a certain penalty for more than one year, you will need to have reasonable cause. Please note, you can also request penalty abatement by calling the IRS as well at 1-800-829-1040 or the number on your notice or by leveraging form 843.

Letter If Requesting First Time Penalty Abatement (FTA)

The IRS does provide first-time penalty abatement for failing to pay, failing to fiie, and failure to deposit if the taxpayer meets certain conditions. You should read more about first-time penalty abatement here. If after reading the previous aforementioned article you believe you qualify, then request 1st-time penalty abatement. You can call, send a letter, or even leverage a tax professional (recommended) to do it on your behalf. 

[Start of Letter]

Internal Revenue Service
Penalty Abatement Coordinator
[address provided on notice of tax amount due]
[indicate what tax form it is pertaining to, e.g. 1040, 1065, etc, and the tax period]

Re: Request for Penalty Abatement Under FTA Administrative Waiver

[taxpayer name(s)]
[address]
[SSN or TIN]

[Date]

To Whom it May Concern,

[I/We] [am/are] writing to request the [failure to file, failure to pay, or failure to deposit] penalty be abated based on IRM 20.1.1.3.6.1 that discusses RCA and First Time Abate "First Time Abate (FTA)" administrative waiver. This is referring to the [enter specific penalty and penalty amount].

[I/We] believe [I/we] meet the criteria for requesting FTA in regards to the [failure to file, failure to pay, or failure to deposit] because of the following reasons: 

1) Compliant with Filings – [I/We] filed all required returns or extensions and do not have any outtstanding tax return requests nor abatements
2) 3 Year Clean Penalty History – [I/We] have not incurred tax penalties for the 3 prior years [note: you can have estimated tax penalty though, as it is allowed]
3) Compliant With Payments: [I/We] have paid all my taxes due, or set up an installment agreement which I am current with

Thank you for your consideration. Stay safe. 

 If you have any questions or need any additional information, you can reach me at [phone number].

Best, 

[Your Name]

Letter If Requesting Abatement for More Than One Year After Getting Letter

Internal Revenue Service
Penalty Abatement Coordinator
[address provided on notice of tax amount due]
[indicate what tax form it is pertaining to, e.g. 1040, 1065, etc, and the tax period]

Re: Request for Penalty Abatement

[taxpayer name(s)]
[address]
[SSN or TIN]

[Date]

To Whom it May Concern:

I am writing to request an abatement of [enter specific penalty] in the amount of [enter amount] as assessed in the enclosed notice that is dated [month/day/year]

The reason why I _________(pick one)

• Paid late
• Filed late
• Failed to deposit

was because ____________ (pick one)

• I had a serious medical condition
• My house burned down
• My documents were stolen
• A close family member died
• Any other reason that prevented you from complying with the IRS requirements

Please find the enclosed______ (describe your supporting documents)

• Death notice of a family member
• Letter from a doctor stating the conditions of your illness that prevented you from filing or paying
• Picture of the house burned down in the fire
• Insurance notice of theft of private property and documents
• Any other proof or supporting documents

Please accept my petition for abatement of penalties owed for reasonable cause. See IRM 20.1.1.3.2. If you have any questions or need any additional information, you can reach me at [phone numer].

Sincerely,

John Doe

Note: You do not need to include a tax payment. However, if you have the money, it is a good idea. It may even help your case. If you don’t have the money, you can apply for an installment agreement to make payments on your taxes owed.

When you send your supporting documents, make sure to only send copies. The IRS is known for “losing” documents.

Help With Penalty Abatement Using TaxCure

At TaxCure, we have a large network of professionals from around the country who can help with a wide variety of tax problems. We have a unique algorithm to help display only professionals that can help with your particular problems. If you are looking for assistance with a tax professional who has penalty abatement experience, you can use this link to view the top-rated pros that can help, or you can start a search below: 
 

Disclaimer: The content on this website is for educational purposes only. It does not serve as legal or tax advice. For specific help regarding your tax situation, contact a licensed tax professional or tax attorney.

Classic IRS Innocent Spouse Relief Requirements

Apply for Tax Relief Under Section 6015 B of IRS Code

Innocent spouse relief is an IRS program designed to protect people who are facing a tax debt due to their former spouse or spouse's actions. To qualify as an innocent spouse, you must establish that your spouse/former spouse is solely responsible for the tax liability, penalties, or interest from your joint return. If you are the responsible party, you can't qualify for this program. To help you out, this guide looks at the innocent spouse relief requirements so you can start to decide if this might be an option for you. 

Requirements for Innocent Spouse Relief

To qualify for innocent spouse relief, you must meet a range of requirements. If you don't meet all of the requirements explained below, you will not be able to obtain this type of relief, but in that situation, you may want to look at the other two types of innocent spouse programs. Note that with this type of relief, married taxpayers who live with their spouses can request innocent spouse relief, but with some of the other options, your marriage must be over.

