IRS Programs for Tax Forgiveness

Andrea Miller
Expert Contributor
Last Updated:
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If an individual or business has unpaid state taxes, the state can place a levy on his or her bank account. This legal action allows creditors to withdraw funds directly from your bank account to settle debts, including tax debts. Although creditors can take this step after showing the bank proof of a legal judgment against you, you may be able to take steps to prevent a levy in certain situations.

While any type of creditor can win a judgment against you and levy your bank account in an attempt to collect overdue debts, or unpaid state taxes, this method is most commonly used by the IRS, state tax agencies, and the Department of Education.

How Does a Tax Levy Work?

If you have unpaid state taxes or other debt, the creditor can sue you for payment of these debts. If the debts in question are legitimate, the court will rule that you have to remit payment to the creditors. The creditor can then use this court judgment to request funds directly from your bank account. If the levy is accepted, the bank will freeze the funds in your account and use them to pay back your creditors.

Neither the bank nor the creditor is required to notify you that a levy has been ordered on your account. However, because creditors typically only use this strategy as a last resort to collect overdue payments, you will likely already be aware that they have taken legal action by the time a bank levy is in progress.

In most cases, you will have a chance to dispute the levy on your account; if you are able to do so successfully, you may be able to stop or reduce the amount of the levy.

IRS Programs for Tax Forgiveness

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The amount of money the state tax authorities or other creditors can take from your account with a levy is limited only by the amount the court has determined that you owe. This can result in catastrophic circumstances such as bouncing checks to other creditors and subsequently owing significant fees. Most banks will also charge you a fee to process the levy.

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If you have learned of an unpaid state taxes or other levies on your account and are not familiar with the creditor in question, request contact information for this individual or business from your bank.

How Are Levies Used by the IRS?

The IRS is permitted not only to levy bank accounts to collect unpaid state taxes, but also to garnish wages and seize and sell vehicles, homes, and other personal assets. If you owe money to the IRS and have not attempted to negotiate a settlement, you may eventually receive either a Final Notice of Intent to Levy and Notice of Your Right to a Hearing.  Taking immediate action when you receive these notices is essential to protect your assets and reach an affordable solution.

The IRS only issues a levy order after taking three steps:

  • You are sent a tax bill titled Notice and Demand for Payment.
  • You fail to remit payment as ordered after receiving this notice.
  • You receive either a Final Notice of Intent to Levy and Notice of Your Right to a Hearing. This is sent by the IRS at least 30 days before the levy occurs and may be left at your home or workplace, delivered to you in person, or sent to your most recent address via either certified or registered mail.

Your bank account can also be levied if you owe back taxes at the state level. While the procedures for state tax collections vary by the state in question, in general, they are similar to those followed by the IRS.

Once you receive a Final Notice of Intent to Levy and Notice of Your Right to a Hearing, you must request a hearing by filing Form 12153, Request for a Collection Due Process or Equivalent Hearing. This is the ideal strategy if you think the IRS is wrong about the amount of back taxes you owe.

How Can a Levy Be Prevented?

Not only does a creditor that has a bank levy completely empty your account, they can return more than once until the debt is completely satisfied if you don’t have sufficient funds in the account. If you’ve become aware of unpaid state taxes or other levies against your bank account, contacting a qualified attorney in your state should be the first step. He or she should be able to explain your options in the face of a levy, which vary by location but may include:

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  • Proving that the creditor is incorrect and that you have already paid all or a portion of the debt in question.
  • Proving that you are a victim of identity theft and never received the amount in question.
  • Showing that the statute of limitations to collect the debt in question has passed.
  • Proving that you were not properly served and thus were not legally notified of legal actions against you by this creditor.
  • Filing bankruptcy.
  • Negotiating with the creditors who have requested the levy.
  • Proving that the tax was assessed and the notice of levy sent after you initiated bankruptcy proceedings.
  • Identifying an error made by the IRS or state tax authorities during your tax assessment.
  •  Proving that you were not given an opportunity to respond to the assessed overdue debt before the levy was filed.
  • Proving you have requested a discussion of collection options before the levy was filed.

In addition, certain funds may not be available to creditors and thus cannot be withdrawn even with the correct legal paperwork for a levy. Ineligible funds include federal payments such as pensions or Social Security payments and payments that are designated for child support. While banks are supposed to determine whether funds are ineligible as part of the levy process, they may fail to do so correctly.

