At Solvable, our #1 goal is to help you get into a better financial position through honestly, partnerships, community and doing things the right way. Some of the links in this post may be from our partners. Opinions are the author’s alone.
Last Updated on
When you owe back taxes and haven’t made any steps to pay off your debt, the IRS has several methods it can use to collect the debt, including wage garnishment. IRS wage garnishment means that the agency will take a certain portion of your paychecks until your back taxes have been paid in full. If you want to avoid having your wages garnished, it’s important to learn more about this common debt collection process and how you can avoid it.
One of the most important things to understand about wage garnishment is that the IRS won’t start taking money out of your paychecks without giving you a warning. In fact, before wage garnishment begins, it’s likely that you will receive several notices from the IRS urging you to pay your back taxes.
Before the IRS moves forward with wage garnishment or any other debt collection method, it will send you a notice informing you of what you owe. In addition to your outstanding tax balance, this letter will list any interest and penalties that you must pay. If you receive this letter and don’t make any attempt to pay your taxes, the IRS will begin the wage garnishment process.
When the IRS plans to garnish your wages due to tax debt, they will send you a Final Notice of Intent to Levy. After receiving this notice, you will have 30 days to pay off your full tax balance or make some other arrangement. Once the 30 days are up, garnishment of your wages will begin if you have not paid what you owe.
If you’re worried that the IRS might garnish your wages because of back taxes, then you probably want to know if there are any limits to how much of your income the agency can take. Fortunately, the IRS is somewhat limited in the amount of wages that it can garnish, but it may still be able to take a substantial portion of your income to cover your tax debts.
When the IRS garnishes wages, it examines your income and exempts a portion of this money. The exempt portion is what you are allowed to keep each month, and the rest of your income is what the IRS garnishes. The IRS bases these exemptions on both your filing status and the average cost of living for someone with this status. This formula allows the IRS to garnish a larger portion of your income than normal creditors, who can only take 25% of your disposable income.
In addition to garnishing your normal income, the IRS is also able to take any bonuses that you receive while working. Unfortunately, unlike income, no garnishment limits exist for bonuses, which means the IRS can seize the entire amount.
Once the IRS starts garnishing your wages, you want it to stop as soon as possible. Wage garnishment will only end in three circumstances:
For most taxpayers, the first option, making an arrangement with the IRS, is the best way to end wage garnishment. Let’s take a closer look at a few of the different arrangements you may be able to make with the IRS.
Depending on the amount you owe, requesting an installment agreement may be the best way to pay off your back taxes and prevent or stop wage garnishment. The IRS offers several different types of payment plans, allowing you to choose the option that best fits your debt situation. As long as you have the ability to make monthly payments and will be able to pay off your full tax balance before the statute of limitations for tax collection ends, the IRS will usually accept your installment agreement.
The IRS offers both short-term and long-term payment plans. Short-term plans are free to set up and are for taxpayers who will be able to pay off their debt within 120 days. If you can’t pay off your debt in 120 days, you’ll need to request a long-term installment agreement.
The fees for long-term plans will depend on whether you plan to make payments through automatic withdrawal or not. Automatic withdrawal plans come with a $31 fee for setting up your plan online and a $107 fee for in-person, mail, or phone setup. The fees for nonautomatic withdrawal agreements are $149 for online setup and $225 for mail, in-person, or phone setups.
After the IRS approves your agreement, you will make monthly payments until you’ve paid off your back taxes, interest, and penalties. Be aware, however, that the IRS can revoke your agreement in the following situations, meaning you may once again face wage garnishment:
One of the reasons people get into tax debt is that they simply don’t have enough money to pay their tax bill. If you’re facing a large tax balance and are worried about facing wage garnishment for years into the future, making an offer in compromise to the IRS may be your best option to end the garnishment and get out of debt.
An offer in compromise is essentially a form of debt settlement. When the IRS accepts your offer, they are accepting a smaller amount of money than you actually owe so that you can clear your tax debt. If you want to make an offer in compromise, you should understand that the IRS will only accept your offer for one of three reasons:
When considering your offer in compromise, several things will take place. First, the IRS will conduct a thorough evaluation of your finances to make sure you are unable to pay your tax debt. For instance, the IRS will search for any assets you may be able to sell to help pay off your back taxes. Second, the IRS will suspend its attempts to collect your debt until it has decided to accept or reject your offer. Finally, if you have an installment agreement in place, you are not required to make payments on the agreement until a decision about your offer has been reached.
An initial payment is required when making an offer in compromise, and this payment can take one of two forms. If you’re offering to pay off your offer in lump sums, you should submit an initial payment that is 20% of your total offer. On the other hand, if your offer is for periodic payments, you should include your initial monthly payment based on how long you plan for the offer to last.
If you’re concerned that wage garnishment will negatively impact your ability to live your life, you may want to ask the IRS to give your debt a Currently Not Collectible (CNC) status. Asking for this status basically means that you don’t make enough money to cover both your tax debt and your living expenses.
Before granting a CNC status, the IRS will examine every area of your finances. In addition to your wages, the IRS will attempt to determine if you are earning any money from real estate, self-employment, dividends, interest, and distributions. After it has a clear view of your income, the IRS will compare your income to living expenses in four major categories:
The IRS will total these expenses and subtract them from your all of your income to determine if any disposable monies remain that could be used to pay your taxes. If taking your disposable income would create a hardship, the IRS may grant you CNC status.
Once this status is granted, wage garnishment and other debt collection activities will halt for a period of time, usually a year. Once the year has ended, the IRS will reevaluate your financial situation to determine if this status should continue. If your situation improves, the IRS may revoke CNC status and resume wage garnishment.
Filing for bankruptcy is another way that you can stop the IRS from garnishing your wages. Once you file the bankruptcy paperwork, the court will issue an automatic stay, which halts all forms of debt collection, including IRS collection activities, while your financial records are examined. During the bankruptcy proceedings, your wages will not be garnished, but this doesn’t mean you won’t eventually have to pay your back taxes.
For instance, if you’ve filed Chapter 13 bankruptcy, then your tax debts will remain in place. While your wages won’t be garnished, you will have to pay your back taxes using a repayment plan. Chapter 7 bankruptcy will also stop wage garnishment while the bankruptcy case is ongoing. Unfortunately, your tax debt will still be in place once bankruptcy proceedings have finished. While declaring bankruptcy will halt wage garnishment, it doesn’t clear tax debt, which makes this a temporary solution at best.
When the IRS garnishes your wages, this is considered a tax levy and, in most cases, the levy will remain in place until you have fully paid your back taxes. If you want to stop the IRS from garnishing your wages, you can appeal the levy by filing IRS Form 12153. This form requests a due process hearing related to your tax debt and the resulting levy. During the appeal, the IRS won’t garnish your wages.
If you’re considering an appeal, you should make sure that you actually have grounds for requesting the hearing. For instance, if you’ve already paid your debt but the IRS didn’t make note of the payment, this would be a reason to appeal the levy. Some other reasons you may want to appeal a levy include the following:
Before requesting a levy appeal, it’s a good idea to consult with a tax attorney. Your attorney should be able to determine whether you have grounds for an appeal. If you don’t, they can help you choose another solution for ending IRS wage garnishment.
Wage garnishment is a very complicated issue, which is why it’s important to cover some of the little-known facts about this form of IRS debt collection. For instance, it’s common to worry that your employer may decide to fire you once they learn you are in tax debt and your wages will be garnished. Fortunately, as long as your wages are only being garnished by the IRS, you cannot be fired. If you’re dealing with more than one garnishment, however, it is possible to be fired.
Another fact to understand about wage garnishment is that not every type of income can be seized by the IRS. For example, both veterans benefits and Social Security payments are exempt from wage garnishment. That said, if you deposit these payments in your bank account, they can be seized in certain circumstances.
The best way to prevent wage garnishment is to get out of tax debt as soon as possible, and Solvable is here to help you with your debt problems. With our debt relief company reviews, you can find a company that will help you pay off your back taxes so that you won’t have to worry about wage garnishment or some other form of IRS debt collection.