You Filed a Joint Tax Return for the Year You Are Seeking Relief

You must have filed a joint tax return for the year you are seeking relief. Legally, when you file a joint return, you and your spouse become jointly and severally liable for the tax debt. This means that the IRS can hold you both responsible (jointly), but it can also hold you individually (severally) responsible.

To give you an example of joint and several liabilities, imagine that you sign a joint tax return that says you and your spouse owe $10,000 in tax. All of the tax owed is due to your spouse's business. You owed some tax during the year, but you already paid it from the money withheld from your paycheck throughout the year. Normally, it doesn't matter that the bill was just due to your spouse. By signing the joint return, you become responsible for the bill. The IRS has the right to go after you personally for the whole thing. However, this rule isn't necessarily fair, and that's where innocent spouse relief comes into play. If you can prove that you shouldn't be responsible for the bill, you can get relief.   

The rules are different in community property states such as Wisconsin. Innocent spouse relief in community property states is complicated, and it often only comes into play when you file as married filing separately. You can find more information about community property states here on the IRS's website.

The Tax Return Has an Understatement of Tax

The joint return must contain an understatement of tax. That means that the joint tax return says you owe less tax than you really do. This can happen due to unreported income, inflated deductions, incorrect basis, or erroneous credits. Here are some examples. If your spouse didn't report income from lottery winnings or a side business, the joint return has underreported income. An inflated deduction may apply if your spouse makes up business deductions or claims deductions for expenses they didn't pay. If your spouse sells a property and claims they originally paid more than they did to minimize the capital gains, that is a case of incorrect basis.  

You Blame Your Spouse or Former Spouse

An error caused by your spouse or former spouse is the reason for the understatement of tax on your joint tax return. As indicated above, that may include underreporting income, claiming the wrong deductions, or over-claiming deductions or credits. Other examples may relate to using the wrong basis for claims related to capital gains or losses, as well as math errors. However, simply blaming your spouse is not enough. You must meet other requirements.

To illustrate, let's say that your spouse claimed a $5,000 business deduction for dog food because they said that the dogs were guard dogs for your home-based business. You didn't really agree, but you signed the return anyway. Then, the IRS audited the return, disallowed the expense, and sent you a bill for the tax. Unfortunately, in this situation, you can't claim that you're not responsible because the deduction was your spouse's idea. Unfortunately, since you knew about the issue when you signed the return, you cannot apply for this type of spouse relief. However, you may be able to get separate liability relief or equitable relief — especially if you signed the return out of fear or under duress. 

You Were Unaware of the Understatement of Tax

Plain and simple, this rule means that you did not know about the unreported income or any other erroneous item(s) when you signed the return. In other words, you had no actual knowledge of the issue and no reason to know about it. This is where innocent spouse relief claims can get very tricky. The IRS has strict definitions around the concepts of actual knowledge and reason to know, but this is also a subjective issue which is why you need a skilled tax pro to help you.

To be declared an innocent spouse, you must be able to prove that you didn’t know about the issue. Furthermore, you must show there was no reason why you would have known. To give you a very basic example, imagine that your spouse was running a secret business to support a secret gambling addiction and they didn't report the income. In this case, it may seem reasonable that you didn't know. However, if your spouse was earning an extra $100,000 a year that was paying for family vacations, home remodels, and other expensive items, you probably should have wondered where all the extra money was coming from. You will remain jointly responsible if the IRS thinks that a reasonable person should have known. This is one of the most common rejection reasons.

When deciding if you should have known about the issue, the IRS considers many factors. For instance, the IRS will consider your spouse’s finances, your educational background, and your business experience. For instance, if you're a lawyer or you have a master's degree in business but you didn't sign a tax return for the last five years, you may be able to argue that you didn't know about the situation, but the IRS will counter that due to your educational background, you should have asked questions about why there wasn't a tax return to sign. In other words, the IRS will claim that you had a reason to know about the issue due to your education. Moreover, the IRS will look at patterns in previous years, and whether you participated in the activity related to the error. The IRS will also consider if you benefited from the understatement of tax.

It Is Truly Unfair to Hold You Responsible for the Tax Liability

There is a significant amount of interpretation in regards to this element. The IRS looks at a number of factors including whether you benefited (indirectly or directly) from the understated tax. The IRS will also look to see if you received a significant benefit. This is a benefit(s) in excess of normal support. For example, if you acquired certain assets, property rights, or money after the filing of the return, the IRS may say that you received a significant benefit.

When you apply for relief, you must reveal if your spouse transferred any property to you. Even if you didn't know about the issue and it was solely your spouse's fault, a property transfer can show that you benefited from the understatement of tax on the joint tax return. For instance, say that your spouse underreported tax in 2018, and you didn't know about it. Then, in 2019, your spouse gave you a sports car, and its cost was substantially more than your spouse could normally afford based on their reported income. In 2020, you got a divorce. The next year, the IRS comes after you for the tax debt. You claim you didn't know about the tax bill, but the IRS looks at the car and begs to differ. These are the types of complex issues that IRS takes into account when assessing the issue of fairness.  

The agency also takes into account if you’re widowed, divorced, separated, and if your spouse left you. Here's another example. Imagine that your spouse lied to you about underreporting income. Then, they fled the country or died unexpectedly. You don't have the resources to pay for the tax bill, and you didn't have any reason to know that your spouse was lying on the returns. In this case, it probably would be unfair or inequitable to hold you responsible.

The agency also takes into account personal details about your relationship. The IRS wants to see if there has been a pattern of your spouse lying and deceiving you. When you apply for innocent spouse relief, you can also explain if your relationship was abusive. If desired, you can have the abuse noted on your account, and the IRS agents who contact you will be sensitive about this personal issue. However, you don't have to note abuse on your account if you don't want to.

What if it would be unfair to hold you responsible but you don't meet the other requirements? In this case, you should check out equitable relief. Innocent spouse based on equitable relief really focuses on the fairness issue. For instance, this may apply in cases where you knew about the issue but you were forced to sign the joint tax return. You have a little more leeway on some of the above requirements when you use the equitable relief category, but you can only apply if you are separated or no longer married.  

The IRS Began Collection Activities Less Than 2 Years Ago

For you to qualify as an innocent spouse, it must be less than two years since the IRS first attempted to collect these taxes from you. Note that the clock starts running when the collection actions start, not when the return was filed. For instance, collection actions may include the IRS taking you to court for the tax bill or seizing your tax refund because you owe tax due to an understatement on a previous year's jointly filed return. To be on the safe side, you should reach out for help as soon as you suspect an issue. You don't want to miss this window of opportunity. 

Partial Innocent Spouse Relief 

Innocent spouse relief isn't all or nothing. In some cases, you may qualify for partial relief. This applies when you knew about part of the understatement but not all. To give you an example, imagine that your spouse earned $80,000 in a side business, and they didn't report the income on your tax return. You knew that they earned $10,000 on the side, but you had no knowledge of the other $70,000 because they were very deftly hiding it from you. In this case, you can make a strong argument that you deserve relief from the tax due to the $70,000 of unreported income. If the IRS grants your request, the agency will hold you responsible for the tax related to the $10,000 but not the remaining $70,000.

If you meet all of the above requirements, there is a strong possibility you will find relief. If the IRS accepts your request, you are no longer liable for the tax debt, interest, or penalties related to the understatement of tax. However, if you do not meet the requirements above, you can look at other forms of Innocent Spouse Relief such as separation of liability or equitable relief. Separation of liability breaks down the details on the return so that you are only responsible for the taxes related to your portion of the income. Equitable relief can apply in situations where the tax was understated or underpaid due to your spouse or ex-spouse's actions, and it would be unfair to hold you responsible. 

If you are looking for a tax professional that has experience with Innocent Spouse Relief, you can find a list of tax professionals that have experience with innocent spouse relief here. Or you can start your search below to find the top-rated professional based on your unique tax situation. Once you find a local tax professional that meets your needs, you can contact them directly. Most tax pros start with a free consultation, and they can help you decide if the innocent spouse program is right for you or if you should take another approach. In many cases, you may end up using multiple programs. For instance, you might apply for innocent spouse relief on some of the tax bill, but then, you might also need to set up payments on the remaining liability. 

IRS Streamlined Installment Agreement

If you owe $50,000 or less or if your business owes $25,000 or less, you may qualify for a Streamlined Installment Agreement (SIA). The IRS calls these installment agreements “streamlined” because they don’t require verification of your assets, expenses, liabilities, or income. In other words, no Collection Information Statement is required in most cases as long as you can pay off the balance before the CSED expires. This includes income taxes and other assessments such as the Trust Fund Recovery Penalty.

These payment plans usually carry 72-month terms. However, they never extend beyond the Collection Statute Expiration Date CSED. That is the date your tax expires, or the IRS can’t collect on it anymore.

If you cannot make the minimum monthly payment on a Streamlined Agreement, consider an Offer In Compromise or a Partial Payment Installment Agreement. Alternatively, try to prove financial hardship to the IRS.

Streamlined Installment Agreements and the Fresh Start Initiative

In 2011, the IRS’s Fresh Start Initiative changed the eligibility levels for the Streamlined Installment Agreement. Before the change, businesses needed to have less than $10,000 in taxes, and individuals were required to have less than $25,000. Now, however, individuals can qualify with up to $50,000 in assessed taxes (with exceptions), and businesses can be eligible with an income tax balance of up to $25,000.

SIAs and Tax Liens

Individuals who owe $25,000 or less and set up a direct debit SIA or payroll deduction SIA, can have tax liens withdrawn. Before the IRS removes a tax lien, the taxpayer must make three consecutive monthly payments. With recent IRS expanded criteria due to Covid-19, a tax lien is generally only placed if the tax balance is $50,000 or more, or if the balance is between $25,000 and $50,000, and–the taxpayer refuses to use direct debit or payroll deduction as a payment method. However, a lien determination can be made even if the taxpayer meets these conditions. 

Recent IRS Changes

Usually, with balances under $50k, individuals can obtain up to 72-month terms. In late 2016, the IRS began testing new criteria for individuals with more than $50k in taxes. Specifically, individuals with balances between $50,000 to $100,000 used to be able to take advantage of 84-month SIA terms as long as the tax is paid before the CSEDs and the payment method is direct debit or payroll deduction. However, the IRS has not extended this and instead replaced it with a non-streamlined installment agreement. This agreement allows taxpayers to have balances up to $250,000, does not require financial disclosure or automatic payments but does generally include a lien determination. Moreover, the IRS may allow taxpayers up to 120 months to pay the balance or before the CSEDs expire. In some cases, the IRS may require the taxpayer to extend the statute. 

Generally, active businesses with balances of $25,000 or less can obtain 24-month SIAs. Similarly, companies can qualify for streamlined trust-fund (payroll tax) repayment plans, as long as they pay off the balance within 24 months or by the CSED (whichever comes first).

Requirements for a Streamlined Installment Agreement

Individual taxpayer streamlined installment agreement requirements:

1. $50,000 or less is owed, including interest and penalties for individuals.
2. If you owe $50,000 or less, you are willing to make payments up to 72 months or before the CSED(s) expire.  If you owe more than $50,000, you are willing to pay off the balance before the CSED. In the event CSEDs cut short the repayment period, you may be able to extend the repayment time by signing a waiver.
3. You have filed at least the last six years of tax returns. If you have delinquent returns, you must file the tax returns before you can qualify for an installment agreement.
4. Your spouse and you (if married filing jointly) have not entered any installment agreements over the last five years.
5. You are not filing for bankruptcy.
6. You are willing to pay a fee to set up a Streamlined Installment Agreement. These fees are rolled into your first payment, so remember to budget for them. There is a $31 fee if you set up a direct debit from your bank account using the OPA. However, the OPA can only support taxpayers with a combined balance (including interest and penalties) of $50,000 or less. It is $149 if you set up an agreement with the OPA but pay by check or money order. However, the former fees jump to $107 and $225, respectively, if you do not use the OPA. There is an $89 fee to reinstate the payment plan or restructure an installment agreement. If you use the OPA, that fee is $10.

How to File or Request a Streamlined IRS Installment Agreement

1.  Contact the IRS to make sure you don’t have any missing tax returns. If you do, make sure to file the tax returns first and get into compliance. See our unfiled tax returns page to get started.
2.  If you are a business that owes $25k or less, or an individual who owes $50k or less, you can use the IRS Online Payment Agreement (OPA), call the IRS, or mail-in form 9465. 
3. When applying, you need to ensure your monthly payment satisfies the taxes within the CSED(s).  Remember, the faster you pay off the taxes, the more you save in interest and penalties.
4. You can estimate your payment by dividing the total amount you owe by 72 (or # of months left on CSED) if you owe $50,000 or less. 
5. Choose a payment date. It must be between the 1st and the 28th, but pick a day that works with your budget. Paying late can terminate the agreement.
6. Select your payment method. Under new IRS criteria, tax amounts between $25,000 to 50,000 require direct debit or a payroll deduction and generally do not lead to a lien. 
7. If you want the IRS to withdraw the payments directly from your paycheck, use Form 2159 (Payroll Deduction Agreement). You pay the setup fee along with your first payment.
8. If you run into issues or prefer a better outcome, contact a licensed tax professional to help you with the forms and the process. Remember, mistakes can lead to more interest and penalties.
9. Generally, the IRS provides a decision within 30 days. To be on the safe side, make the payments until you get a response. Also, feel free to contact the IRS directly. Calling the IRS can speed up the setup process, but unfortunately, sometimes, hold times are long.

Important Considerations

Contact the IRS or a tax professional if, at any point, you cannot make monthly payments anymore. Missed payments could lead to a termination of your agreement. If the IRS terminates your agreement, it can start the asset seizure process.

Most importantly, if you do not qualify for a streamlined installment agreement, you may be eligible for a verified financial installment agreement or an installment agreement that requires you to disclose your financial information to the IRS.

Disclaimer: The content on this website is for educational purposes only and does not serve as legal or tax advice. For specific advice regarding your tax situation, contact a licensed tax professional.