If you owe federal or state back taxes, it’s important to reach out to the IRS or the state agency in question to attempt to come to an agreement about paying what you owe. You can request an extension to file and pay your taxes due. You can also request a payment plan if you believe you will be able to pay off your tax debt in full during the specified time period. A short-term payment plan of fewer than 120 days has no associated fee, though you will be responsible for accrued penalties and interest until your taxes are completely paid off. If you request a long-term payment plan of more than 120 days, you’ll be responsible for a $31 setup fee if you pay online or $107 if you apply by phone, by mail, or in person.

If you don’t think you will be able to pay your unpaid state taxes even with an installment plan, a tax attorney can help you negotiate an offer in compromise. This means that the IRS or state tax agency agrees to settle your tax debt for less than the full amount you owe. They will assess your full financial picture to determine eligibility, including income, assets, expenses, and ability to pay. You can either submit a lump sum payment of 20 percent of your offer amount with the request or submit your initial requested monthly installment and continue to pay this amount monthly until the IRS approves or denies your offer in compromise.

What Penalties Are Assessed by the IRS for Unpaid Taxes?

If you fail to file taxes by the due date and you owe money to the government for the year in question, you’ll be charged a failure to file fee of 5 percent of the balance due each month up to 25 percent of the total amount owed. If you file more than 60 days after the deadline, the minimum penalty is equal to either $130 or the total tax liability, whichever is smaller. If you file taxes on time but do not have the money to pay, you are subject to much more lenient penalties of one-half of 1 percent of the total tax liability each month you fail to pay, up to a maximum of 25 percent.

How Can a Tax Levy Be Released?

The IRS will cancel your tax levy under certain circumstances if you can prove that this action has caused you immediate financial hardship. If your request for levy removal is denied, you also have a right to appeal before the levy takes effect. If funds from your bank account have already been sent to the IRS, which occurs 21 days after the levy is initiated, you can file a claim to have these funds returned.

The IRS is required to cancel a bank levy if any of the following circumstances exist:

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  • You have paid your tax debt.
  • The collection period for the debt in question ended before the levy was issued.
  • Canceling the levy will allow you to pay your back taxes.
  • You are approved for an installment agreement.
  • You are no longer able to meet basic living expenses.
  • The amount of the levy exceeds the amount of your unpaid debt.

Even if a levy is released, you’re still responsible for paying back the taxes you owe. If you fail to do so, the bank levy may be reissued.

What Is Uncollectible Status with the IRS?

If you are able to prove that paying your tax burden would cause undue financial hardship, you will be placed on what the IRS calls uncollectible status. This is done on a case-by-case basis and requires provision of detailed information about your financial situation. You may be a good candidate for uncollectible status if a bank levy or unpaid state taxes collections action would prevent you from being able to afford food, mortgage or rent, utilities, medications and/or medical treatments, transportation to and from your job, or other essential items.

To determine your status, the IRS will compare your monthly income to allowable monthly expenses and note whether you are able to make even a small tax payment after all necessary items are covered. Allowable monthly expenses are based on IRS national standards for most items based on your family size. Housing, transportation, and utility costs are based on IRS local standard for your area. You’ll need to be prepared to provide supporting documentation to prove your stated expenses, income, assets, and liabilities.

If you are placed on uncollectible status, the IRS will check back every few months to determine whether your financial situation has changed. They will require you to remit your unpaid taxes once they determine you are able to do so without causing undue hardship. Interests and penalties will continue to accrue while you are granted hardship status.

What Other Collection Actions Are Used by Federal and State Tax Authorities?

In addition to bank account levies, the IRS and state tax authorities use a variety of methods to attempt to collect on unpaid tax debt. If you receive Social Security checks, government employment benefits, or state or municipal tax refunds, these can be seized by the IRS to pay your tax debt. However, if Social Security benefits are levied by the IRS, they will take no more than 15 percent of each check.

The IRS can also seize your home, car, or other assets without a court order if you have unpaid tax debt. These dire consequences mean it’s important to take action as soon as you are contacted by federal or state tax agencies about your outstanding tax balance.

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Unpaid State Taxes

While unpaid state taxes can cause serious financial issues, working with a qualified tax attorney can help you take steps to remit your unpaid tax debt before collections actions are taken against you. Once you hire a tax attorney, designate him or her to communicate and negotiate with federal and state tax agencies on your behalf by submitting IRS Form 2848, Power of Attorney and Declaration of Representative. Although it can be tempting to ignore IRS notices about unpaid taxes, seeking legal help for this problem as early as possible can help you avoid fees and other penalties.


Andrea Miller
Expert Contributor
Last Updated: